DrVijayMalik Company Analyses Vol 9

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

www.drvijaymalik.com
Company Analyses (Vol. 9)
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 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 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 one-off opinion snapshots at the date of the article. We do not plan to
have 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 a Research Analyst
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Table of Contents
Important: About The Book .......................................................................................................................... 4

1) Deepak Nitrite Ltd .................................................................................................................................... 6
2) Jamna Auto Industries Ltd ...................................................................................................................... 61
3) Pnc Infratech Ltd .................................................................................................................................... 99
4) Valiant Organics Ltd ............................................................................................................................ 145
5) Ngl Fine Chem Ltd ............................................................................................................................... 179
6) Monte Carlo Fashions Ltd .................................................................................................................... 224
7) Lincoln Pharmaceuticals Ltd ................................................................................................................ 271
8) Som Distilleries & Breweries Ltd......................................................................................................... 314
9) Asian Energy Services Ltd ................................................................................................................... 364
10) Beekay Steel Industries Ltd ................................................................................................................ 420
How To Use Screener.In "Export To Excel" Tool .................................................................................... 462
Premium Services ..................................................................................................................................... 487
Disclaimer & Disclosures ......................................................................................................................... 503
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1) Deepak Nitrite Ltd

Deepak Nitrite Ltd is India’s leading manufacturer of Phenol, Acetone, optical brightening agents (OBA),
fuel additives and other chemical intermediates like sodium nitrite/nitrates etc.
Company website: Click Here
Financial data on Screener: Click Here
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While analysing the history of Deepak Nitrite Ltd for the last 10-years (FY2012-FY2021), an investor
would notice that originally, the company did not have any subsidiary; therefore, it used to report only
standalone financial data.
In FY2014, the company formed a wholly-owned subsidiary (WOS), Deepak Nitrite LLC in the USA.
However, the company still reported standalone financials because; the subsidiary did not have any
operations.
FY2014 annual report, page 94:
During the year, company has incorporated a subsidiary ‘Deepak Nitrite LLC’, a Limited Liability
Company in the United States of America. The said Subsidiary has no transactions up to March
31, 2014. Therefore, consolidated financial results have not been prepared and published
In the next year, FY2015, Deepak Nitrite Ltd changed the name of its subsidiary in the USA to Deepak
Nitrite Corporations Inc., took 49% shareholding in Deepak Gulf LLC in Oman and acquired 100%
shareholding of Deepak Phenolics Ltd (earlier known as Deepak Clean Tech Ltd).
Last year, your Company also incorporated Deepak Nitrite Corporation, Inc. in North Carolina,
USA to take care of marketing & operations part of customers in Northern and Southern American
region. Your Company is also having an Associate Company Deepak Gulf LLC in Oman with 49%
of holding in total Share Capital.
Acquiring the entire Share Capital of Deepak Phenolics Limited (earlier known as Deepak Clean
Tech Limited) and then investing in the said wholly owned subsidiary company.
As in FY2015, the subsidiaries and associate companies of Deepak Nitrite Ltd had started to conduct
financial transactions; therefore, the company started to report consolidated financial performance from
FY2015 onwards.
We believe that while analysing any company, an investor should always look at the company as a whole
and focus on financials, which represent the business picture of the entire company including its
subsidiaries, joint ventures etc. Consolidated financials of a company present such a picture. Therefore, if
a company reports both standalone as well as consolidated financials, then in such a case, it is advised that
the investor should prefer the analysis of consolidated financials of the company, whenever they are present.
Therefore, in the case of Deepak Nitrite Ltd, we have analysed standalone financials until FY2014 and
consolidated financials from FY2015 onwards.
With this background, let us analyse the financial performance of the company.
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Financial and Business Analysis of Deepak Nitrite Ltd:

While analyzing the financials of Deepak Nitrite Ltd, an investor notices that the sales of the company have
grown at a pace of 21% year on year from ₹790 cr in FY2012 to ₹4,360 cr in FY2021. Further, the sales of
the company have increased to ₹5,905 cr in the 12-months ended September 30, 2021, i.e. during Oct. 2020-
Sept. 2021.
While analysing the sales growth of the company over the last 10-years, an investor notices that the sales
of the company increased every year except in FY2017 when the sales of Deepak Nitrite Ltd declined
marginally from ₹1,373 cr in FY2016 to ₹1,371 in FY2017.
While analysing the profitability of Deepak Nitrite Ltd, an investor notices that the operating profit margin
(OPM) of the company has also increased every year in the last 10-years (FY2012-FY2021) except FY2017
when the OPM of the company declined from 12% in FY2016 to 10% in FY2017.
To understand the reasons for the financial performance of Deepak Nitrite Ltd, an investor needs to read
the publicly available documents of the company like annual reports, conference calls, credit rating reports,
fund-raising prospectuses as well as its corporate announcements. Then she would understand the factors
leading to the increase in its revenue and profit margins as well as the reasons for the decline in performance
in certain periods.
After going through the above-mentioned documents, an investor notices the following key factors, which
influence the business of Deepak Nitrite Ltd. An investor needs to keep these factors in her mind while she
makes any predictions about the performance of the company.
1) Dependence of raw material of Deepak Nitrite Ltd on crude oil prices:

One of the key features that an investor learns while analysing Deepak Nitrite Ltd is that its business has
significant linkages to crude oil prices. This is because; most of the raw materials used by Deepak Nitrite
Ltd are derived from crude oil.
The largest contribution to the revenues of Deepak Nitrite Ltd (about 58% in FY2021) is from the phenolic
business (phenol, acetone and isopropyl alcohol). In the case of phenolic business, the key raw materials
are benzene and propylene, which are derived from crude oil. As a result, their prices are strongly linked to
crude oil prices.
Conference call, February 2021, page 11:
Somsekhar Nanda: The top line in Deepak Phenolics depends on the crude price and hence the prices of
propylene, benzene and hence phenol and acetone.
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An investor would appreciate that the phenolic business, which is currently, the largest contributor to
Deepak Nitrite Ltd.’s business was started in FY2019. However, in the case of other products as well, the
raw material prices are strongly linked to crude oil prices.
crude oil and related petrochemical intermediates, which form an important source of raw materials for
your Company
Even for the products, which the company is producing for more than a decade, the prices of the raw
materials are linked to crude oil prices.
An ongoing threat to your Company’s business is crude oil prices. An increase in price could significantly
increase raw material prices.
Conference call, May 2011, page 2:
there has been a fair amount of volatility in price of crude and resulting volatility in our key raw material
Therefore, an investor would appreciate that the prices for the raw material of almost all the products
manufactured by Deepak Nitrite Ltd are dependent on crude oil prices.
Moreover, an investor would appreciate that crude oil is one of the most volatile commodities in the world.
In the past, the prices of crude oil have witnessed very sharp fluctuations. The following chart from
Macrotrends, showing historical prices of crude oil indicates that from 2008 until now, crude oil prices have
witnessed levels from $20 to $140 per barrel.
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An investor would notice that crude oil prices touched a high of about $140 per barrel in 2008 and then
declined to about $40 in 2009. Then, the prices recovered to about $115 in 2011 only to decline sharply
over 2014-2016 to about $30 in 2016. Thereafter, the crude oil prices increased again to about $70 per
barrel in 2018 and then declined to about $20 in 2020. Currently, the prices have increased to about $80 in
2022.
Therefore, an investor would appreciate that the crude oil prices have been very volatile over the last decade
and have moved up and down in a cyclical manner. As a result, the raw material prices for Deepak Nitrite
Ltd would also be highly volatile during this period.
The investor would also acknowledge that when any company faces such significant volatility in its raw
material prices, then it becomes a challenge for it to maintain stability in its business on the parameters like
profitability.
Moreover, it is not only the raw material prices of Deepak Nitrite Ltd that depend on crude oil prices; for
many products, the demand from the customers is also dependent on crude oil prices. This is because; many
customers reduce the purchase of products from Deepak Nitrite Ltd when crude oil prices are in the
declining phase. After all, they attempt to minimize inventory losses.
In the FY2015 annual report, Deepak Nitrite Ltd highlighted to its investors that some of the customers
reduced their purchases during the year when crude oil prices were declining.
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Towards the beginning of the second half of FY 2014-15, due to the sharp decline in international crude
oil prices, there was disruption in volume off-take from some of your Company’s customers who decided
to minimize inventory to insulate them from heightened volatility. As a result of this, some products
witnessed temporary decline in demand.
Let us see how Deepak Nitrite Ltd has managed such challenges when its business model is significantly
dependent on volatile crude oil prices.
2) Formula based pricing of end products as well as the raw material of Deepak
Nitrite Ltd:
While analysing the business of Deepak Nitrite Ltd, an investor comes across multiple instances where the
company intimated to its shareholders that its pricing arrangements with both, its customers as well as its
suppliers are formula-based, which allow regular revision of prices.
The company has been following the formula-based pricing for both its customers as well as its suppliers
for a very long time. During its conference call with investors in February 2011, Deepak Nitrite Ltd
highlighted the formula based selling prices to the customers as well as formula based purchase prices from
its suppliers, which are linked to crude oil prices.
Sanjay Upadhyay: Yes Abhijeet, just to add on this, where we feel that prices are fluctuating violently we
go by formula base pricing where customer also understands the price mechanism, so that is how we try to
manage those things, where it is a long-term contract there we try to see that it is a formula based pricing
linked to the major raw material which are crude based.
Umesh Asaikar: Similarly we try to enter with some of our suppliers on formula base. It will be fair to
everybody, and then one lands up with proper, fair and reasonable manufacturing margins, and one is not
exposed to violent trends and volatility in material prices.
Even after the passage of more than 10-years, in October 2021, Deepak Nitrite Ltd again emphasized to the
investors that formula-based pricing is the best proposition in its business.
Conference call, October 2021, page 3:
Maulik Mehta: As mentioned earlier, our approach instead of timing the market both from RM and FG
side, was focused on back-to-back formula-based arrangements with suppliers and customers both where
the contracts are signed with a predetermined benchmark index on an annualized basis, which allows us
to procure at the best rate possible. Parallelly, with our customers also, in many cases we have formula-
based pricing, whereby we are able to pass on raw material price increases after a period of time. We
believe under the current situation of high volatility; this is the most optimal approach one can have.
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Therefore, an investor would appreciate that Deepak Nitrite Ltd has built a business model where most of
its business is via products where the sale prices is calculated by using a formula based on an index (linked
to crude oil price). The company follows the same formula based pricing with its suppliers as well.
As a result, when the crude oil prices increase, then the cost of raw materials for Deepak Nitrite Ltd
increases. Similarly, as the cost of raw material for Deepak Nitrite Ltd increases, it is able to increase the
selling price of its products to its customers and therefore, it is able to protect is profit margins.
In the conference call done by the company with investors in May 2011, it highlighted that it has been able
to maintain its margins because it could pass on the increase in its costs to its customers.
Umesh Asaikar: …we are in a position to pass on the increase in price line and thus we were able to
maintain the margins.
In the above chart showing crude oil prices, an investor would note that in 2020-2021, crude oil prices
increased sharply from about $20 per barrel to about $80 per barrel. As a result, the raw materials of Deepak
Nitrite Ltd increased significantly. However, despite such an increase, the company reported its highest-
ever operating profit margin because it could pass on the increase in the cost of its raw material to its
customers.
Maulik Mehta: …This was achieved despite a significant increase in raw materials almost across the board
as the company was able to pass on a lot of the cost.
From the above discussion, an investor would notice some important observations. She would note that the
key raw material used by Deepak Nitrite Ltd are derivatives of crude oil. Therefore, its raw material prices
are very volatile. However, the company is able to pass on the increase in its costs to its customers by way
of formula-based pricing.
An investor would note that due to formula-based pricing linked to crude oil prices, the sales prices of
Deepak Nitrite Ltd are highly volatile. As a result, many times, during the periods when crude oil prices
decline, then the company is not able to increase its sales despite a significant increase in the volumes.
For example, in FY2010, the sales of the company declined in value by 7% from ₹572 cr in FY2009 to
₹532 cr in FY2010; despite an increase in the volume of sales by more than 20%.
Financial Year 2009-10 has been an eventful year for your Company. The turnover for the year was Rs.
532 crores compared to Rs. 572 crores in the previous year…Your Company has been able to increase the
quantitative volumes by more than 20% compared to the previous year.
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Again, in FY2016, when the crude oil prices declined sharply from about $130 per barrel in 2014 to about
$30 per barrel in 2016, its raw material prices declined and in turn, the company had to reduce its sales
price, which affected its revenue.
The prices of crude oil and related petrochemical intermediates, which form an important source of raw
materials for your Company declined significantly over the past one year thereby impacting top-line
growth.
Nevertheless, due to formula-based pricing, the company is able to avoid any hit on its profit margins.
Therefore, an investor would appreciate that over the last 10-years, the company has been able to report
continuously improving operating profit margin.
However, after making a detailed reading of the public documents, an investor notices that the pass-through
of increased costs is not a simple and straight event. Deepak Nitrite Ltd faces multiple challenges before it
can get a higher price from its customers.
3) Challenges in increasing prices to customers despite formula-linked

arrangements:
In the prospectus for its qualified institutional placement (QIP) in January 2018 (source: BSE), Deepak
Nitrite Ltd acknowledged that there have been occasions when it could not pass on the increase in its costs
to its customers.
QIP prospectus, January 2018, page 38:
there have also been occasions when we have been unable to pass on increases in raw materials prices to
our customers.
At times, Deepak Nitrite Ltd could not pass on the increase in the raw material prices to its customers
because of the fear of losing market share.
In October 2021, in the press release declaring the Q2-FY2022 result, Deepak Nitrite Ltd intimated to its
shareholders that it did not increase the prices of its leading products to maintain market share. Under this
dynamic strategy, the company increased the prices of products other than its leadership products.
Q2-FY2022 press release, October 2021, page 2:
Assessing the market situation, the Company deployed a dynamic strategy this quarter, which involved
focusing on preserving market share for leadership products while driving pricing for some other products.
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Moreover, an investor notices that the contracts entered by Deepak Nitrite Ltd with its customers allow for
revision in the prices only at fixed intervals like every quarter. Therefore, it can increase prices only after a
gap of 3-months from the previous price change.
However, an investor would notice that the crude oil prices and hence its raw material prices are very
volatile and can fluctuate a lot during the period of a quarter (3-months). Therefore, at times, Deepak Nitrite
Ltd was stuck in situations where after a recent price revision, the raw material prices increased
significantly. However, it could not increase its prices and had to take a hit on its margins during the period
until the subsequent price revision.
For example, in May 2021 conference call, Deepak Nitrite Ltd highlighted to its investors that it could not
increase the prices to some of its customers where the review of pricing is after each quarter. In such a case,
Deepak Nitrite Ltd had to absorb the increase in its costs.
Maulik Mehta: …In some products where there is more of a long-term relationship where the contractual
clause is to look at price reviews every quarter. We had to absorb the cost increase within the quarter and
look at how best we can ensure that we are able to pass it on the next opportunity that we have to review.
On many previous occasions, Deepak Nitrite Ltd had highlighted this challenge of absorbing an increase in
raw material costs during the period between the dates of the pricing review. For example, in the FY2015
annual report, the company highlighted this as a major weakness of its business model, to its investors.
WEAKNESSES: One of the major hurdles for the chemical industry is its susceptibility to volatile raw
material costs particularly BCC. Absorbing cost of this volatile market becomes challenging, as there are
time lags before any costs benefit or price hike can be passed on to customers.
In FY2012, the company suffered a hit on its profitability when it could not pass on the increase in raw
material prices to its customers.
Sanjay Upadhyay: PAT was impacted by lag in passing the high increase in the price of key raw material.
Therefore, an investor would appreciate that when the raw material of any company are highly volatile
(linked to crude oil prices), then having a formula-based product pricing may also not be sufficient. This is
because; such arrangements allow for revision in the prices after a fixed interval like a quarter. However,
the crude oil prices and hence, the raw material costs can change significantly during this period.
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In addition, at times, companies like Deepak Nitrite Ltd are not able to increase prices because they face
intense competition from global chemical manufacturers. The company had intimated to its shareholders
that it faces strong price-based competition from foreign companies.
We face price pressures from foreign companies that are able to produce chemicals at competitive costs
and consequently, supply their products at cheaper prices.
Deepak Nitrite Ltd had highlighted to its investors that the products made and the processes followed by it
are the same, which are followed by other global manufacturers e.g. in China. Therefore, it faces strong
competition from China.
Maulik Mehta: Of course, we face significant competition from China, of course, our processes that we
employ across multiple products, in many of these cases, Chinese companies also do the same. This has
always been a feature for the chemical intermediate segment, and is not expected to change.
Therefore, despite formula-based pricing arrangements, before increasing prices to its customers Deepak
Nitrite Ltd has to continuously think of the threat of foreign competitors taking away its market share.
An investor would notice that in the recent period, there have been significant challenges in sea trade due
to shortage of containers as well as unavailability of ships for sending cargo via sea.
…challenges on international shipping, due to container and ship unavailability.
Conference call, August 2021, page 9:
Maulik Mehta: And there were a lot of export disruptions where ship berthing was not available, where
you had the Suez Canal issue…
There were supply restriction bottlenecks due to container shortage…
An investor would appreciate that due to challenges in trade-by-sea, the freight costs would increase and it
becomes difficult to import goods at a cheap price. Deepak Nitrite Ltd also highlighted to its investors in
May 2015 conference call that due to the above-mentioned challenges, sea freight has gone up and now, it
is difficult for people to import and sell in India.
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Sanjay Upadhyay: …sea freight are also going up. It is extremely difficult for people to import and sell in
India.
Therefore, an investor would notice that during FY2021 and later, Deepak Nitrite Ltd has taken significant
advantage of the difficulties faced by the importers in procuring goods from abroad. Because of the high
demand due to lower imports, the company is able to run its factories at very high utilization levels. For
example, in FY2021, the company was running its phenol plant at a capacity utilization level of 130%.
Sanjay Upadhyay: In fact, today we are running at 130% capacity utilization
An investor would appreciate that such high capacity utilization levels lead to a lot of operating leverage
benefits i.e. lower per-unit cost of products. In addition, lack of competition from cheaper imports has
Deepak Nitrite Ltd to charge a high price of its goods to its customers.
As a result, it does not come as a surprise to the investor when she notices that during FY2021, Deepak
Nitrite Ltd has reported its highest-ever operating profit margin (OPM) of 29% and an OPM of 28% in the
12-months ended September 30, 2021, i.e. during Oct. 2020-Sept. 2021.
4) Lack of long-term contracts with customers and suppliers:

While analysing the business history of Deepak Nitrite Ltd an investor notices that in the past, the company
did not have any long-term supply arrangements with either its customers or its suppliers. The company
highlighted this as a risk in the prospectus before the QIP in January 2018.
QIP, January 2018, page 39:
We do not have long term agreements with majority of our suppliers. We do not have long term agreements
with any of our customers.
An investor would note that if a company does not have long-term supply arrangements/contracts with its
customers, then it continuously faces the risk of customers shifting to the competitors without much
difficulty. This is because; in the absence of long-term contracts, the barriers to entry to the competitors go
down.
Absence of such long term agreements exposes us to the risk that our customers may cease to source
products from us.
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Similarly, an absence of long-term supply arrangements with the suppliers puts Deepak Nitrite Ltd at the
risk of failure to get raw material when it requires it urgently.
Short term supplier contracts subject us to risks such as price volatility, unavailability of certain raw
materials in the short term and failure to source critical raw materials in time, which would result in a
delay in manufacturing of the final product.
An investor would notice that the lack of long-term supply agreements with customers and suppliers
exposes Deepak Nitrite Ltd to many risks. Then, she wonders, why the company is not going for long-term
contracts.
Upon reading the past annual reports, an investor comes across the fact that it has not been the case always.
Previously, the company used to enter into long-term contracts and used to highlight it to the investors as
one of the major achievements.
For example, in the FY2010 annual report, Deepak Nitrite Ltd pointed out to the investors that it has entered
into long-term contracts with customers and suppliers, which has increased the durability of its business
model.
…has been able to enter into long-term contracts with both suppliers and customers, thereby enhancing the
durability of its business model.
Therefore, it looks like originally, the company preferred to have long-term contracts with its suppliers and
customers. However, subsequently, Deepak Nitrite Ltd had to pay a penalty to one of its key suppliers for
natural gas, GAIL (India) Ltd, when it could not use its contracted quantity of natural gas.
As per the FY2016 annual report, when Deepak Nitrite Ltd did not use the committed amount of natural
gas, then GAIL (India) Ltd asked it to pay a penalty of ₹7.18 cr. After arbitration, it seems that the penalty
amount was reduced to ₹1.41 cr.
The Company has entered into a long term contractual arrangement with GAIL India Limited (“GAIL”)
for supply of Gas with a Take or Pay obligations. A communication was received from GAIL regarding
non-consumption of committed quantity for the year 2014. Accordingly, the Company is required to deposit
a sum of ₹ 718.00 Lacs which may subsequently be adjusted in future against the consumption of Gas. The
matter has been referred to an arbitrator for settlement, which is pending. However, GAIL has offered the
Company to settle the matter amicably by paying one-time charges of ₹ 141.00 Lacs. Based on the above
understanding, the Company has prudently provided for the said charges during the year.
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It seems that due to such experience, the company avoided long-term contracts and by January 2018 (date
of QIP prospectus); Deepak Nitrite Ltd started preferring short-term contracts with its suppliers as well as
customers.
However, in the absence of long-term contracts, the risks of short-term contracts highlighted by Deepak
Nitrite Ltd in its QIP prospectus came true and the company realized the benefits of entering into long-term
contracts.
Therefore, in the current year (FY2022), Deepak Nitrite Ltd has again started stressing about entering into
long-term contracts with its customers. The company acknowledged that in the past, it did not prioritize
long-term contracts with customers because they were already giving it a business for the last 10-15 years.
Therefore, the company thought that why ‘bother’ about getting into long-term contracts.
However, it seems that now, the company has realized that long-term contracts make a strong relationship
between the customer and supplier. Therefore, now, Deepak Nitrite Ltd has again started focusing on long-
term contracts with customers.
Conference call, October 2021, pages 11-12:
Abhijit Akella: …the investor communication also talks about various long-term formula linked
arrangement that you are kind of working on, so could you share some more insights…
Maulik Mehta: …Earlier, Deepak itself stayed away from this because we said look we have 10 years, 15
years relationship with these customers, they have been depending on us, they have been giving us a lion’s
share of their requirements, why bother to get into that, but as we have gone ahead in the last couple of
years, we have realized that their focus then can shift towards business development, market development
rather than worrying about annual discussions with Deepak and that has successfully transpired itself into
a more solidified relationship…
Therefore, an investor would notice that over FY2010-FY2022, Deepak Nitrite Ltd has seen its focus shift
from long-term contracts in FY2010 to preferring short-term contracts by FY2018. It seems that the penalty
imposed by GAIL (India) Ltd for the non-usage of a committed amount of natural gas may have played a
role in this transition. However, now, Deepak Nitrite Ltd has once again realized that having long-term
contracts is good for a strong relationship between the suppliers and customers. Therefore, in FY2022, the
company is again showing a preference for long-term contracts.
Going ahead, an investor should closely monitor whether the company continues to stick to long-term
arrangements with its customers and suppliers or it switches back to short-term contracts.
5) Focus on high-value products and energy efficiency by Deepak Nitrite Ltd:
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While reading about the business of Deepak Nitrite Ltd over the years, an investor notices that from FY2012
to FY2021, the company increased its operating profit margin (OPM) from 7% to 29%. This improvement
of about 22% in the OPM is significant. As a result, an investor needs to analyse the reasons for the same.
When an investor observes the different expenses incurred by Deepak Nitrite Ltd and compares them year
on year by benchmarking them as a percentage of sales, then she notices that two parameters, raw material
costs and power & fuel have shown the most remarkable improvement over the last 10-years (FY2012-
FY2021).
The below table compares different expenses as a percentage of sales for Deepak Nitrite Ltd in FY2012
and FY2021.
An investor would notice that from FY2012 to FY2021, Deepak Nitrite Ltd could reduce its raw material
costs as a percentage of sales from 67% in FY2012 to 51% in FY2021; thereby, adding 16% (= 67 – 51) to
its operating profit margin (OPM).
A reduction in the raw material cost as a percentage of sales indicates that Deepak Nitrite Ltd has focused
on high margin products over the years, which has resulted in an improvement in profitability.
While analysing the annual reports of Deepak Nitrite Ltd over the years, an investor comes across multiple
instances where the company highlighted an improvement in the product mix i.e. selling more high-margin
products, as a reason for the improvement in its profit margins.
In the FY2016 annual report, Deepak Nitrite Ltd highlighted that an improvement in the product mix
resulted in higher profitability.
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A combination of factors including favourable product mix, efficiency gains and better realisations across
key products also contributed to better EBITDA performance.
In FY2018 also, the company mentioned improvement in the product mix (selling more high margin
products) as the reason for increasing profits.
Full resumption of normal operations and favourable shift in product mix led to better PAT performance
The company continued to improve its product mix in the subsequent years i.e. FY2019, FY2020 and
FY2021 as well.
Margin expansion was a result of product-mix adjustments, better realisation, and cost leadership
initiatives
The expansion of margins was an outcome of enhancements in the product mix, improved realizations and
cost reduction efforts undertaken at Company level.
The Company undertook several enhancements in the product mix, improved realisations and cost-
reduction efforts that helped deliver better margins.
Looking at the above disclosures, an investor would appreciate that changing the product mix of the
company over the years, has contributed significantly to the improvements in the profit margins of the
company. From the changing product mix, an investor would note that Deepak Nitrite Ltd is able to
manufacture different products in its plants as per the changing market scenario i.e. its plants are
multipurpose.
In a multipurpose plant, Deepak Nitrite Ltd can easily switch production from one product to another
whenever it realises that any particular product is commanding a higher profit margin in the market.
In multiple instances in the past, Deepak Nitrite Ltd has highlighted that its plants are multipurpose and
provide it with the flexibility to change the products that are manufactured at a short notice.
Deepak Mehta: Right…the benefit is these multipurpose plants help us to see that if there are any spurt in
demands for any other segments we can quickly switch over and make those intermediate.
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In the FY2017 annual report, the company explained to its investors that it could report a higher margin
in its basic chemicals segment when it shifted production away from fuel additives to other intermediates.
The company decided to produce other intermediates because the demand for fuel additives was low and
the multipurpose plants allowed it to produce other products.
Basic Chemicals: While business of Fuel Additives was subdued during the year, the same production lines
could have been utilised for producing other contributory products during the year, which gave boost to
the margin in this business segment.
The credit rating agency, ICRA, highlighted in its report for the company in January 2018 that multipurpose
plants allowed Deepak Nitrite Ltd to use the production lines of fuel additives to produce Sodium Nitrite
and Sodium Nitrate.
Credit rating report, ICRA, January 2018, page 2:
…the facilities are designed to provide flexibility to change the product mix to cater to market requirements.
For instance, the company used a few of its production lines, originally meant for fuel additives, to
manufacture sodium nitrite/ sodium nitrate given the decline in demand for fuel additives.
In the conference call in August 2021, the company highlighted to the investors that it focuses on chemical
processes instead of specific chemical products while designing its manufacturing plants. The company
mentioned that in the past when it focused on making plants for a specific product, then it had to suffer.
Therefore, it changed its strategy to focus on multipurpose plants.
Maulik Mehta: So, it is not like the Deepak Nitrite of old where one plant only focused on making one
product, we have learnt at a very high cost the need to be fungible and have the flexibility of product.
As per the company, it focuses on developing integrated product chains where many products can be
produced instead of focusing on specific products.
Maulik Mehta: The Company’s business strategy is to prioritize the development of integrated product
chains over standalone products…
Therefore, an investor would appreciate that Deepak Nitrite Ltd has preferred to create multipurpose
manufacturing plants where it can switch production from one chemical to another as per changing market
scenario. Due to this flexibility, the company has been able to improve its product mix over the years to
focus more on high-margin products. This is one of the most important factors leading to a significant
improvement in the profit margins of the company.
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From the above table on the analysis of operating expenses of Deepak Nitrite Ltd as a percentage of its
sales, an investor would remember that the other parameter leading to significant savings for the company
was power & fuel costs. Over FY2012-FY2021, Deepak Nitrite Ltd decreased its power & fuel costs from
about 10% of sales in FY2012 to about 6% of sales in FY2021, which contributed an improvement of about
4% in the operating profit margin (OPM) of the company.
While reading the annual reports of Deepak Nitrite Ltd, an investor notices that the company has
continuously focused on improving its energy efficiency and has taken multiple steps about the same over
the years.
In FY2010, the company highlighted that it is shifting away from the usage of furnace oil to using natural
gas and coal in its manufacturing plants.
Deepak Mehta: I would say some significant portion is also going for bringing in more energy efficiency
in all these four sites, wherever possible we have been moving into investments in using gas which is now
more readily available, thanks to Reliance, wherever possible we are now moving from furnace oil based
boilers to coal based boilers…
In addition, to reduce the power costs, Deepak Nitrite Ltd is constructing a captive power plant in Dahej,
which as per the company, is about to get completed soon.
Expand Capabilities: Completion of captive power plant is nearing
Maulik Mehta: …we are expecting to commission IPA to manufacture 30,000 tonnes of additional capacity
and 29-megawatt cogent plant during this current quarter.
The new captive power plant would be in addition to another captive power plant that it has in Nandesari,
near Vadodara, which it commissioned in 2004 (as per FY2011 annual report, page 17).
Therefore, an investor would note that Deepak Nitrite Ltd has taken steps to improve its cost efficiencies,
which has contributed to an increase in its profit margins.
The credit rating agency, CRISIL, highlighted the role of cost efficiencies in the improvement of its profit
margins in its report for Deepak Nitrite Ltd in August 2020.
The group’s operating profitability improved to 25.1% in fiscal 2020 from 16.1% in fiscal 2019 supported
by extraordinary performance of PP segment as well as increase in the margins for the BC segment owing
to cost efficiency measures…
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Going ahead, an investor should keep a close watch on the raw material costs as well as other cost efficiency
measures of Deepak Nitrite Ltd. This is because; a tight control on the same is needed to keep its operating
profit margins at current improved levels.
An investor would also remember that in the recent period, due to difficulties in the sea trade i.e. ship
shortage, container shortage etc., the importers are not able to source cheap goods from overseas
manufacturers. As a result, Deepak Nitrite Ltd is able to charge a high price to its customers and run its
plants at very high utilization levels exceeding 100%. This has resulted in the best ever profit margins for
the company.
Going ahead, an investor should keep a close watch on the profit margins because; the supply chain
bottlenecks like challenges of sea trade would not continue forever. Once the supply chain problems are
resolved, then the competition from foreign manufacturers would increase, which may bring down the profit
margins.
The company itself realizes this; as a result, it has acknowledged that the current profit margins on some of
its products like Phenol are not sustainable.
Sanjay Upadhyay: …Phenol, of course, you can’t expect this kind of EBITDA margins every quarter, so I
cannot commit on that.
Therefore, an investor should be cautious while projecting the currently improved profit margins in her
future projections.
While analysing the tax payout ratio of Deepak Nitrite Ltd., an investor notices that for most of the years,
the tax payout ratio of the company has been in line with the standard corporate tax rate prevalent in India.
It was only in FY2015 when the company reported a tax payout ratio of 21%. The primary reason for the
lower tax payout ratio in FY2015 was an adjustment of minimum alternate tax (MAT) credits of about ₹11
cr.
In recent years, the tax payout ratio has declined to 25% from the previous years’ level of about 30%, which
seems to be in line with the recent changes in the corporate tax rates implemented by India.
Operating Efficiency Analysis of Deepak Nitrite Ltd:
a) Net fixed asset turnover (NFAT) of Deepak Nitrite Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Deepak Nitrite Ltd in the past years
(FY2013-21), then she notices that the NFAT of the company has declined from 4.0 in FY2013 to 2.4 in
FY2021.
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While analysing the business decisions taken by Deepak Nitrite Ltd during the last 10-years (FY2012-
FY2021), an investor notices that the company has consistently invested money in creating additional
manufacturing capacity during this period.
Some of the major capital expenditure projects undertaken by Deepak Nitrite Ltd during the last 10-years
are:
 FY2011-FY2013: Optical brightening agent (OBA) project in Dahej, Gujarat: Phase 1 was
completed in March 2013 (FY2014 annual report, page 45) and the remaining project was
completed in FY2015 (FY2015 annual report, page 7).
 FY2011-FY2014: Brownfield expansion of salt section in Nandesari, Vadodara: commissioned in
June 2013 (FY2014 annual report, page 45).
 FY2017-FY2019: A very large greenfield project in Dahej for Phenol and Acetone was
commissioned in November 2018 (FY2019 annual report, page 18).
 FY2020-FY2021: Isopropyl Alcohol (IPA) plant, 30,000 MTPA in Dahej (FY2020 annual report,
page 37).
 FY2021-FY2022: Doubling of the capacity of IPA plant from 30,000 MTPA to 60,000 MTPA and
a captive power plant of 29 MW (Conference call, October 2021, page 4).
While analysing the various investor communications done by Deepak Nitrite Ltd, an investor gets to know
that the asset turnover of the investments done by the company in the last 10-years, is in the range of 1.50
to 2.25 times.
In May 2010, the company intimated to its shareholders that the asset turnover for the investments planned
for OBA and salts segments was expected to be 1.50-1.75 times.
Paurav Lakhani: So roughly the additional sales from this Dahej plant would be in the region of what…?
Deepak Mehta: Again this depends upon the product mix, but I can say that our turnover to investment has
been in the ratio of about 1.5 to 1.75 to 1.
While planning the large Phenol project in May 2016, the company intimated to its shareholders that it is
expecting a turnover ratio of about 2.25 times on its investment in the project.
Arun Malhotra: The same asset turnover, means on Rs. 1200 crore of CAPEX…?
Somsekhar Nanda: The asset turn ratio on a normal crude price, crude price is subdued now, on a normal
situation it will be about 2.25x:1.
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Further, in May 2021, while elaborating the strategy for upcoming capacity expansion projects, the
company intimated to its shareholders that it expects an asset turnover ratio of about 1.75 to 2.00 times on
its investments.
Onkar Ghugardare: I was looking into what can be the asset turnover.
Sanjay Upadhyay: Normally we look at 1.75 to 2x
Therefore, an investor would appreciate that almost all the projects undertaken by the company during the
last 10-years have an asset turnover ranging from 1.50 – 2.00 times.
The largest project undertaken by Deepak Nitrite Ltd, the Phenol project, commissioned for a cost of ₹1,400
cr reported a turnover of about ₹2,561 cr in FY2021 (FY2021 annual report, page 271) while running at a
capacity utilization of 115% (FY2021 annual report, page 14). It amounts to an asset turnover of about 1.83
(=2,561 / 1,400).
As the new investments done by Deepak Nitrite Ltd in the last 10-years are producing a lower fixed asset
turnover than the historical fixed assets (in FY2013, the NFAT was 4.0), therefore, the NFAT of the
company has come down over the last 10-years to 2.4 in FY2021.
Going ahead, an investor should keep a close watch on the progress of the newly announced project and
the capacity utilization levels of Deepak Nitrite Ltd so that she can assess whether the company is utilizing
its assets efficiently or not.
b) Inventory turnover ratio of Deepak Nitrite Ltd:

While analysing the efficiency of inventory utilization by Deepak Nitrite Ltd, an investor notices that over
the last 10 years (FY2013-FY2021), the inventory turnover ratio (ITR) of the company has remained
constant at the levels of about 10.5-11.0. The ITR was 10.6 in FY2013 and 11.0 in FY2021.
However, during these years, the ITR has witnessed significant fluctuation when it declined to its lowest to
6.7 in FY2018. Thereafter, the ITR started increasing and it improved significantly to 11.0 in FY2021.
Therefore, when an investor analyses the efficiency of inventory management of Deepak Nitrite Ltd, then
she may see it in terms of two different periods; first, until FY2018 and then the second period from FY2019
until date.
An investor would recollect from the above discussion on net fixed asset turnover that during the first phase,
FY2013-FY2018, Deepak Nitrite Ltd had done a major capital expenditure in Dahej, Gujarat, where it
created a plant to manufacture optical brightening agents (OBA), which is a part of the colours segment.
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OBA was a forward integration step for Deepak Nitrite Ltd because it was already making the raw material
for OBA, which is Diamino stilbene disulfonic acid (DASDA) and Para Nitro Toluene (PNT), which is
used to make DASDA.
Our greenfield expansion in Dahej is a forward integration to manufacture OBA. With the completion of
this greenfield project at Dahej, we will complete the vertical integration from Toluene to Optical
Brightening Agent – OBA (Toluene ->PNT -> DASDA -> OBA). This feat places us amongst the very few
fully integrated player in the world with such a capability.
The company highlighted that it is one of the very few fully integrated manufacturers of OBA. Deepak
Nitrite Ltd had created a large capacity of OBA because; soon it captured 75% of the domestic market for
OBA.
Your Company is the only fully integrated manufacturer of Optical Brighteners (OBAs) which is backward
integrated up to the feedstock of toluene. In this segment, your Company caters to 75% of the domestic
requirement of brighteners
To analyse the business dynamics of OBA production, when an investor analyses the locations where
Deepak Nitrite Ltd manufactures each of these products in the OBA chain, then she gets to know that:
 Toluene is converted into PNT (Para Nitro Toluene) in the Nandesari plant near Vadodara, Gujarat
 PNT is converted into DASDA in its Hyderabad plant in Telangana
 Thereafter, DASDA is converted into OBA in its newly created plant in Dahej, Gujarat.
An investor would appreciate that to make OBA; first, the company has to buy Toluene in Gujarat and
process it into PNT in Nandesari. Then, it has to send it about 1,050 km away to Hyderabad in Telangana
to convert it into DASDA. Thereafter, it has to send DASDA back to Gujarat in the Dahej plant, which is
about 1,020 km away from Hyderabad.
Therefore, an investor would appreciate the long distances the products have to travel to be converted from
Toluene to OBA. Moreover, an investor would note that some of these products are hazardous and require
special transport arrangements like special containers, speed limits, temperature etc., which further
increases the cost of transportation and hence, the cost of inventory management and production.
Such a production process where dangerous chemicals are moved crisscross across the country to make the
final product puts pressure on the efficiency of inventory management. As a result, the more OBA the
company produced, the more its inventory turnover suffered. It seems to be one of the key reasons for the
decline in the inventory turnover ratio (ITR) of Deepak Nitrite Ltd declined from 10.6 to 6.7 during
FY2013-FY2018.
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Deepak Nitrite Ltd started the production of its Phenol plant at Dahej, Gujarat in November 2018 (FY2019)
in its wholly-owned subsidiary, Deepak Phenolics Ltd (DPL). This plant is a very large plant when
compared to the existing size of business operations of Deepak Nitrite Ltd. Therefore, any improvement or
deterioration in the operating efficiency of the Phenol plant was going to significantly affect the entire
company.
In the case of Phenol production as well, the company had to undertake significant transportation of its raw
material because its key raw material to produce Phenol, Benzene, is sold by refineries. In the case of many
international manufacturers of Phenol, they have their plants within the refinery premises in order to reduce
the cost of production. However, Deepak Nitrite Ltd did not enjoy such an advantageous location.
The company highlighted it as one of the major disadvantages to its shareholders in its conference call in
February 2021 (pages 14-15).
Maulik Mehta: Our competitive disadvantage primarily, if I am comparing to global marquee players in
the same segment, is that they manufacture phenol and acetone right next to their raw material sources. So
normally they do it attached to a refinery… and we have no easy access to putting the plant up in the same
premises as refiners.
Therefore, the company had to tie up with large refineries present at a distance. It even had to consider
sourcing the raw material, benzene, from faraway places like Bhatinda in Punjab about 1,250 km away.
Maulik Mehta: …Now there is a new benzene plan that is coming up in Bhatinda, so we continue to see
small, medium and big opportunities to optimize our supply chain…
Deepak Nitrite Ltd has acknowledged that the cross-country shipment of hazardous chemicals in its
production process poses a risk and as a result. As a result, it has done special arrangements to contain the
damages in any toward incident like placing first respondents at every 120 km on the route.
Considering the cross-country movement of over 6 Lakhs MT of explosive/hazardous materials, DPL is

committed towards improving the safety standards for road transportation. DPL has interfaced with Loss
Control Services (LCS) for ‘First Respondents’ services with an aim to minimise the environmental and
social impact of in-transit incidents. LCS has a strong network of First Respondents stationed every 120
kms between the facility and DPL’s sources/destinations. LCS’s teams possess adequate know-how and
experience in handling materials and are equipped with a 24-hour central control room.
Looking at the dangerous nature of the chemicals being transported, Deepak Nitrite Ltd has implemented a
logistic safety management system, which does real-time, GPS-based monitoring of its transport vehicles.
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Logistic Safety Management System: Your Company has, along with its peers, founded Nicer Globe, an
independent platform, which provides real-time monitoring of the movement of dangerous goods across the
length and breadth of India…with GPS for real-time monitoring for the safety of its customers, carriers,
suppliers, distributors and contractors.
An investor would appreciate that all these special arrangements to transport dangerous products increase
the cost of production. Therefore, in order to control the costs and be competitive with the larger
multinational manufacturers, the company had to improve the efficiency of its logistical activities.
The company highlighted to the investors that it has put in a lot of effort and technology to save on logistics
costs in order to be competitive.
Maulik Mehta: I think here again it is the pennies that take care of the pounds, we do software modeling,
we do a lot of analysis about how we can manage material movement without risking too much.
The management of the company stated that the logistics planning in the production process involves so
much time & effort that it looks like they are a logistics company that happens to produce phenol and
acetone.
Maulik Mehta: …I still remember Mr. Mehta’s one point to a group of investors, he said that sometime the
phenolic business seems like we were actually running a logistics company that happens to make phenol
and acetone.
Therefore, an investor would appreciate that due to the strong focus on logistics planning in the phenol
business, which is now about 58% of the overall revenue of Deepak Nitrite Ltd in FY2021, the company
has done significant improvements in the efficiency of inventory management.
Therefore, it seems to be the major reason for the improvement in the inventory turnover ratio (ITR) of
Deepak Nitrite Ltd since FY2019 when the Phenol plant became functional. The ITR of Deepak Nitrite Ltd
has increased from 6.7 in FY2018 to 11.0 in FY2021.
Going ahead, an investor should monitor the inventory turnover ratio of Deepak Nitrite Ltd so that she can
assess whether the company is utilizing its inventory efficiently or not.
c) Analysis of receivables days of Deepak Nitrite Ltd:

While analysing the receivables days of Deepak Nitrite Ltd, an investor would notice that the receivables
days of the company used to be in the range of 72 days to 85 days from FY2013 to FY2018. Thereafter, the
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receivables days improved to 57 days in FY2021. The significant change in the business of Deepak Nitrite
Ltd during recent years (since FY2019) has been the operationalization of the phenol plant.
Deepak Nitrite Ltd is currently, the largest domestic producer of phenol with a market share of about 65%.
Through DPL, we achieved a key milestone by substituting majority of the local market imports of Phenol
and Acetone, and reportedly attaining a market share of about 65% in the country.
It seems that due to a strong position in the phenol market, Deepak Nitrite Ltd is able to get its money for
phenol from the customers in a comparatively shorter period than in the case of other products. As a result,
its receivables days have witnessed an improvement ever since the phenol plant has become operational.
Going ahead, an investor should keep a close watch on the receivables position of the company to monitor
whether its receivables days go back to the previous levels of 72-85 days.
From the above discussion, an investor would appreciate that in the last 10-years; Deepak Nitrite Ltd has
kept its efficiency of inventory management under control and has improved its efficiency of receivables
collection. As a result, the company has been able to grow in the last 10-years without deterioration of its
working capital position.
When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from
operations (cCFO) of Deepak Nitrite Ltd for FY2012-21, then she notices that over the last 10-years
(FY2012-FY2021), the company has converted its profit into cash flow from operations.
Over FY2012-21, Deepak Nitrite Ltd reported a total net profit after tax (cPAT) of ₹1,951 cr. During the
same period, it reported cumulative cash flow from operations (cCFO) of ₹2,384 cr.
It is advised that investors should read the article on CFO calculation, which would help them understand
the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors
would also understand the situations when the companies would have their CFO higher than the PAT.
Learning from the article on CFO will indicate to an investor that the cCFO of Deepak Nitrite Ltd is higher
than the cPAT due to the following factors:
 Depreciation expense of ₹613 cr (a non-cash expense) over FY2012-FY2021, which is deducted

while calculating PAT but is added back while calculating CFO.
 Interest expense of ₹494 cr (a non-operating expense) over FY2012-FY2021, which is deducted
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The Margin of Safety in the Business of Deepak Nitrite Ltd:
a) Self-Sustainable Growth Rate (SSGR):

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal
to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able
to fund its growth from its internal resources without the need of external sources of funds.
Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal
resources would not be sufficient to fund its growth aspirations. As a result, the company would have to
rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its
target growth.
An investor may calculate the SSGR using the following formula:
SSGR = NFAT * NPM * (1-DPR) – Dep
Where,
 SSGR = Self Sustainable Growth Rate in %

 Dep = Depreciation rate as a % of net fixed assets
 NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
 NPM = Net profit margin as % of sales
 DPR = Dividend paid as % of net profit after tax
While analysing the SSGR of Deepak Nitrite Ltd, an investor would notice that over the years, the company
had an SSGR in the single digits. It is only recently that a significant improvement in the product prices
due to supply chain disruptions in China as well as in the sea trade has allowed Deepak Nitrite Ltd to enjoy
very high-profit margins.
This performance has been partially caused by supernormal realisation in DASDA owing to China’s
temporary disruption and hence may be seen in light of this.
The company even acknowledged that such margins are not sustainable.
An investor would appreciate that the recent high prices of the products have led to an improvement in the
profit margins of Deepak Nitrite Ltd, which may not sustain at these levels going ahead. These high margins
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have increased its SSGR in recent years to 20%. Any correction in the margins in the future may lead to a
decline in the SSGR of Deepak Nitrite Ltd.
Therefore, an investor is looking at a situation, where over most of the last 10-years, the SSGR of Deepak
Nitrite Ltd has been in the single digits whereas, over the same period, the company has grown its sales at
a CAGR of about 21%.
As the company has grown its sales more than its SSGR; therefore, in order to grow its sales from ₹790 cr
in FY2012 to ₹4,360 cr in FY2021, the company has to raise additional capital in the form of incremental
debt and equity dilution multiple times.
Over the last 10-years (FY2012-FY2021), the company has raised an additional debt of ₹329 cr as its total
debt has increased from ₹261 cr in FY2012 to ₹590 cr in FY2021 (329 = 590 – 261).
Over and above the debt, in the last 10-years, Deepak Nitrite Ltd has diluted its equity three times for
meeting the funds’ requirements of the phenol plant. It raised a total of ₹383 cr from FY2016 to FY2018.
 FY2016: QIP1: ₹83.3 cr (FY2016 annual report, page 43)

 FY2017: QIP2: ₹150 cr (FY2017 annual report, page 5)
 FY2018: QIP2: ₹150 cr (FY2018 annual report, page 21)
Therefore, an investor would notice that during the last 10-years (FY2012-FY2021), the company has
grown its business beyond what its internal resources could sustain in the terms of SSGR. As a result, it
had to raise a total of ₹712 cr (additional debt: ₹329 cr + additional equity: ₹383 cr) to meet its funds’
requirement.
Deepak Nitrite Ltd has always followed the route of taking on additional capital for its growth because even
in the previous decade, it had raised additional equity. Deepak Nitrite Ltd raised about ₹45 cr in May 2006
by way of a rights issue and about ₹15 cr by way of conversion of warrants in February 2010 (QIP
prospectus, January 2018, page 62).
Deepak Nitrite Ltd realizes that its growth aspirations are beyond what its internal resources can sustain in
terms of SSGR. The recent increase of SSGR in FY2021 to 20% seems to be based on unsustainable product
prices and profit margins.
The company realizes it. Therefore, the company has made it very clear that in order to maintain the growth
momentum; it would have to continue raising additional capital by way of incremental debt and equity
dilution.
In 2021, Deepak Nitrite Ltd intimated to its shareholders that it is not looking forward to becoming a debt-
free company indicating that it will keep raising debt for expanding its business.
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Somsekhar Nanda: …never ever we have said that we would like to be zero debt Company or a low levered
Company. We would like to grow, and which means you will have to infuse capital in form of debt or equity.
And for that matter, if we have to increase our debt levels, that is fine…
Maulik Mehta: But, in fact, Mr. Sanjay Upadhyay has told us many times that, look, he is very tired of
people asking him about zero debt, he is not interested in being a zero-debt Company.
The company also realizes that its funds’ requirements are beyond what its internal resources can provide.
Therefore, to fund its recently announced capital expenditure of about ₹1,200 cr for new products like
solvents, fluorination platform, brownfield expansion of existing products and more capex to be announced
later, Deepak Nitrite Ltd has already initiated the process to raise additional equity.
In December 2021, Deepak Nitrite Ltd has initiated a postal ballot process to obtain approvals from its
shareholders for a qualified institutional placement (QIP) of about ₹2,000 cr. In the postal ballot notice to
the shareholders for approving the QIP, the company has acknowledged that the internal resources of the
company would only be able to meet a partial funds’ requirement. Therefore, it would have to raise
additional money by way of equity dilution.
The corporate announcement, December 29, 2021, page 9:
While it is expected that the internal generation of funds would partially meet the funding requirement of
its growth objectives, it is thought prudent for the Company to have enabling approvals to raise capital at
an appropriate time for the purpose of funding some of these growth opportunities…
From the above discussion, an investor would appreciate that Deepak Nitrite Ltd is continuously relying on
outside capital for meeting its growth aspirations. Frequently raising equity money by way of qualified
institutional placements (QIP) and debt is a clear indication in this regard.
Moreover, when an investor analyses the history of Deepak Nitrite Ltd right from its beginning in 1970,
then she notices that the company has launched its initial public offer (IPO) on the Bombay Stock Exchange
(BSE) in 1971 even before it had started manufacturing any product. Effectively, Deepak Nitrite Ltd
constructed its first manufacturing plant by raising equity money from public shareholders via an IPO.
Source: Company website: Legacy
It was this very trust that gave Deepak Nitrite’s very first IPO great success. Conducted even before the
company had started manufacturing, it was oversubscribed by 20 times.
Therefore, an investor would notice that Deepak Nitrite Ltd started the foundation of its entire business by
raising equity from outside shareholders even before it could start manufacturing a product. Therefore, it
seems that consistently relying on additional money is a consistent practice at Deepak Nitrite Ltd. and it
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has shown the same by relying on debt and QIP in the past and also by going for approval for another QIP
for its upcoming capital expansion plans.
Nevertheless, an investor should appreciate that the growth aspirations of the company are beyond what its
internal resources can sustain and the recent increase in SSGR is due to abnormally high product prices and
elevated profit margins, which may not sustain in the future.
The company has acknowledged it and the investor may keep a close watch on the equity dilution levels
and incremental debt that Deepak Nitrite Ltd raises so that she may timely assess whether these are in the
best interests of the shareholders or the company is going overboard.
An investor arrives at a similar conclusion when she analyses the free cash flow (FCF) position of Deepak
Nitrite Ltd.
b) Free Cash Flow (FCF) Analysis of Deepak Nitrite Ltd:

While looking at the cash flow performance of Deepak Nitrite Ltd, an investor notices that during FY2012-
2021, it generated cash flow from operations of ₹2,384 cr. During the same period, it did a capital
expenditure of about ₹2,396 cr.
Therefore, during this period (FY2012-2021), Deepak Nitrite Ltd had a negative free cash flow (FCF) of
(₹12) cr (=2,384 – 2,396).
In addition, during this period, the company had a non-operating income of ₹156 cr and an interest expense
of ₹494 cr. As a result, the company had a total negative free cash flow of (₹350) cr (= -12 + 156 – 494).
Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.
In addition, during the last 10-years (FY2012-FY2021), Deepak Nitrite Ltd paid out a total dividend of
₹247 cr (excluding dividend distribution tax, DDT) to its shareholders. Over and above this amount, Deepak
Nitrite Ltd would have paid a DDT of about ₹50 cr being 20% of the dividend paid. Therefore, Deepak
Nitrite Ltd paid out about ₹300 cr to its shareholders in dividends and the dividend distribution tax.
Therefore, Deepak Nitrite Ltd faced a total cash flow deficit of about ₹650 cr (= 350 + 300).
Deepak Nitrite Ltd resorted to meet this cash flow gap by way of raising incremental debt of ₹329 cr as its
total debt has increased from ₹261 cr in FY2012 to ₹590 cr in FY2021 (329 = 590 – 261). Over and above
the debt, in the last 10-years, Deepak Nitrite Ltd has diluted its equity three times for meeting the funds’
requirements of the phenol plant. It raised a total of ₹383 cr from FY2016 to FY2018.
Going ahead, an investor should keep a close watch on the free cash flow generation by Deepak Nitrite Ltd
to understand whether the company continues to generate surplus cash from its operations.
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Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin
of safety in the business model of any company.
Additional aspects of Deepak Nitrite Ltd:

On analysing Deepak Nitrite Ltd and after reading annual reports, DRHP, its credit rating reports and other
public documents, an investor comes across certain other aspects of the company, which are important for
any investor to know while making an investment decision.
1) Management Succession of Deepak Nitrite Ltd:

Deepak Nitrite Ltd is a part of the Deepak group, which was founded by Mr C. K. Mehta. Currently, Mr C.
K. Mehta is the chairman-emeritus of the company since August 5, 2016 (FY2017 annual report, page 46).
At present, four members of the Mehta family are a part of the board of directors and executive management
of the company.
 Mr Deepak C. Mehta (age 66 years) son of Mr C. K. Mehta is the chairman and managing director
of the company.
 Mr Ajay C. Mehta (age 63 years) son of Mr C. K. Mehta and brother of Mr Deepak Mehta is a non-
executive director of the company. He resigned from the position of managing director of Deepak
Nitrite Ltd from December 1, 2017 (FY2018 annual report, page 61). Currently, he is the managing
director of one of the group companies, Deepak Novochem Technologies Limited (FY2020 annual
report, page 31).
 Mr Maulik D. Mehta (age 38 years) son of Mr Deepak C. Mehta is the executive director and chief
executive officer of the company.
 Mr Meghav D. Mehta (age 34 years) son of Mr Deepak C. Mehta and brother of Mr Maulik D.
Mehta is the executive director of Deepak Phenolics Ltd, the wholly-owned subsidiary of the
company (FY2021 annual report, page 21).
The following disclosures in the annual reports of Deepak Nitrite Ltd would help an investor understand
the relationships of the various members of the Mehta family with each other.
Mr Meghav D. Mehta: Grandson of Shri Chimanlal K. Mehta, son of Shri Deepak C. Mehta and nephew of
Shri Ajay C. Mehta
Mr Deepak C. Mehta: Father of Shri Maulik D. Mehta and Brother of Shri Ajay C. Mehta
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Therefore, an investor would note that currently, three generations of the Mehta family are associated with
Deepak Nitrite Ltd. The founder-promoter is appointed as the chairman emeritus of the company and the
members of the other two generations are present as executive members.
The presence of younger family members at executive positions within the group, while the senior members
are still handling responsibilities, looks like a good succession plan. This is because the young members
can learn about the fine nuances of the business under the guidance of senior members until the seniors
decide to take retirement.
Currently, it looks like Mr Deepak C. Mehta and his family are taking care of Deepak Nitrite Ltd and his
brother Mr Ajay C. Mehta is taking care of Deepak Novochem Technologies Limited.
Within the family of Mr Deepak C. Mehta, it seems that his younger son Mr Meghav D. Mehta is being
groomed to handle the phenolic segment under Deepak Phenolics Ltd whereas his elder son Mr Maulik D.
Mehta is being groomed to handle other chemicals segments of Deepak Nitrite Ltd.
Going ahead, an investor may keep a close watch on the relationships among the promoter family members
to understand whether any ownership issues arise between them. An investor may contact the company
directly for any clarifications in this regard.
2) Project execution by Deepak Nitrite Ltd:

From the above discussion in the section on the net fixed asset turnover ratio, an investor would remember
that over the last 10-years, Deepak Nitrite Ltd has executive many capital expansion projects. An investor
needs to assess these projects in terms of their completion within time and cost estimates to understand the
project execution skills of the company.
2.1) Optical brightening agents (OBA) project at Dahej, Gujarat:
Deepak Nitrite Ltd intimated to its shareholders in May 2011 that it is planning to build a manufacturing
plant at Dahej for an investment of about ₹150 cr. It mentioned that the plant would be completed in 15
months i.e. by August 2012.
Umesh Asaikar: At Dahej we are setting up manufacturing facilities for a fine and speciality performance
chemical which will result in to forward integration of one of our existing products DASDA. We will require
a capital outlay of Rs. 150 Crore for this project… Both these projects are estimated to be completed in the
next 15 months.
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However, in the FY2014 annual report, the company intimated to its shareholders that the first stream of
phase one of the project was completed in March 2013.
FY2014 annual report, page 45-46:
Phase I of your Company’s Greenfield expansion plan at Dahej commenced its first stream of commercial
production in March 2013.
The rest of the project was completed in FY2015.
Following the Greenfield and Brownfield expansion, our facilities at Dahej and Nandesari are fully
operational
Therefore, an investor would note that initially, Deepak Nitrite Ltd had estimated to complete the OBA
project at Dahej in August 2012. However, the project was delayed significantly. It suffered delays of about
2 years and was completed in FY2015.
When an investor attempts to estimate the capital expenditure done by Deepak Nitrite Ltd on this project
from the annual reports, then she gets the following data:
 FY2012: ₹8 cr (FY2012 annual report, page 80)

From the above data, an investor would note that Deepak Nitrite Ltd spent about ₹290 cr (= 8 + 140 + 62
+ 80) on the project against an initial estimate of ₹150 cr.
Therefore, from the above discussion, it seems that the execution of the OBA project at Dahej by Deepak
Nitrite Ltd left scope for improvement. This is because; the project witnessed cost as well as time overruns.
2.2) Nandesari: brownfield expansion project of Inorganic intermediates (solar storage

salts):
In May 2011, Deepak Nitrite Ltd intimated to its shareholders that it is going for a brownfield expansion
project at Nandesari near Vadodara for an investment of about ₹50 cr. It mentioned that the plant would be
completed in 15 months i.e. by August 2012.
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Umesh Asaikar: We are also planning to expand our facility at Nandesari in Gujarat. This expansion is
especially being executed for growth on our inorganic intermediates business…With a capital outlay of
only Rs. 50 Crore… Both these projects are estimated to be completed in the next 15 months.
However, the project witnessed a delay, as it could not be completed by August 2012. It was completed in
June 2013.
The Brownfield expansion at the Nandesari facility was commissioned in June 2013
When an investor attempts to estimate the capital expenditure done by Deepak Nitrite Ltd on this project
from the annual reports, then she gets the following data:

From the above data, an investor would note that Deepak Nitrite Ltd spent about ₹78 cr (= 19 + 3 + 56) on
the project against an initial estimate of ₹50 cr.
Therefore, from the above discussion, it seems that the execution of the brownfield project at Nandesari
also left scope for improvement. This is because; the project also witnessed cost as well as time overruns.
2.3) Phenol and Acetone project:
In May 2016, Deepak Nitrite Ltd intimated to its shareholders that it is planning to build a large project at
Dahej. The cost of the project was estimated to be about ₹1,200 cr and the company expected to complete
it by December 2017.
Arun Malhotra: The same asset turnover, means on Rs. 1200 crore of CAPEX can we assume around Rs.
2,000 crore of turnover? When will this project be completed?
Somsekhar Nanda: The asset turn ratio on a normal crude price, crude price is subdued now, on a normal
situation it will be about 2.25x:1. Commissioning time is December 2017…
However, in the next year, FY2017, the company increased the cost of the project o ₹1,400 cr.
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This greenfield project is expected to be commissioned in the second half of the current financial year. For
this, the overall capital outlay will be approximately ₹ 1,400 crores.
The company could complete the project in November 2018.
we also commissioned our mega-greenfield facility of Phenol and Acetone at Dahej, Gujarat, on November
1, 2018.
Therefore, when an investor looks at the data, then it seems that the phenol project saw a cost overrun of
about ₹200 cr and a delay of about 11 months because the project cost about ₹1,400 cr against an initial
estimate of ₹1,200 and was completed in November 2018 against an initial estimate of December 2017.
For any further clarifications in this regard, an investor may contact the company directly.
2.4) Capital expansion project at Roha, Maharashtra:
While reading the annual reports of Deepak Nitrite Ltd, an investor gets to know that in the past, the
company had initiated work on a project at Roha, Maharashtra. The company started constructing a building
and spent about ₹4 cr on the same, which it included in the capital work in progress (CWIP).
However, in FY2009, due to unexplained circumstances, it seems that the company abandoned the building
and impaired the entire amount spent on the building.
FY2016 annual report, page 154
*In respect of Building held under Capital work in progress at Roha which was impaired in the year 2008-
09, cumulative provision stands at ₹ 397.88 Lacs as on Balance Sheet date.
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The annual reports of the company do not contain the reasons why the building was considered unusable
while it was still under construction.
Many questions arise in the mind of the investor. What was this building? Why was it abandoned midway?
Why could it not be completed and repurposed for any other project?
An investor would appreciate that by abandoning a building midway in construction and then impairing it
indicates that the building is beyond any alternate use. It is a straight loss for the shareholders.
An investor may contact the company directly to get any clarifications about this abandoned building at
Roha, Maharashtra.
Nevertheless, if the investor notices the progress of the project currently under execution, then she notices
that at present, Deepak Nitrite Ltd is executing two projects.
The first project is the capacity expansion of isopropyl alcohol from 30,000 MTPA to 60,000 MTPA. As
per February 2021 conference call (page 4), the project was supposed to be completed by Q4-FY2021 or in
Q1-FY2022. The second project is the 29 MW captive power plant being constructed in Dahej, which as
per the May 2021 conference call (page 8) was expected to be complete by September 2021.
However, both these projects were yet to be completed in October 2021 when the company held its
conference call.
as I mentioned, we are expecting to commission IPA to manufacture 30,000 tonnes of additional capacity
and 29-megawatt cogent plant during this current quarter.
Moreover, until today, there is no intimation by the company to the stock exchanges about the completion
of these projects.
Regarding the currently ongoing projects, an investor may note that the currently ongoing coronavirus
pandemic would definitely have an impact on completion. Therefore, for the projects currently under
execution or those projects that may start in near future, an investor should build her expectations about
completion by taking in her mind, the risk of delays due to coronavirus pandemic.
3) Operationalization of completed projects by Deepak Nitrite Ltd:

An investor would appreciate that whenever a company comes up with a new manufacturing plant, then in
addition to completing it within budgeted cost and time, it is also important to sell the new product in the
market so that the investment done by the company can provide a value to its shareholders. In this
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assessment, it matters how quickly a company is able to reach the optimal utilization levels of the new
plant.
In the case of Deepak Nitrite Ltd, the company has completed a few manufacturing projects in the past 10-
years (FY2012-FY2021). Therefore, an assessment of these projects would help an investor understand
whether the company has the ability to sell new products in the market.
3.1) Phenol project:
In November 2018, Deepak Nitrite Ltd completed its largest manufacturing plant for producing phenol and
acetone. Later on, the company expanded the plant to produce isopropyl alcohol (IPA) from acetone in
April 2020.
your Company commissioned a plant to manufacture Isopropyl Alcohol (IPA) from Acetone with a capacity
of 30,000 MTPA in the month of April 2020.
Let us assess how much time the company took to reach optimal utilization levels of these plants.
In the case of the phenol and acetone plant started in November 2018, the company immediately reached
100% utilization in the very next quarter (January-March, Q4-FY2019).
…its capacity utilisation was also ramped up to touch 100% during Q4 of FY 2018-19
An investor notices that ever since the capacity utilization of the phenol and acetone plant has continuously
been very high; at times exceeding 100%.
 FY2020: above 90% utilization level (FY2020 annual report, page 36).
 FY2021: 115% utilization level (FY2021 annual report, page 14).
Many factors helped in a quick increase in the utilization levels of the phenol and acetone plant.
Even before the completion of the phenol plant, in FY2018 itself, the world has started witnessing a
tightening of the demand-supply equation as the demand was increasing sharply than the supply. In China,
the demand for phenol increased as a few plants of phenol derivatives started operations. In addition, a large
phenol plant in the USA was shut down. As a result, the phenol prices increased in FY2018.
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…some downstream projects have commenced in China leading to greater captive consumption of Chinese
Phenol capacity. Further, a large global facility for production of Phenol has been shut down in the US.
The combination of these factors has resulted in firming up of overall prices of Phenol globally.
Subsequently, Deepak Nitrite Ltd intimated to its shareholders in May 2021 that the demand for phenol in
China has increased so much that China, which was a competitor previously, is now importing phenol. In
addition, due to various difficulties in the sea trade like unavailability of ships, container shortage etc., the
cost of transportation by sea has increased significantly, which has made it difficult for importers to buy
phenol at a cheaper price from multinational producers. As a result, in FY2021, Deepak Nitrite Ltd
witnessed a significant increase in the demand for phenol that led to very high realizations as well as high
volumes of phenol sales.
Conference call, May 2021, pages 3 and 10:
Maulik Mehta: This was bolstered by volume as well as realization gains in the phenolics business that
witnessed an incrementally favorable demand environment in the end-user industries.
Sanjay Upadhyay: China is actually now importing phenol so there is a short supply there, some plants in
US are again in trouble on phenol….you can see in this situation where the commodity prices are going up
and sea freight are also going up. It is extremely difficult for people to import and sell in India.
Therefore, an investor notices that the increased consumption of phenol in China, reduced production in
the USA and difficulties faced by importers due to challenges in the sea-trade have helped Deepak Nitrite
Ltd use its phenol plant at more than 100% levels and also to realize a much higher price and profit margins.
When an investor studies the operationalization of the isopropyl alcohol (IPA) plant after its completion in
April 2020, then she notices that in the case of the IPA plant as well, Deepak Nitrite Ltd achieved a 110%
utilization level within one quarter.
Credit rating report, CRISIL, August 2020:
The company commissioned its IPA plant in Deepak Phenolics Limited (DPL) which supported
performance achieving 110% capacity utilization within first quarter.
An investor would appreciate that IPA is used to produce sanitisers and in the light of the coronavirus
pandemic during 2020, the demand for IPA increased sharply to the extent that its prices more than doubled.
Credit rating report, ICRA, June 2020, page 2:
IPA is extensively used as a sanitiser, and with the Covid-19 pandemic, the global demand for IPA peaked.
This resulted in the realisations more than doubling since March 2020
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The following table shows the performance of the phenolic segment of Deepak Nitrite Ltd, which includes
phenol, acetone and IPA in terms of revenue and EBIT (earnings before interest and taxes) from its start
until FY2021.
An investor would notice that Deepak Nitrite Ltd reported losses in the phenolic segment in FY2018 when
the plant was not operational. It was due to the seed marketing activities done by the company to test the
phenol market in India.
In the above table, an investor would note that the profit margins of the phenolic segment have increased
sharply from about 11% in FY2019 to 25% in FY2021.
From the above discussion, an investor would realize that this sharp increase in the profit margins of the
phenolic segment has been due to the increased consumption of phenol in China, reduced production in the
USA, difficulties faced by importers due to challenges in the sea trade and increased demand and prices of
IPA due to coronavirus pandemic.
In addition, an investor would note that phenol imports from some countries in India are subject to anti-
dumping duty (ADD). As per the QIP prospectus, January 2018, in the past, India had imposed ADD on
phenol imports from many countries like Singapore, South Africa, EU, Japan, Thailand, China, USA, South
Korea and Taiwan etc.
Government has also levied anti-dumping duty on import of phenol from countries such as China, USA,
South Korea and Taiwan. In Oct 2008, an anti-dumping duty was levied on imports from Singapore, South
Africa and EU for a period of 5 years. In 2010, antidumping duty of up to $547/ tonne was imposed on
imports from Japan and Thailand for a period of five years. In 2014, anti-dumping duty of up to $80/ton
was imposed on imports from China and up to $194/ton was imposed on imports from any country other
than China for a period of six months. In August 2014, an anti-dumping duty of $47-$196 per tonne was
levied on imports originating from Taiwan and the USA.
In fact, the credit rating agency, CRISIL, in its report for Deepak Nitrite Ltd in March 2021 stressed that
any change in the anti-dumping duties on phenol might have a detrimental impact on the business of Deepak
Nitrite Ltd.
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Credit rating report by CRISIL, March 2021:
The domestic phenol sector faces competition from imports contributing 40% of domestic demand. Any
changes in anti-dumping duty impacting demand-supply situation of some of its products may remain key
monitoring factor.
An investor would appreciate that all these factors leading to an import restriction are temporary in nature
and as the situations improve, then maintaining such a high level of profit margins in the phenolic business
may not be possible by Deepak Nitrite Ltd.
The company itself realizes this. As a result, Deepak Nitrite Ltd has acknowledged that the current profit
margins of the phenolic segment are not sustainable.
Therefore, we believe that an investor should be cautious while projecting the currently improved profit
margins in her future projections.
3.2) Optical brightening agent (OBA) project:
From the above discussion on project execution, an investor would remember that Deepak Nitrite Ltd
commissioned the first phase of the OBA plant in March 2013 and completed the whole project in FY2015.
Therefore, the OBA project started contributing to the revenue from FY2014 onwards.
As per the company, OBA has been in use for the last 70 years and it believed that there is no possibility of
its substitution. As a result, it decided to create a large capacity of OBA.
OBA is used since last 70 years and a substitution is highly unlikely in near future.
As per Deepak Nitrite Ltd, its plant of OBA is the world’s largest brightener plant.
Deepak Nitrite would be offering OBA at the door-step not only from the world’s largest Brightener plant
but it would also be offering equally matching logistic solutions and after-sale technical services.
However, the company realized that the OBA business is not very simple where it could launch its product
in the market and quickly gain market share. This is because the customers are very cautious before
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approving any new supplier for OBA. As per the company, any problems in the OBA may lead to the
rejection of millions of meters of cloth for a textile mill or millions of tons of paper for a paper mill.
Somsekhar Nanda: OBA business actually is not a bulk business, it is a specialized performance chemical
and very-very specialized, it has to perform its quality…if chemical is not working as per their satisfaction
or as per their chemical perception they might lose a million meters of cloth or million tons of paper. So
very-very difficult.
As a result of the very strict approval process by the customers, Deepak Nitrite Ltd faced many challenges
in getting approvals for its OBA products. The credit rating agency, ICRA highlighted the troubles faced
by the company in the OBA segment in its report for Deepak Nitrite Ltd in January 2018. ICRA stated that
the company is not able to scale the OBA business as per its expectations as it is facing difficulties in getting
approvals from the customers.
Credit rating report by ICRA, January 2018:
Delays in ramping up of operations at Dahej facility for OBA: …the revenue growth remains lower-than-
expected. The company continues to witness challenges since OBA is a performance chemical and goes
through an elongated approval process by the customer.
Therefore, an investor would appreciate that in FY2012, Deepak Nitrite Ltd planned to go for OBA
production assuming that it is a long-standing chemical product with little threat of substitution. As a result,
it created the world’s largest brightener plant. However, soon, it realized that OBA is a very-very important
chemical for the textile and paper mills where any problem with OBA can lead to rejection of millions of
meters/tons of their product. Therefore, it did not get quick approvals for its product from customers.
As a result, the performance of the OBA division continued to be below expectation. In fact, an investor
would notice that OBA (performance products) segment continued to make losses until FY2018.
The following table shows the performance of the “performance products” segment of Deepak Nitrite Ltd,
which includes OBA over FY2014-FY2021.
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From the above table, an investor would observe that even until FY2018, which is about 5-years after
completing phase 1 of the OBA plant in March 2013, Deepak Nitrite Ltd continued to make losses. This is
despite building the largest brightener plant in the world.
Therefore, an investor should keep in her mind that just building a large plant may not assure business
success for any company.
In the above table, an investor would notice that over FY2019 and FY2020, the performance of the
“performance products” division suddenly improved very sharply and its EBIT margins increased from
losses in FY2018 to 55% in FY2020.
When an investor analyses the reasons for such a sharp improvement in the performance in the
“performance products” division, then she gets to know that it was due to supply disruptions in China.
This performance has been partially caused by supernormal realisation in DASDA owing to China’s
temporary disruption and hence may be seen in light of this.
The credit rating agency, ICRA, highlighted in its report for Deepak Nitrite Ltd in June 2020 that due to
supply disruptions, the prices of DASDA had increased by 150% and the prices of OBA had increased by
50%.
The average realisations for diamino stilbene disulfonic acid (DASDA) and optical brightening agent
(OBA) increased by over 150% and 50% YoY, respectively, in FY2020, resulting in unprecedented
profitability in the PP segment for DNL.
An investor would appreciate that such supply disruptions are always temporary in nature. This is because
either the same set of suppliers come back or new suppliers notice the opportunity and the new supply
reaches the market. The same thing happened in this case as in FY2021, the supply situation improved and
the EBIT margins of the “performance products” division declined sharply from 55% in FY2020 to 7% in
FY2021.
Maulik Mehta: Our performance products segment is clearly impacted by a sharp drop in prices, which
were unusually elevated last year.
As per the credit rating report of Deepak Nitrite Ltd by ICRA in March 2021, the prices of the “performance
products” segment declined to previous levels.
ICRA also notes that the sales of performance products (PP) dropped sharply in FY2021 with decline in
realisations to erstwhile levels
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Therefore, from the above discussion, an investor would notice that the “performance products” division
was performing poorly and making losses until FY2018 despite Deepak Nitrite Ltd.’s plant being the largest
brightener plant in the world. It reported a sudden and very sharp increase in profitability in FY2020;
however, it was only a temporary phase of supply disruptions in China. Soon enough, the supply situation
normalized and the profit margins of the “performance products” division declined sharply.
Therefore, from the above discussion, an investor would appreciate two things. First, only building a large
manufacturing plant does not assure business success and two, sharp increases in profitability due to supply
disruptions are temporary where the product prices and profit margins return to normal after a short period
as new supply arrives in the market.
Therefore, an investor should always be cautious before she expects the sustainability of elevated profit
margins in her future projections.
4) Dividends funded by debt or equity dilution:

An investor would remember from the discussion on the free cash flow position of Deepak Nitrite Ltd that
it could not meet its capex requirements from its CFO and as a result, the company had to raise additional
debt as well as do multiple rounds of equity dilution.
During FY2012-FY2021, Deepak Nitrite Ltd generated cash flow from operations of ₹2,384 cr. During the
same period, it did a capital expenditure of about ₹2,396 cr. Moreover, after taking into account the non-
operating (other) income and interest payments, it came out that the company had a total negative free cash
flow of (₹350) cr during FY2012-FY2021.
Deepak Nitrite Ltd resorted to meet this cash flow gap by way of raising incremental debt of ₹329 cr as its
total debt has increased from ₹261 cr in FY2012 to ₹590 cr in FY2021 (329 = 590 – 261). Over and above
the debt, in the last 10-years, Deepak Nitrite Ltd has diluted its equity three times for meeting the funds’
requirements of the phenol plant. It raised a total of ₹383 cr from FY2016 to FY2018.
From the above discussion, it would clearly come out that the company’s growth aspirations were higher
than what its internal resources could sustain and as a result, it had to take on debt as well as frequently
dilute its equity so that it could arrange funds to complete its capacity expansion plans.
However, an investor notices that during the last 10-years, despite spending all the money from its operating
activities on capital expenditure, Deepak Nitrite Ltd continued to pay dividends to its shareholders.
In fact, during the last 10-years (FY2012-FY2021), Deepak Nitrite Ltd paid out a total dividend outflow of
about ₹300 cr consisting of ₹247 cr of dividends (excluding dividend distribution tax, DDT) to its
shareholders and DDT of about ₹50 cr being 20% of dividend paid.
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From the above calculations, an investor would appreciate that on a cumulative basis in the last 10-years
(FY2012-FY2021), the dividends paid by Deepak Nitrite Ltd are funded out of the debt proceeds or the
money received from the issuance of new equity shares.
An investor would appreciate that during periods when a company is spending more money on capital
expenditure than what it is making from its operations, then it should refrain from distributing money in the
form of dividends. The company should conserve resources so that it may use them for capital expenditure
or repayment of debt. Otherwise, the company ends up paying dividends by raising debt from lenders and
paying interest on the same, which increases the costs for the company and may not be in the best interests
of the company and its stakeholders.
We believe that in the cases where dividends are funded by debt or equity dilution, investors should not
take any comfort of the dividend yield because such dividends may be stopped at any time whenever the
cash flow position of the company deteriorates.
5) Related party transactions of Deepak Nitrite Ltd:

While analysing the annual reports of Deepak Nitrite Ltd an investor notices that, the company regularly
enters into financial transactions with the promoter-group entities.
5.1) Purchase and sale of goods from promoter entities:
Among the major transactions, the company purchases goods of about ₹75-80 cr each year from Deepak
Fertilisers & Petrochemicals Corporation Limited and sales of goods & conversion transactions valuing
about ₹15-20 cr each year with Deepak Novochem Technologies Limited (source: consolidated related
party transaction sections of annual reports)
While analysing these transactions, an investor gets to know that Deepak Fertilisers & Petrochemicals
Corporation Limited is a very large producer of nitric acid, which is used by Deepak Nitrite Ltd to produce
intermediates like Sodium Nitrite.
Maulik Mehta: …Deepak Fertilizers, because they are one of the largest nitric acid manufacturers, we are
consumers.
An investor may contact the company directly to understand more about the transactions that it does with
other group companies like Deepak Novochem Technologies Limited.
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An investor should analyse the related party transactions between the listed entity and the promoters/their
entities in detail because these transactions provide opportunities for shifting economic benefits from the
minority/public shareholders to the promoters.
If the listed entity pays a price to the promoter-entities, which is higher than the market price of those goods
or sells goods to promoter-entities at a price, which is lower than the market price of those goods, then
effectively, these transactions may benefit promoters at the cost of minority/public shareholders.
Therefore, it becomes very essential that an investor does proper due diligence of the related party
transactions between the listed company and its promoter-group entities.
5.2) Purchase of capital asset (apparently land) from promoter group entity:
In the FY2020 annual report, Deepak Nitrite Ltd intimated to its shareholders that it has acquired many
land parcels at Dahej, Hyderabad and Roha for future growth opportunities. As per the company, it paid a
total of ₹141 cr for these land parcels.
DNL acquired several land parcels as a part of its capacity expansion and growth plan. This comprises a
big parcel of land acquired at Dahej, Gujarat, followed by smaller parcels of land acquired in Hyderabad
and in Roha. The land acquired during FY 2019-20 has been capitalised wherein the Company had paid ₹
141 Crores in aggregate for these land parcels.
Further, when an investor analyses the related party transactions of Deepak Nitrite Ltd with its promoter-
group entities, then she notices that during FY2020, it has purchased a capital asset from Deepak Fertilisers
& Petrochemicals Corporation Limited for ₹117 cr (FY2020 annual report, page 226).
5. Acquisition of Capital Asset: Deepak Fertilisers & Petrochemicals Corporation Limited: 117.11 cr
It is highly likely that out of the total land acquired by Deepak Nitrite Ltd in FY2020 for ₹141 cr, it might
have purchased the land for ₹117 cr from the promoter-group entity, Deepak Fertilisers & Petrochemicals
Corporation Limited.
We suggest that an investor may contact the company directly to understand the nature of the capital asset
purchased by Deepak Nitrite Ltd from Deepak Fertilisers & Petrochemicals Corporation Limited in FY2020
for ₹117 cr. She should ask whether it is one of the land parcels purchased by the company during the year.
In any case, whether it is a land parcel or any other capital asset that Deepak Nitrite Ltd had purchased from
Deepak Fertilisers & Petrochemicals Corporation Limited for ₹117 cr, the investor should do her
independent due diligence to ascertain whether the said transaction is at the market price. This is because,
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as discussed above, such transactions provide opportunities for shifting economic benefits from the
minority/public shareholders to the promoters.
5.3) Promoter remuneration paid by Deepak Nitrite Ltd:
While analysing the annual reports of Deepak Nitrite Ltd, an investor notices that at times, the company
has paid its promoters a remuneration, which was higher than the legally allowed limits. As a result, the
auditor of the company pointed it out to the shareholders in the annual report.
For example, in the FY2015 annual report, the auditor of the company emphasized that the company has
paid a remuneration, which is higher by ₹45.66 lac than the legal limits.
Managerial Remuneration to the Managing Director(s) and Executive Director is in excess of the limit
prescribed under clause (i) of second proviso to sub-section (1) of section 197 of the Companies Act, 2013
by ₹45.66 Lacs
Because of the excess remuneration paid by the company, it had to take special approval from the
shareholders for the same in its annual general meeting.
Subsequently, approval of the shareholders was obtained at the Annual General meeting held on August 7,
2015 and the emphasis of matter does not appear in any of our subsequent financial statements.
Thereafter, as per the FY2019 annual report, Deepak Nitrite Ltd sought approval from its shareholders for
paying a remuneration exceeding ₹5 cr or 2.5% of net profits to each promoter director and exceeding 5%
of net profits to all the promoter directors in aggregate.
the approval of the Company be and is hereby accorded for payment of remuneration to the Executive
Directors who are Promoters or members of Promoter Group as under:
(a) annual remuneration to an Executive Director who is a Promoter or member of Promoter Group,
exceeding ₹ 5 Crores or 2.5 per cent (2.5%) of the net profits of the Company computed in accordance with
Section 198 of the Companies Act, 2013 (“Net Profit”), whichever is higher; or
(b) aggregate annual remuneration to Executive Directors who are Promoters or members of Promoter
Group, where there is more than one such Executive Director, exceeding 5 per cent (5%) of the Net Profit.
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An investor may note that in FY2021, Deepak Nitrite Ltd paid a remuneration of ₹18.93 cr to the promoter-
director Mr Deepak C. Mehta who is the chairman and managing director of the company. The total
remuneration taken by Mr Mehta and his two sons from the company in FY2021 is ₹23 cr, which includes
₹2.53 cr paid to Mr Maulik D. Mehta and ₹1.54 cr paid to Mr Meghav D. Mehta.
Going ahead, an investor may continue to monitor the remuneration paid by Deepak Nitrite Ltd to the
promoter directors so that she may be cautious if the salaries exceed her comfort levels.
5.4) Security deposit paid to the promoter for residential premises:
While analysing the past annual reports, an investor notices that Deepak Nitrite Ltd had paid a security
deposit of ₹4 cr to Mr Deepak C. Mehta for residential premises.
Security deposit of ₹400 lacs (₹400 lacs) placed with Shri D. C. Mehta towards lease of residential
premises.
The company had disclosed the said security deposit in its annual reports until FY2018 and it seems that it
was repaid in FY2019.
It is advised that an investor may contact the company directly to know more about the residential premises
taken on lease by the company from Mr Deepak C. Mehta. She should get clarification about the location
of the premises. She may ask whether it is a flat or a villa or any other such information that might help her
in the assessment of the total value of the residential premises.
This is because; if the value of the residential premises is about ₹4 cr or less, then payment of a security
deposit of ₹4 cr for the premise may be similar to a situation where the company itself has funded the
purchase of the residential premise by the promoter and has subsequently been paying rent for using the
same.
An investor would notice that previously Deepak Nitrite Ltd had its head office in Pune and in FY2012; it
shifted the head office to Vadodara.
Shifting headquarters – closer control over destiny: The Company has recently moved its major
operational functions from Pune (Maharashtra) to Vadodara (Gujarat).
If an investor considers the cost of residential premises in both Pune as well as Vadodara, then she would
notice that in either of these cities, ₹4 cr is sufficient for buying very large and luxurious residential
premises.
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Therefore, an investor may contact the company directly to understand more about the discussed aspects of
the residential premises so that she may form informed viewpoints about the transactions of the promoter
with Deepak Nitrite Ltd.
6) Risk of environmental laws and other regulations:

While analysing the business of Deepak Nitrite Ltd, an investor comes across disclosures where the
company has acknowledged that out of all the laws applicable to it, the environmental laws are the most
critical.
Amongst the laws that we must adhere to, environmental laws and regulations are one of the most critical
laws.
These laws are the most critical because any lapses in meeting these regulations can straightaway lead to
the forced closure of the operations of the company.
In the past, in FY2017, Deepak Nitrite Ltd had faced a critical situation when the govt. authorities ordered
the closure of its Hyderabad plant due to air pollution.
The Telangana State Pollution Control Board (“TSPCB”)…issued closure order dated October 1,
2016…causing air pollution in the area, disconnected the power supply to the industry and our Company
has been directed to stop all industrial activities with effect from the date of the Closure Order.
Later on, the company took the necessary steps and could get a revocation order against the closure of the
plant. However, such an incidence highlights the risk of any lapse in compliance with environmental laws
and regulations.
An investor should keep a close watch on the developments related to the compliance or issues regarding
environmental regulation at the company so that she may get an early indication about any adverse
developments in this regard.
This is more crucial if an investor notices that the business of the company involves processing and
transporting potentially dangerous material.
Moreover, the business of chemical processing and production release a very high amount of effluents.
There have been numerous instances where companies operating in the chemical sector have faced adverse
orders from govt. authorities for violating pollution norms.
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An investor may read the analysis of NGL Fine Chem Ltd as a case study of a company, which faced many
instances of such adverse orders: Analysis: NGL Fine Chem Ltd
Going ahead, an investor should keep a close watch on the progress of the pollution control measures being
undertaken by the company in its plants. This is because, nowadays, the regulators are taken a very strict
approach while dealing with polluting plants.
An investor would remember that the copper smelting plant of Vedanta group at Tuticorin (Thoothukudi),
which was the largest copper unit in India, was shut by the govt. in 2018 as it was causing a lot of pollution.
Tuticorin protest: Tamil Nadu government orders permanent closure of Sterlite plant: Economic Times,
May 29, 2018
The Vedanta group has not been able to get permission to run the plant despite its best efforts for more than
the last 3 years and it is incurring losses of multiple crores of rupees every year due to the plant closure.
Closure of copper facility in Tamil Nadu costs Vedanta Group $600 mn: Business Standard, March 4, 2020
Because of the increasing awareness of the environmental pollution caused by industries, it is advised that
an investor should keep a close watch on the pollution control measures implemented by Deepak Nitrite
Ltd in its plants.
There are certain other aspects that an investor needs to keep a close watch on while analysing and
monitoring Deepak Nitrite Ltd, like the safety measures in the plants. An investor notices that in 2010, in
an accident in the Hyderabad plant of the company, two employees had died.
there has been an industrial accident in 2010 at Hyderabad which resulted in fatality of two of our workmen
In addition, the investor should continuously check for the labour-management relationship in its plants. In
the past, there have been occasions when the company’s plants witnessed labour strikes over wage issues;
in 2010 in Taloja, Maharashtra and in 2012 in Hyderabad.
We have, in the past, experienced such disruptions such as strikes at our Taloja and Hyderabad plants in
the years 2010 and 2012 respectively. The strikes were caused by disputes over wages.
In its annual reports, Deepak Nitrite Ltd has disclosed that four plant locations; Nandesari, Taloja, Roha
and Hyderabad have worker unions.
The Company has recognized Trade Unions at Nandesari, Taloja, Roha and Hyderabad.
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An investor may contact the company to understand whether it has a workers’ union in Dahej or it has
disclosed only about the workers’ unions in the plants of the standalone entity in its annual reports.
In any case, the investor needs to monitor the worker-management relationships of the company at its plants
so that she may get important inputs about her investment decisions.
7) Error in the annual report of Deepak Nitrite Ltd:

While analysing the annual report of Deepak Nitrite Ltd, an investor comes across instances where the
company has erroneously done some mistakes while presenting the data.
For example, in the FY2019 annual report, while reading the table showing “Indebtedness of the Company”;
the investor notices that the company has done a mistake while doing the calculations.
In the above table, an investor would notice that the section “Change in Indebtedness during the financial
year” has the following error:
The net change in the total indebtedness during the year (last column) is mentioned by the company as an
increase of ₹25,932.73 lac. However, if the investor analyses the data presented in the table, then she notices
that during FY2019, there was an addition of debt of ₹6,258.52 lac and there was a reduction of debt of
₹19,674.21 lac.
If the investor factors in the data of addition and the reduction of the debt during FY2019, then during the
year the net change of the indebtedness should be a reduction of ₹13,415.69 lacs (= 6,258.52 – 19,674.21).
However, by mistake, while preparing the FY2019 annual report, Deepak Nitrite Ltd added both, the figure
for the addition as well as reduction of debt and mentioned the net change as ₹25,932.73 lac (= 6,258.52 +
19,674.21).
Previously, the company made another mistake in the QIP prospectus, January 2018 when it erroneously
mentioned that out of its five manufacturing facilities, three are present in Hyderabad.
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QIP Prospectus, January 2018, page 38:
We have five manufacturing facilities in India out of which three manufacturing facilities are located at
Hyderabad.
However, by reading the annual reports of the company as well as from other publicly available information,
an investor gets to know that the five manufacturing facilities of the company are at Dahej, Nandesari
(Gujarat), Roha, Taloja (Maharashtra) and Hyderabad (Telangana).
Therefore, it seems that the company made another inadvertent error while preparing the QIP prospectus in
January 2018.
Looking at the above instances of errors in the presentation of data by the company in the annual report and
QIP prospectus, an investor would appreciate that she should increase her level of attention while reading
the annual reports and other disclosures by the company.
8) Other matters about Deepak Nitrite Ltd:

While analysing the publicly available documents of Deepak Nitrite Ltd, an investor comes across certain
pieces of information about which an investor may contact the company directly to seek more information
and clarifications.
8.1) Central Bureau of Investigation (CBI) case against Deepak Nitrite Ltd:
In the QIP prospectus, Deepak Nitrite Ltd highlighted that there is an old criminal case pending against the
company in the CBI court. The case is related to a sale transaction done by the company in 1995 where it
allegedly gave a higher discount, where CBI alleged corruption and said that a loss was caused to Krishak
Bharti Cooperative Limited.
Originally, CBI had filed the case against the company as well as the promoters; however, later on in 2017,
the High Court of Gujarat removed the names of the promoters from the case. As per the QIP prospectus,
the case against the company was still pending in the CBI court.
The Central Bureau of Investigation (“CBI”) had filed criminal case…against our Company, Mr. Deepak
C. Mehta…Mr. Ajay C. Mehta…and others (together the “Other Respondents”)…for offences under
sections 120(B) and 420 of the Indian Penal Code…Prevention of Corruption Act…for causing wrongful
loss amounting to ₹ 33.47 lacs to Krishak Bharti Cooperative Limited by giving discount of ₹ 1,000 per MT
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for ammonia supplied during April 1995 and May 1995… The FIR alleges that the Respondents, with an
object to obtain pecuniary advantage, allowed a discount of ₹1000 per MT instead of ₹150 per…
The High court vide its order dated March 24, 2017…setting aside the criminal case against the Other
Respondents.
The criminal case against the Company is pending before the CBI Court.
An investor may contact the company directly to understand the current status of this criminal case.
8.2) Raid by the Income Tax Dept. on Deepak Nitrite Ltd:
In FY2019, the Income Tax Dept. had conducted a raid on Deepak Nitrite Ltd and its wholly-owned
subsidiary, Deepak Phenolics Limited.
The Income Tax Department has conducted search operations during the year at the premises of Deepak
Nitrite Limited and Deepak Phenolics Limited.
An investor may contact the company for more details about the said investigation. She may ask if the
investigation is complete, and if so, then what has been the outcome. In case the investigation is still going
on, then she may ask about the current status of the same.
8.3) Issues with the registered office of Deepak Nitrite Ltd:
While reading the QIP prospectus, January 2018 of Deepak Nitrite Ltd, an investor gets to know that in
2016, govt. authorities had ordered the company to stop commercial use of its registered office; otherwise,
the office was to be sealed by the govt. authorities.
As per the company, its appeal against the said order is pending in the High Court of Gujarat.
QIP Prospectus, January 2018, page 179:
The Company has filed a civil petition against order…passed by the Town Development Officer and Deputy
Town Development Officer…under which the Company was directed to stop the commercial use of the
Registered office failing which the Registered Office would be sealed by the Respondent. The Hon’ble High
Court of Gujarat has passed an interim order…to stay and suspend the Orders… The matter is presently
pending before the Hon’ble High Court of Gujarat for final orders.
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An investor may contact the company to know more details about this issue and the current status of the
appeal in the High Court of Gujarat.
The Margin of Safety in the market price of Deepak Nitrite Ltd:

Currently (January 15, 2022), Deepak Nitrite Ltd is available at a price to earnings (PE) ratio of about 34
based on consolidated earnings of the last 12-months (Oct. 2020-Sept. 2021). An investor would appreciate
that a PE ratio of 34 does not offer any margin of safety in the purchase price as described by Benjamin
Graham in his book The Intelligent Investor.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid
for any stock, which takes into account the strength of the business model of the company as well. The
strength in the business model of any company is measured by way of its self-sustainable growth rate and
the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, even a low PE ratio of the company’s
stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price
may represent the poor business dynamics of the company.
 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
 How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
 Hidden Risk of Investing in High P/E Stocks
Analysis Summary
Overall, Deepak Nitrite Ltd seems a company, which has grown its sales at a fast growth rate of 21% year
on year for the last 10 years. In addition, the sales of the company have grown at increasing profitability
over the years. The operating profit margin (OPM) of the company has increased from 7% in FY2012 to
29% in FY2021.
In recent years, the company has faced significant tailwinds due to which its profit margins have increased
sharply. Supply chain disruptions in China, ship unavailability, contain shortages etc. have made it difficult
for importers to get cheap products from multinational players. Therefore, the demand for Deepak Nitrite
Ltd.’s products has increased multifold and it has been able to charge high prices to its customers. In
addition, the company has focused on improving its product mix by selling more high-value products, which
has also added to the improving profitability.
The business of the company is highly dependent on crude oil prices because its raw materials are
derivatives of crude oil. Therefore, their prices are linked to crude oil prices. Moreover, the company enters
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into formula-based arrangements with its customers and suppliers. Therefore, the prices of its raw material,
as well as final products, fluctuate based on crude oil prices. Moreover, many customers cancel their orders
when crude oil prices are declining to avoid inventory losses.
However, at times, Deepak Nitrite Ltd faces challenges in passing on an increase in raw material prices
despite a formula-based pricing arrangement because it fears a loss of market share. In addition, the prices
are revised at certain intervals like every quarter; however, the raw material prices are very volatile and the
company has to absorb the costs if prices increase significantly during this period.
Until now, Deepak Nitrite Ltd did not prefer long-term supply contracts with its customers because it was
anyway getting business from them for the last 10-15 years. However, it has realised that in the absence of
long-term contracts, the supplier-customer relationship is not very strong and competitors can take away its
market share easily. Therefore, now, Deepak Nitrite Ltd is focusing on long-term contracts.
Deepak Nitrite Ltd has been continuously expanding its manufacturing capacity over the last 10-years.
However, at times, the company has witnessed time and cost overruns while executing the expansion
projects. Its experience of operationalizing the new manufacturing plants has been mixed. Once, it
abandoned a building after spending crores of rupees on constructing it and then wrote it off when it could
not find any use for it.
Deepak Nitrite Ltd is not shy of undertaking very large projects. Its phenol project was bigger than its entire
operations when it was completed in FY2018. However, the company could complete the project and ramp
up its production within a short period. As a result, its business has grown multifold in recent years.
However, it has not been able to do the same for all the products.
Previously, the company built the world’s largest brightener plant; however, it continued to report losses
even after 5-years of completion. Only recently, its profitability improved sharply due to supply disruptions
in China. However, soon, the supply situation improved and the profit (EBIT) margins of its “performance
products” declined almost 90% from 55% in FY2020 to 7% in FY2021.
When the company completed its optical brightening agent (OBA) plant, then even if it was the largest fully
integrated brightener plant in the world; however, to manufacture OBA, it had to move dangerous chemicals
in a crisscross manner across the country. First, the raw material was processed in Gujarat and then sent to
Hyderabad for further processing only to return it later to Gujarat, for final processing. Such production
processes deteriorated its inventory management efficiency. However, with the start of the phenol plant,
Deepak Nitrite Ltd improved its inventory efficiency by working more like a logistics company.
The company has a practice of growing more than what its internal resources can sustain. As a result, it has
to continue to rely on additional capital like incremental debt and equity dilutions e.g. QIP. In fact, Deepak
Nitrite Ltd built its first manufacturing plant in 1970 by launching an IPO even before it could manufacture
any product. Even today, the company has already sought approval for an additional QIP so that it can fund
its upcoming capital expansion from such additional capital. Deepak Nitrite Ltd has categorically stated
that it does not aim to become a debt-free company.
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The company is not shy of declaring dividends, which are indirectly funded from debt or equity dilution.
As a result, it has declared increasing dividends even in the periods when it had a negative free cash flow
and was meeting its funds’ requirement by raising money from QIP.
Multiple generations of promoters are currently involved in the management of the company. It seems that
the promoters have started focusing on ownership segregation where Mr Deepak Mehta and his brother
have taken over the management of different companies. Within Deepak Nitrite Ltd, the two sons of Mr
Deepak Mehta have started focusing on different business segments, which indicates a plan for management
succession at the company.
Deepak Nitrite Ltd is involved in many transactions with its promoters and their group entities, which
increase the risk of promoters benefiting at the cost of minority/public shareholders. An investor needs to
continuously monitor such transactions.
The company deals with dangerous chemicals and its operations produce a lot of polluting effluents. An
investor needs to monitor its plants as in the past; it had received a closure order from govt. authorities due
to polluting operations.
Going ahead, an investor should closely monitor the profit margins of the company to understand whether
it is able to withstand competition and pass on the increase in raw material costs. She should track the
progress of its expansion projects as well as inventory utilization to ascertain whether it is using the capital
efficiently. The investor should closely watch its capital structure so that she can get early signs if it goes
for excessive equity dilution or a large debt raising that might be a cause of concern for the existing
shareholders.
The investor should monitor the relationship of promoter family members to understand any ownership
related issues and keep a check on the transactions between the company and the promoters. She should
analyse its corporate disclosures carefully to avoid any errors in data presentation. She should attempt to
seek clarifications from the company about issues like the criminal case in the CBI court, an investigation
by the Income Tax department, issues related to the commercial usage of its registered office etc.
The company has acknowledged that the recent spurt in its performance is due to temporary supply chain
disruptions at the international level and the current high-profit margins of some of its products may not
sustain going ahead. Therefore, an investor should be cautious while projecting the currently improved
performance parameters into the future.
These are our views on Deepak Nitrite Ltd. However, investors should do their own analysis before making
any investment-related decisions about the company.
P.S.
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2) Jamna Auto Industries Ltd

Jamna Auto Industries Ltd is the largest manufacturer of suspension solutions (spring manufacturer) for
commercial vehicles in India and the third-largest in the world. The company manufactures products like
leaf springs, parabolic springs, air suspensions and lift axles etc.
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While analysing the past financial performance of the company, an investor notices that in FY2008, Jamna
Auto Industries Ltd merged two companies, Jai Parabolic Springs Ltd and MAP Springs Ltd with itself.
Thereafter, the company started reporting consolidated financials from FY2008 onwards. In addition, over
the years, Jamna Auto Industries Ltd has established a few subsidiary companies and as a result, it has
continued to report consolidated financial statements from FY2008 until now.
subsidiaries, joint ventures etc. Consolidated financials of any company, whenever they are present, provide
such a picture.
Therefore, in the analysis of Jamna Auto Industries Ltd, we have analysed the consolidated financial
performance from FY2008 and standalone financial performance before that.
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Financial and Business Analysis of Jamna Auto Industries Ltd:

While analyzing the financials of Jamna Auto Industries Ltd, an investor notices that the sales of the
company have grown at a pace of about 2% year on year from ₹903 cr in FY2011 to ₹1,079 cr in FY2021.
While doing a detailed analysis of Jamna Auto Industries Ltd, an investor notices that the company has
seen alternating periods of increasing and declining sales. The sales of the company increased to ₹1,120 cr
in FY2012. Thereafter, the sales started declining and reached a low of ₹833 cr in FY2014, a decline of
more than 25%. Thereafter, the sales started increasing and the company reported sales of ₹2,135 cr in
FY2019. However, soon thereafter, the sales again started declining and the company had sales of ₹1,079
cr in FY2021 about 50% lower than the peak.
Such kind of cyclical trend of increasing and then declining sales of Jamna Auto Industries Ltd is not limited
to the last 10 years. In the previous decade as well, the company witnessed similar periods. Previously, the
sales of Jamna Auto Industries Ltd declined about 33% from ₹98 cr in FY2000 to ₹66 cr in FY2003 (as per
FY2005 annual report, page 2).
The fluctuations in the business performance of Jamna Auto Industries Ltd is not limited to its sales. The
profitability of the company has witnessed similar cyclical patterns over the years. During the last 10-years
(FY2011-21), the operating profit margin (OPM) of the company first, declined from 12% in FY2011 to a
low of 5% in FY2014. The OPM then increased to 16% in FY2016 and thereafter, declined to 10% in
FY2020. The company reported an OPM of 12% in FY2021.
The net profit margin (NPM) of the company has also fluctuated between 2% to 8% during the last 10 years
(FY2011-21).
If an investor extends her analysis period further, then she notices that Jamna Auto Industries Ltd has even
faced multiple years of financial losses. In the table of financial performance of the company from FY2000-
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FY2005, shared above, an investor would notice that the company reported net losses continuously for 5
years over FY2000-FY2004 (as per FY2005 annual report, page 2).
Thereafter, once again, Jamna Auto Industries Ltd reported a net consolidated loss of ₹12 cr in FY2009.
(as per FY2009 annual report, page 62).
From the above discussion, an investor would appreciate that the business of Jamna Auto Industries Ltd
faces high uncertainties. The company continuously comes across periods of poor performance after a few
years of improving business performance. As a result, it looks like that it is very difficult for any investor
to extrapolate the recent performance of the company, whether good or poor, into the future.
In order to understand the reasons behind such fluctuating performance of Jamna Auto Industries Ltd in
sales as well as profitability, an investor needs to analyse the business model of Jamna Auto Industries Ltd
in detail. Only after understanding the reasons behind the fluctuating performance of the past, an investor
would be able to make an educated guess about the future performance of the company.
While reading the annual reports of Jamna Auto Industries Ltd from FY2005, its credit rating reports, as
well as various corporate announcements, an investor notices the following key characteristics of its
business model, which influence its performance significantly:
A) Business of Jamna Auto Industries Ltd is highly dependent on commercial

vehicles industry, which is cyclical in nature:
An investor would notice that Jamna Auto Industries Ltd manufactures suspension solutions for commercial
vehicles (CV) like leaf springs, parabolic springs, air suspension etc. Major customers of the company are
commercial vehicle manufacturers like Tata Motors and Ashok Leyland Ltd.
Credit rating report by ICRA for Jamna Auto Industries Ltd, April 2021, page 2:
ICRA notes its high client concentration with top two customers accounting for a predominant share of
sales (67% in FY2020 and 52% in 9M FY2021) – Tata Motors Limited (TML) and Ashok Leyland Limited
(ALL).
An investor would appreciate that a high customer concentration of Jamna Auto Industries Ltd with India’s
two largest CV manufacturers contributing more than 50% of sales links the business performance of Jamna
Auto Industries Ltd with the performance of the commercial vehicle industry.
Whenever the sales volume of the commercial vehicle (CV) industry increase, the sales of CV
manufacturers like Tata Motors Ltd and Ashok Leyland Ltd would increase. This, in turn, would increase
the demand for the suspension solution manufactured by Jamna Auto Industries Ltd resulting in its higher
sales. On the contrary, when the sales volume of the CV industry decline, the sales of CV manufacturers
and in turn sales of Jamna Auto Industries Ltd would also decline.
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An investor can see this linkage by comparing the trend of sales of commercial vehicles in India with the
sales of Jamna Auto Industries Ltd over the years.
The following chart shows the number of commercial vehicles sold in India from FY2012 to FY2021.
An investor would notice that during FY2012 to FY2015, the CV industry was in a downtrend as the sales
of commercial vehicles in India declined from 809,000 in FY2012 to 615,000 in FY2015.
From the above discussion, an investor would remember that during this period, the sales of Jamna Auto
Industries Ltd declined from ₹1,120 cr in FY2012 to ₹833 cr in FY2014 along with a sharp decline in the
profit margins.
The company highlighted the strong link between the performance of the CV industry and its own
performance to its shareholders in the FY2014 annual report on page 16:
Commercial Vehicles (CVs), the segment in which JAI operates, was the worst affected, witnessing a
20.23% fall in volumes during the year. This had a direct bearing on our performance, resulting in 14.9%
fall in revenues to Rs 83,370 lacs in FY14 from Rs 98,010 lacs in FY13.
The above chart shows that during FY2015-FY2019, the CV industry witnessed an uptrend and the sales
of commercial vehicles in India increased from 615,000 in FY2015 to 1,007,000 in FY2019. During this
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period, the sales of Jamna Auto Industries Ltd nearly doubled from ₹1,095 cr in FY2015 to ₹2,135 in
FY2019.
An investor would notice that the CV industry has witnessed a sharp decline in the last two years when the
sales of commercial vehicles declined from 1,007,000 in FY2019 to 569,000 in FY2021. Therefore, it does
not come as a surprise to the investor when she notices that during this period, the sales of Jamna Auto
Industries Ltd declined by about 50% from ₹2,135 cr in FY2019 to ₹1,079 cr in FY2021.
Therefore, an investor would appreciate that the fortunes of the company are tightly linked to the
performance of the CV industry.
The credit rating agency, ICRA, has also highlighted this aspect of the business of Jamna Auto Industries
Ltd in its report for the company in April 2021.
JAI Group’s significant dependence on the M&HCV segment, which exposes it to the inherent cycle nature
of the underlying industry.
While reading the FY2006 annual report, an investor gets to know that the sharp decline in the sales during
FY2000-FY2003 and the losses reported by the company during FY2000-FY2004 were due to a recession
in the CV industry. FY2006 annual report, page 11-12:
During the year 1999 to 2003 the Commercial Vehicle industry was reeling under the recession. These
recessionary trends also affected both operational and financial performance of the Company.
After incurring losses during recession period the Company has started earning profit from previous year.
From the above discussion, an investor would appreciate that the CV industry and the performance of Jamna
Auto Industries Ltd are highly interlinked and have followed cyclical patterns in the past where periods of
good performance are followed by poor performance and vice versa.
In such a situation, it becomes difficult for any investor to extrapolate the recent performance of Jamna
Auto Industries Ltd whether good or poor, into the future.
B) Input costs for Jamna Auto Industries Ltd are very volatile:
While analysing the business of the company, an investor notices that the key raw material used by Jamna
Auto Industries Ltd to make suspension solutions like leaf springs, parabolic springs etc. is steel. An
investor would appreciate that the price of commodities like steel face extreme cyclical patterns where it
can increase up to 5-6 times in uptrends and decline by about 75%-80% during downtrends.
The management of the company highlighted this aspect of their key raw material, steel, to the shareholders
in its FY2018 annual report on page 171:
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The Group is affected by the price volatility of certain commodities. Its operating activities require the
ongoing purchases of steel which is a volatile product and is major component of end product. The prices
in these purchase contracts are linked to the price of raw steel and demand supply matrix.
The problem of volatility in the prices of steel, which is the company’s key raw material, has been one of
the key challenges for it for a long time. The company intimated to its shareholders in FY2007 that it has
faced many difficulties to hedge the impact of steel prices. However, it was not able to protect its profit
margins from the impact of an increase in steel prices. As a result, its operating profit margins were
declining.
Main raw material cost i.e. steel prices (comprising about 65% to sales and among the most difficult to
hedge), increases recently and its continuing trend resulting in declining margins.
Therefore, an investor would note that Jamna Auto Industries Ltd operates in a business environment where
the demand for the products of the company is uncertain due to frequent cyclical trends in the CV industry.
At the same time, the prices of the raw material of the company are uncertain due to commodity cycles.
Therefore, an investor would appreciate that maintaining a stable profit margin is highly challenging for
Jamna Auto Industries Ltd.
In such a situation, if Jamna Auto Industries Ltd wishes to protect its profit margins, then it needs to exhibit
a very high pricing power to pass on the increase in its input costs to its customers.
Let us see whether Jamna Auto Industries Ltd has a high pricing/negotiation power over its customers.
C) Jamna Auto Industries Ltd does not have pricing power with its customers:
From the above discussion, an investor would remember that the major customers of Jamna Auto Industries
Ltd that contribute more than 50% of its sales are Tata Motors Ltd and Ashok Leyland Ltd. An investor
may also note that Tata Motors Ltd and Ashok Leyland Ltd are also the biggest commercial vehicle
manufacturers in India with a 75% stake in the medium & heavy commercial vehicle (M&HCV) segment.
Credit rating report by ICRA for Jamna Auto Industries Ltd in Nov. 2017:
Tata Motors Limited (TML) and Ashok Leyland Limited (ALL) are JAI major customers which contributed
~64% of its sales revenue in H1FY2018. However, the client concentration risk is mitigated by strong
market position with these OEMs (which together account for more than 75% of the domestic M&HCV
market)…
Therefore, an investor would notice that the key customers of Jamna Auto Industries Ltd (FY2021 sales of
about ₹1,000 cr) are comparatively very big corporates, Tata Motors Ltd (FY2021 sales of about ₹250,000
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cr) and Ashok Leyland Ltd (FY2020 sales of about ₹22,000 cr). In addition, these two customers also
control about 75% share of the M&HCV market where Jamna Auto Industries Ltd operates.
This combination of large size and large market share of customers gives them very high bargaining power
over Jamna Auto Industries Ltd. As a result, an investor would appreciate that Jamna Auto Industries Ltd
has very little pricing power in negotiations.
In the article elaborating the business analysis of auto-ancillary companies (click here), an investor would
notice that the auto-ancillary companies are under continuous pressure from the original equipment
manufacturers (OEMs) to reduce prices.
While analysing the business performance of Jamna Auto Industries Ltd, an investor notices that sharply
fluctuating profit margins of the company, which sometimes even result in losses, indicate that the company
faces difficulty in passing on its cost pressures to its customers and as a result, it has to take a hit on its
profit margins.
In FY2012, when the operating profit margin (OPM) of Jamna Auto Industries Ltd declined sharply from
12% in FY2011 to 9% in FY2012, the company highlighted the tough business conditions it was facing. At
one end, the raw material prices were increasing and at the other end, the customers were putting pressure
to reduce prices.
During the year we had to contend with rising input costs and pricing pressure from customers. Our people
responded well with intense cost-cutting and business process improvement efforts.
Therefore, an investor would appreciate that Jamna Auto Industries Ltd does not have a strong
negotiating/pricing power over its customers.
An investor would appreciate that when a company with a low pricing power faces an increase in raw
material prices, then it has to do cost-cutting to protect some of its profit margins. In addition, the company
has also focused on increasing the share of high-margin and value-added products like parabolic springs in
its overall sales.
Credit rating report by ICRA for Jamna Auto Industries Ltd in April 2021:
Over the recent years, the Group has witnessed a growth in revenue contribution from the higher value-
accretive products such as parabolic springs. The contribution of parabolic springs to JAI’s sales revenue
has improved gradually to nearly 28% in FY2021 from 9% in FY2011.
A higher contribution from higher-margin parabolic springs has helped the company to improve its business
position; however, still, the major portion of the business comes from leaf springs, which are low-value
adding commodity products.
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Credit rating report by ICRA for Jamna Auto Industries Ltd in August 2018:
JAI derives majority of its revenues from a single product category, leaf springs, which is commoditised in
nature.
As the company’s business is highly dependent on a commoditized product where a customer can use the
products of any competitor with equal efficiency, therefore, the company faces a low pricing power with
its customers.
As discussed above, the nature of its raw material, steel, which has a history of highly volatile prices, further
increases the tough business situation of Jamna Auto Industries Ltd.
The low pricing/negotiating power of Jamna Auto Industries Ltd is visible in the sharply fluctuating profit
margins, which in the past have even declined to losses.
In addition, due to the low pricing power, even if the raw material prices decline, then Jamna Auto Industries
Ltd has to give money back to its customers for the sale made by it during the year. It looks like the company
has to even refund the money on the prior sales done by it as it carries a “provision for price differences”
in its balance sheet.
As per the company, the “provision for price differences” is the money that it needs to pay to customers for
savings made by it due to a decline in prices.
The Company’s business requires passing on price differences to the customers for the sales made by the
Company. The Company at the year end, has provided for saving made in price differences to be passed on
to the Customers.
Jamna Auto Industries Ltd has highlighted to the shareholders in the FY2020 annual report that it has to
pass on price differences, discounts, rebates and various incentive schemes to the customers, which an
investor would recall are the biggest players in the M&HCV industry.
Revenue is measured by the Group at the fair value of consideration received/receivable from its customers
and in determining the transaction price for the sale of finished goods, the Group considers the effect of
various factors such as price differences and volume based discounts, rebates and other promotion
incentive schemes (“trade schemes”) provided to the customers. Adequate Provisions have been made for
such price differences, and trade schemes, with a corresponding impact on the revenue.
In light of the above discussion, an investor would appreciate that Jamna Auto Industries Ltd does not have
high pricing power over its customers. The very large size of its customers, the cyclical nature of the CV
industry as well as the steel industry puts continuous pressure on its profit margins. As a result, Jamna Auto
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Industries Ltd has witnessed sharply fluctuating profit margins in the past, which on multiple occasions
have declined to losses as well.
In the past, the cyclical nature of the CV industry and the low pricing power of Jamna Auto Industries Ltd
put so much stress on the profitability and cash-generating ability of the company that Jamna Auto
Industries Ltd defaulted to its lenders during 2004-2005. In the near bankruptcy stage, its lenders had to
restructure its debt so that the company could survive.
Based on our audit procedures and according to the information and explanation given to us, we are of the
opinion that the company has defaulted in repayment of dues to financial institutions, banks or debenture
holders. However, the restructuring proposal prepared by the State Bank of India under the Corporate
Debt Restructuring Cell (CDR) set up by Reserve Bank of India, provide interalia for rephasement of all
Term loans and has been agreed and implemented by majority of the lenders
Therefore, an investor would appreciate that Jamna Auto Industries Ltd operates in a very tough business
environment of uncertain demand of its products, uncertain prices of its raw materials, and low pricing
power over its very large customers. As a result, the business performance of the company keeps on
fluctuating from good performance to poor performance.
Sales of the company, after a few years of continuous growth, suddenly decline by up to 50% within a short
period of time. After a few years of good profits, suddenly, the company may report losses.
Predicting the business performance of the company is difficult and therefore, an investor needs to
continuously keep close monitoring of the business performance of the company.
While looking at the tax payout ratio of Jamna Auto Industries Ltd., an investor notices that in recent years
(FY2015 onwards), the tax payout ratio of the company has been in line with the standard corporate tax
rate prevalent in India. However, before FY2015, Jamna Auto Industries Ltd reported a lower tax payout
ratio.
While analysing the previous annual reports, an investor notices that in FY2009, Jamna Auto Industries Ltd
had started production in its plant at Pantnagar (Uttarakhand), which had income tax benefits. The plant
had 100% income tax benefits for the first 5 years and 30% income tax benefits for the next 5 years.
The newly set up unit of Jai Suspension Systems Limited at Pant Nagar is eligible for 100% deduction of
the profit of the said undertaking for first 5 years and 30% for the next 5 year from the year of set up of the
undertaking as per provisions of Section 80-IC of the Income Tax Act, 1961.
However, Jai Suspension Systems Limited is liable for Minimum Alternate Tax (MAT) as per the Income
Tax Act, 1961…
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While doing a detailed reading of the annual reports, an investor notices that the income tax department has
alleged that Jamna Auto Industries Ltd has mis-utilized the tax exemptions available to it. The income tax
department has alleged that the company sold goods to its subsidiary, which owns the Pantnagar plant and
thus enjoys the tax holiday, at a lower cost. This practice, in turn, leads to a higher profit for the subsidiary
when it sells the finished goods to the end customers. As the subsidiary enjoys the tax holidays, therefore,
the income tax department has alleged that Jamna Auto Industries Ltd has avoided taxes by channelling its
sales via the subsidiary.
The assessing officer has increased the taxable income of the Company by Rs 1,095.73 contending that it
has sold material of its subsidiary firm (Jai Suspension System LLP (JSSLLP) at lower margin in order to
divert its profits to JSSLLP as JSSLLP was enjoying tax exemption during that year. Tax impact of the same
is Rs. 372.46 (Previous year: Rs. Nil). The Company is in process of filing an appeal against this order and
based on discussion with the legal counsel is confident of a favourable outcome.
An investor notices that the company has received multiple such orders year after year from the income tax
department e.g. in FY2019 (as per page 152 of FY2019 annual report), in FY2020 (as per page 99 of
FY2020 annual report).
In FY2020, the company made applications to the govt. for settlement of tax disputes under the Vivad se
Vishwas Scheme and Sabka Vishwas Legacy Dispute Resolution Scheme.
During the year, the Company has made voluntary application to the Central Board of Direct taxes (CBDT)
under Vivad se Vishwas Scheme (VsV Scheme) for settlement of cases pertaining to the assessment years
2016-17 and 2017-18.
During the year, the Company has applied under Sabka Vishwas Legacy Dispute Resolution Scheme
(SVLDRS) for the resolution of the matter which was pending with CESTAT Lucknow till previous year in
respect of Cenvat Credit wrongly availed as capital goods instead of input and service tax credit availed
without actual documents.
The investor should do deeper due diligence to assess the outcome of such appeals to know the impact of
these orders on the tax payout and cash flow position of the company.
Operating Efficiency Analysis of Jamna Auto Industries Ltd:
a) Net fixed asset turnover (NFAT) of Jamna Auto Industries Ltd:
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When an investor analyses the net fixed asset turnover (NFAT) of Jamna Auto Industries Ltd in the past
years (FY2011-21), then she notices that the NFAT of the company has been fluctuating between the levels
of 6 and 3.
The NFAT declined from 6 in FY2012 to 3.2 in FY2014, which coincided with the downturn of the CV
industry during FY2012-2014 during which period, the sales of Jamna Auto Industries Ltd had declined by
about 25% from ₹1,120 cr in FY2012 to ₹833 cr in FY2014. The demand for the company’s products
declined so much that it had to reduce the number of its employees and even close one of its plants at
Lucknow.
The company rationalized manpower, shut down the Lucknow plant…
Thereafter, the NFAT started increasing in line with the uptrend of the CV industry and by FY2019, the
NFAT increased to 6.3. This was the period when the sales of Jamna Auto Industries Ltd increased to
₹2,135 cr in FY2019.
However, soon thereafter, the CV industry went into another downturn and the NFAT of the company
declined to 3.0 as the sales of the company declined by about 50% to ₹1,079 cr in FY2021. As a result, of
the declining demand, the company had to again shut down an assembly line at the Lucknow plant. This
plant was started in FY2017 after it was closed in FY2014.
One assembly unit of Jai Suspension Systems LLP at Lucknow (U.P.) was closed in FY 2019-20.
Therefore, an investor would notice that the NFAT of Jamna Auto Industries Ltd has been fluctuating in
line with the cyclical patterns of increase and decrease of CV demand in India. The company ends up
making a lot of investment in creating new plants to increase its manufacturing capacity during the CV
upcycle. However, during the downcycle, the company has to shut down plants.
In the upcycle, the company faces capacity constraints to service different business segments like
aftermarket as the demand from original equipment manufacturers (OEMs) consumes most of the
production of its plants.
During the CV industry upcycle, in FY2011, the company intimated to its shareholders that it could not
generate significant revenue from the aftermarket segment due to capacity constraints as the OEMs
consumed most of the capacity.
Spring demand from domestic OEMs continued to be strong. As a result, we faced capacity constraint and
could not fully capitalize on the opportunities in After Market segment.
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However, soon thereafter, in the downcycle of the CV industry, the company had to reduce its manpower
and shut down its Lucknow plant.
Jamna Auto Industries Ltd again faced capacity constraints in the subsequent upcycle of the CV industry
in FY2018 when most of its capacity was consumed by OEMs and it could not meet the full demand of the
aftermarket and export segment. As a result, it had to limit supplies to the non-OEM segment.
ICRA notes that in FY2018, non-OEM sales was restricted to 15% of total sales revenue as JAI’s capacity
was deployed towards increased off-takes by OEMs.
However, all of a sudden within a year, the CV industry hit a downturn and the sales of the company
declined by almost half from ₹2,135 cr in FY2019 to ₹1,129 cr in FY2020.
commercial vehicle segment witnessed slowdown from the second half of FY 2019
As a result, the company had to put almost all its expansion plans on a hold and as discussed earlier, it had
to shut down an assembly line in its plant in Lucknow.
During FY2019, the management had announced a significant capacity expansion plan (~Rs. 650 crore
between FY2019-22), a large part of which was discretionary and has been put on hold in line with
weakness in demand for end user.
Such a turn of events in the business history of Jamna Auto Industries Ltd would highlight the uncertainties
associated with the operating business environment of the company.
b) Inventory turnover ratio of Jamna Auto Industries Ltd:

While analysing the efficiency of inventory utilization by Jamna Auto Industries Ltd, an investor notices
that for most of the period in the last 10 years, the inventory turnover ratio (ITR) of the company has
fluctuated with periods of improving ITR followed by a period of declining ITR.
During the downturn in the CV industry (FY2012-2014), the ITR of Jamna Auto Industries Ltd declined
from 9 in FY2012 to 7.2 in FY2014. In the upcycle of the CV industry, the ITR increased to 12.8 in FY2018.
However, since then, the ITR has seen a sharp correction to 6.3 in FY2020. In FY2021, the ITR stood at
6.4.
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From the above discussions on NFAT and ITR of Jamna Auto Industries Ltd, an investor would notice that
for the companies operating in cyclical industries like auto-ancillary companies, such parameters are not
highly useful to determine the overall trends of improvement or deterioration in the resource utilization
efficiency.
The gains in the efficiency achieved by the company in one phase of the industry cycle are lost when the
cycle turns and the measuring parameters like NFAT and ITR get impacted significantly by the phase of
the industry cycle. As a result, an investor is not able to assess whether the company is able to bring any
real and sustained improvement in its resource utilization efficiency.
Therefore, an investor should be very cautious about interpreting the improvement or deterioration of
operating efficiency by parameters of NFAT or ITR.
In the case of Jamna Auto Industries Ltd, an investor comes across many instances where the company was
found to keep useless assets, both fixed assets as well as inventory, where it seemed like the company has
totally forgotten about these assets.
For example in FY2016, while shifting one of the plants, the company realized that it has fixed assets of
about ₹9 cr, which are no longer usable.
During the shifting of one plant, the management identified certain assets having book value of Rs. 907.99,
which are no longer actively usable and has accordingly provided for accelerated depreciation on the same.
An investor would appreciate that assets lying useless are inefficient utilization of resources by a company.
However, the trend of NFAT for Jamna Auto Industries Ltd could not highlight it in FY2016 because the
NFAT was continuously rising during FY2015-FY2016 due to the upcycle in the CV industry.
Therefore, an investor would appreciate that the trend of asset utilization ratios like NFAT and ITR are not
very helpful to an investor in cyclical industries like auto-ancillary industries. As a result, the investor
should be cautious and focus on aspects like auditor’s report, provisioning etc. to find out whether a
company is showing signs of inefficiency in the management of its fixed assets or inventory.
c) Analysis of receivables days of Jamna Auto Industries Ltd:

Over the last 10 years, the receivables days of Jamna Auto Industries Ltd have improved from 42 days in
FY2012 to 23 days in FY2021. However, when an investor analyses year on year changes in the receivables
days, then she notices that the receivables days of the company had improved to 10 days in FY2017 after
which it sharply increased to 62 days in FY2020.
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When the investor attempts to analyse the developments related to Jamna Auto Industries Ltd during this
period from the publicly available documents, then she finds out that the sharp decline of receivables days
to 10 days was due to the use of cash-discounting used by the company with its customers.
The credit rating agency, ICRA, in its report of November 2017, mentioned the practice of cash discounting
of receivables by Jamna Auto Industries Ltd with its customers. In its report of November 2017, ICRA
highlighted that Jamna Auto Industries Ltd used to follow cash discounting, which it had discontinued for
the last 6-months.
ICRA notes that the company’s working capital borrowings from banks and money market has increased
over the last six months following discontinuation of cash discounting with customers, which would allow
improvement in operating margin keeping the coverage indicators comfortable.
The above note by ICRA seems to indicate that Jamna Auto Industries Ltd used to give additional discounts
to customers if they make early payments, which reduced the amount of trade receivables; however, at the
same time, it reduced the profitability as the customer would ask for discounts if it has to make early
payment.
However, as per ICRA, for the previous 6-months, Jamna Auto Industries Ltd had stopped this practice of
cash discounting with customers. Instead, it started utilizing the bank borrowings to meet its cash needs and
in turn started receiving the comparatively higher contracted price from the customers. As a result, in
November 2017, ICRA expected that the stoppage of cash discounting with customers would increase the
operating margins of Jamna Auto Industries Ltd.
Therefore, an investor would appreciate that after the stoppage of the cash-discounting facility from
FY2017, the receivables days of the company increased sharply from 10 days in FY2017 to 62 days in
FY2020. In absolute terms, the trade receivables increased significantly from ₹34 cr in FY2017 to ₹304 cr
in FY2019.
operations (cCFO) of Jamna Auto Industries Ltd for FY2011-21 then she notices that the company has
converted its profits into cash flow from operating activities.
Over FY2011-21, Jamna Auto Industries Ltd reported a total cumulative net profit after tax (cPAT) of ₹710
cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹1,270 cr.
Learning from the article on CFO will indicate to an investor that the cCFO of Jamna Auto Industries Ltd
is higher than the cPAT due to the following factors:
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The Margin of Safety in the Business of Jamna Auto Industries Ltd:

target growth.
Where,

While analysing the SSGR of Jamna Auto Industries Ltd, an investor would notice that the SSGR of the
company used to be negative during FY2014-FY2016; however, from FY2017, it turned positive. The
negative SSGR during FY2014-FY2016 is primarily due to decreasing NFAT (a result of a sharp decline
in sales) and lower profit margins during this period. (Please note that we use a 3-year average for all the
inputs for SSGR. So, the impact of change in every input influences SSGR with a lag).
However, after FY2017, the SSGR has turned positive due to improving NFAT (due to rising sales from
upcycle in the CV industry) and profitability.
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If an investor notices the overall trend and average of SSGR, then she notices that Jamna Auto Industries
Ltd has an SSGR of about 4% whereas the company has increased its sales at a rate of about 2% over the
last 10-years from ₹903 cr in FY2011 to ₹1,079 cr in FY2021.
As Jamna Auto Industries Ltd is growing at a pace less than its SSGR in the last 10-years (FY2011-
FY2021), therefore, it could manage to reduce its debt over this period. The total debt of Jamna Auto
Industries Ltd reduced from ₹138 cr in FY2011 to ₹11 cr in FY2021.
As per the press release of the company on May 31, 2021, the company has become debt-free on March 31,
2021.
Debt Position: The Company has become debt free as of 31 March 2021.
An investor arrives at the same conclusion when she analyses the free cash flow (FCF) position of Jamna
Auto Industries Ltd.
b) Free Cash Flow (FCF) Analysis of Jamna Auto Industries Ltd:

While looking at the cash flow performance of Jamna Auto Industries Ltd, an investor notices that during
FY2011-2021, it generated cash flow from operations of ₹1,270 cr. During the same period, it did a capital
expenditure of about ₹657 cr.
Therefore, during this period (FY2011-2021), Jamna Auto Industries Ltd had a free cash flow (FCF) of
₹613 cr (=1,270 – 657).
of ₹216 cr. As a result, the company had a net free cash flow of ₹480 cr (= 613 + 83 – 216). Please note
that the capitalized interest is already factored in as a part of the capex deducted earlier.
While looking at the overall cash-flow position of Jamna Auto Industries Ltd over the last 10 years
(FY2011-2021), an investor notices that the company has primarily used its free cash flow in the following
manner:
 Payment of dividends to the shareholders: ₹209 cr excluding dividend distribution tax (DDT). The
company might have paid about ₹40 cr (about 20% of the dividend amount) as DDT.
 Reduction of debt: ₹127 cr as a reduction in total debt from ₹138 cr in FY2011 to ₹11 cr in FY2021.
If an investor looks at the overview of the cash-flow position of Jamna Auto Industries Ltd from FY2011
to FY2021, then she might feel that the company has generated a significant amount of cash over the years
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and seems to be a cash-rich company. However, an investor should always keep in her mind that Jamna
Auto Industries Ltd operates in a cyclical industry with a lot of uncertainties around the demand of its
products as well as the prices of its raw materials. In addition, the company has low pricing power over its
customers.
These combinations create a tough operating business environment for Jamna Auto Industries Ltd.
Therefore, at times, the company faced periods of extreme liquidity stretch. On some occasions, the
liquidity situation deteriorated so much that Jamna Auto Industries Ltd could not repay its lenders on time.
History of defaults to lenders by Jamna Auto Industries Ltd:

In FY2012, when the downcycle in the CV industry started, Jamna Auto Industries Ltd defaulted to its
lenders and could not repay about ₹46 cr for about 67 days. As a result, the auditor of the company
highlighted this incident in its report.
In our opinion and according to the information and explanations given to us, the Company has not
defaulted in repayment of dues to its bankers or to any financial institutions except in respect of dues
aggregating ₹4,589.75 lakhs to banks and a financial institution for delays ranging upto 67 days.
In the same year, FY2012, Jamna Auto Industries Ltd exhibited other sign of liquidity stress, when it had
to use its short-term funds for long-term purposes.
According to the information and explanations given to us and on an overall examination of the Balance
Sheet of the Company, we are of the opinion that the funds raised on short-term basis amounting to
₹3,581.17 lakhs have been used for long-term investments.
In the next year, FY2013, the downcycle in the CV industry continued and Jamna Auto Industries Ltd once
again defaulted to its lenders, as it could not repay an amount of about ₹92 cr to its lenders for about 35
days.
In our opinion and according to the information and explanations given to us, the Company has not
defaulted in repayment of dues to its bankers or to any financial institutions, except in respect of dues
aggregating ₹ 9,186.58 lakh to banks and a financial institution for delays ranging upto 35 days.
In FY2013 as well, Jamna Auto Industries Ltd used short-term funds for a long-term purpose, which is
another indication of liquidity stress in a company.
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According to the information and explanations given to us and on an overall examination of the Balance
Sheet of the Company, we are of the opinion that the funds raised on short-term basis amounting to
₹3,934.95 lakhs have been used for long-term investments.
As a result of the defaults to the lenders in FY2013, the credit rating agency, ICRA downgraded the credit
rating for Jamna Auto Industries Ltd to “D”, which indicated default to lenders in repayment.
During 2012-13, ICRA had downgraded the rating to ‘D’.
The management of the company agreed that Jamna Auto Industries Ltd faced liquidity issues during the
year, which had led to default to lenders where it could not repay the lenders on time.
The Statutory Auditors have reported delay in repayment of dues to banks and financial institutions. These
delays occurred mainly due to temporary liquidity problem.
As a result of the liquidity stress, Jamna Auto Industries Ltd had to sell one of its investment in the Indian
subsidiary of NHK Spring, Japan to raise money.
We have infused long term funds to the tune of ₹25.50 crore by way of liquidation of investment in NHK
Spring India Pvt. Ltd.
Moreover, in FY2011 also, shareholders had to infuse equity funds of about ₹25 cr in Jamna Auto Industries
Ltd when it allotted shares on a preferential basis to the private equity investor Clearwater Capital Partners
and the promoters.
During the year the company made preferential issue of 2631578 equity shares to Clearwater Capital
Partners Singapore Fund III Pvt Ltd and the promoters. The entire preferential issue proceed of ₹25 crore
was utilized to prepay high cost term loans.
An investor would remember from the earlier discussion that during the CV downturn of 2000-2003, Jamna
Auto Industries Ltd had reached near bankruptcy. It could not repay its lenders and as a result, the lenders
had to restructure its loans. At that time, the private equity (PE) firm, Clearwater Capital, infused ₹179 cr
in the company and took a 28% stake in the company.
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The company has undergone financial restructuring recently with infusion of INR 1790 million from
Clearwater Capital (Cyprus), which has acquired a 28% stake in the company. The money has been used
for working capital and capex, and also to retire high cost debt.
It was only after receiving the money from the PE investor that Jamna Auto Industries Ltd could pay off its
lenders and come out of the corporate debt restructuring (CDR).
After reaching a one time settlement of debt with IDBI, SBI, HSIDC, UTI, MPSIDC, the company has exited
from the provisions of corporate debt restructuring.
From the above discussion, an investor would appreciate that the companies operating in cyclical industries
like auto component manufacturers face a very high degree of uncertainty in their business environment in
the terms of fluctuating demand, volatile raw material prices and a low pricing power with their large
customers.
In such tough business conditions, even though on an overview, it may look that the company is doing
satisfactory on an annual basis; however, the company may face periods of such severe liquidity stress that
it may not repay its lenders on time and even end up in bankruptcy.
Therefore, while analysing companies in cyclical sectors, an investor should always keep in her mind that
it is very difficult to predict the recent performance of companies, whether good or bad, in the future. Such
companies may show a sudden sharp decline in their sales and profits after a period of continued growth.
An investor should always look at signs of stress in the financial statements of the companies instead of
only looking at the overview of annual financial statements.
Additional aspects of Jamna Auto Industries Ltd:

On analysing Jamna Auto Industries Ltd and after reading its past annual reports since FY2005, its credit
rating reports and other public documents, an investor comes across certain other aspects of the company,
which are important for any investor to know while making an investment decision.
1) Management Succession of Jamna Auto Industries Ltd:

The company is a part of the Jauhar family and currently, four members of the family are a part of the
company. Three members of the family are a part of the board of directors of the company.
 Mr Bhupinder Singh Jauhar (aged 87 years) is the chairman of the company.
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 Mr Randeep Singh Jauhar (aged 60 years); son of Mr B.S. Jauhar is the Vice Chairman & Executive
Director of the company.
 Mr Pradeep Singh Jauhar (aged 56 years); son of Mr B.S. Jauhar is the Managing Director & CEO
of the company.
Apart from the above, Ms Kirandeep Chadha, daughter of Mr B.S. Jauhar is also a part of the company.
She joined the company in FY2006 as Director (International Business).
Mrs. Kiran Chadha, a relative of Mr. B. S. Jauhar, Chairman & Managing Director and Mr. R. S. Jauhar,
Executive Director of the Company, to hold an office or place of profit in the Company as Director
(International Business) of the Company w.e.f. 6th February 2006
Recent annual reports of Jamna Auto Industries Ltd do not mention the current responsibilities or
designation of Ms Chadha.
As per the FY2019 annual report, related party transactions section on page 154, Ms. Chadha has taken a
remuneration of ₹0.21 cr as compared to the remuneration for her brothers of ₹10.93 cr for Mr P.S. Jauhar
and ₹10.80 cr for Mr R.S. Jauhar. The significant difference in remuneration between Ms. Chadha and her
brothers indicates that she might not be playing a very active role in the day-to-day management of the
company.
Apart from the above four members of the Jauhar family, the annual reports do not mention any details of
members of the next generation of promoters who might have joined the company in an executive position.
An investor may contact the company directly to understand the roles and responsibilities of Ms Kirandeep
Chadha and whether members of the next generation of promoters have joined the company.
are still handling responsibilities, is a preferable succession plan. This is because the young members can
learn about the fine nuances of the business under the guidance of senior members until the seniors decide
to take retirement.
2) Promoters remuneration of Jamna Auto Industries Ltd:

When an investor analyses the remuneration taken by the promoter-family members of Jamna Auto
Industries Ltd, then she notices that on many occasions, the promoters have taken remuneration above the
statutory guidelines for which the company had to take special permissions from the govt.
In FY2014, the auditor of the company highlighted that Jamna Auto Industries Ltd had paid remuneration
to its promoters, which is more than the statutory limits.
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we draw your attention to the note no. 44 of accompanying financial statements stating that remuneration
of Rs.191.33 lacs being paid to the executive and whole time directors which is in excess of permissible
remuneration under the Companies Act, 1956
In the next year, FY2015, the company applied to the central govt. for the approval of payment of a high
remuneration to the promoters. However, it had still not received it.
During the previous year, the Company had paid Rs. 191.33 towards Directors remuneration. This amount
is in excess of permissible remuneration determined under the Companies Act, 1956. Management has filed
an application with the Central Government for approval of payment of salary to the Directors in excess
of permissible limits. Pending such approval from the government, management has taken a confirmation
from the Directors that they shall refund the amounts in the event of such approvals being refused.
Jamna Auto Industries Ltd has a history of paying a high remuneration to its promoter family members.
Previously, in FY2008 as well, the company had to take approval from the central govt. for the remuneration
of Mr R. S. Jauhar.
Application for increase in remuneration of Mr. R. S. Jauhar is pending before the Central Government for
approval.
Recently, in FY2019, Jamna Auto Industries Ltd had to take approval for remuneration of promoter-family
members because their remuneration was more than the new listing regulations.
The members of the Company have granted their approval for payment of remuneration to Mr. Randeep
Singh Jauhar and Mr. Pradeep Singh Jauhar, within the limits as prescribed under the provisions of
Companies Act, 2013 which is in excess of the newly prescribed threshold limits of amended Listing
Regulations.
As per the FY2020 annual report, page 41, during FY2020, the promoter-executive-directors did not take
any commission from the company, which is usually the largest part of their overall remuneration. It seems
that the company and the promoters took this decision in light of the coronavirus pandemic.
However, in the past, an investor would notice that the promoter-brothers, Mr R. S. Jauhar and Mr P. S.
Jauhar have utilized the commission part of their salary in such a manner that they could get the near
maximum possible remuneration from the company as allowed by the law.
In FY2015, the maximum remuneration that a promoter-executive director could take from the company
was about ₹2.22 cr and both the promoter-brothers took home a remuneration of ₹2.2 cr each.
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In the next year, FY2016, when the maximum possible salary limit increased to about ₹5.1 cr, then both the
promoter-brothers took home a salary of about ₹5 cr.
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In the past, there have been instances where the promoter family members who are a part of the board of
directors took home the salary from the company without attending even a single board meeting of the
company during the year.
In FY2009, the chairman of the company, Mr. B.S. Jauhar, took home a remuneration of ₹0.79 cr as per the
standalone financials of Jamna Auto Industries Ltd (as per FY2009 annual report, page 56). However, as
per the data on the attendance of directors in the meeting of the board during the year on page 11 of the
FY2009 annual report, Mr. B. S. Jauhar did not attend any of the 6 meetings of the board of directors that
took place during the year. An investor may note that in FY2009, Mr. B. S. Jauhar was a non-executive
chairman of the company, which means that his role is only limited to attending the meetings of the board
of directors and add value to the discussion of the board.
In the later years, the company started paying remuneration to the chairman, Mr. B. S. Jauhar via its
subsidiary, Jai Suspension System LLP. As a result, the standalone financials of Jamna Auto Industries Ltd
did not report any remuneration payment to Mr B. S. Jauhar. The annual reports contain payment of
remuneration to Mr. B. S. Jauhar only in the consolidated financials indicating that he is now receiving
remuneration from the subsidiary entity.
Therefore, the subsequent annual reports did not contain any information about the level of involvement of
Mr B. S. Jauhar in the affairs of Jai Suspension System LLP by the means of attending key meetings.
Going ahead, an investor should keep a close watch on the overall remuneration of the promoters family
members as a percentage of the profits of the company. While assessing remuneration, an investor should
be cautious when she observes an increase in the remuneration of the promoters while the profits of the
company are decreasing.
3) History of weak internal processes & control at Jamna Auto Industries Ltd:
While analysing the annual reports of the company, an investor notices multiple instances, which indicate
that the internal processes and controls at Jamna Auto Industries Ltd leave a lot of room for improvements.
An investor notices that during multiple years, the company did not deposit undisputed statutory dues on
time and the auditor highlighted such delays in its report as a part of the annual reports. An investor could
see such comments by the auditor of the company in the annual reports for FY2005, FY2006, FY2008,
FY2009, FY2012 etc.
In FY2013, the company acknowledged that such delays in the deposit of undisputed statutory dues are due
to poor oversight.
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The Statutory Auditors have, in their report, mentioned about delays in deposit of statutory dues in few
cases. We may mention here that these delays were due to oversight and purely unintentional. We are
implementing corrective actions to ensure such delays do not occur again. In addition, we are also training
and sensitizing our employees at working level for compliances/timely deposits.
Apart from delays in the payment of govt. dues, the auditors also found out instances of significant
differences in the inventory as per records and the actual inventory on the ground. In FY2014, the auditors
highlighted such material discrepancies in their report as a part of the annual report.
The Company is maintaining proper records of inventory. Some discrepancies noted on physical
verification of inventories which were material…
During the year, due to the cleanup of the inventory, Jamna Auto Industries Ltd had to face a loss of about
₹6 cr.
The Company, during the year, has carried a detailed exercise to identify stocks that are no longer required
for various reasons and has accordingly disposed off such stocks. The loss, which is estimated around Rs.
618 has been included in the consumption of raw materials…
(Please note that in the annual report, the data is presented in the units of ₹ lakhs. As a result, in the above
disclosure, the loss of ₹618 lakh is mentioned as ₹618).
In the next year, FY2015 as well, the auditors found significant differences in the inventory as per records
and the inventory on the ground.
The Holding Company is maintaining proper records of inventory. Discrepancies noted on physical
verification of inventories were material…
In FY2015, the auditor found significant differences in the fixed assets as well, as per the records and the
actual fixed assets on the ground.
All fixed assets have not been physically verified by the management of the Holding Company during the
year but there is a regular programme of verification which, in our opinion, is reasonable having regard
to the size of the Company and the nature of its assets. Discrepancies noted during the year were material
and these have been properly dealt with in the books of accounts.
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An investor would appreciate that if any company has weak internal controls and processes, then it presents
a situation of poor oversight. In such situations, companies are exposed to higher probabilities of frauds.
In FY2013, Jamna Auto Industries Ltd intimated to its shareholders that one of its workers attempted to do
fraud on it. The company made provisions for it in FY2013.
The Statutory Auditors have, in their report, mentioned about one instance of an attempted fraud on the
Company by a job worker. This has happened purely during the course of commercial dealing with the
vendor having long term relationship. This risk has been fully provided in FY 2012-13.
In this regard, an investor may read the example of National Peroxides Ltd, a Wadia Group company,
which due to weak internal controls and processes faced fraud by its employees allegedly including senior
management including the managing director of the company.
Read: Analysis: National Peroxide Ltd
It seems that by FY2015, the management had realized that it needs to strengthen its internal processes and
controls. As a result, it decided to appoint an internal auditor from April 1, 2015, to strengthen the control
processes.
In order to improve and strengthen the control processes, M/s Protiviti Risk & Business Consulting is
appointed as internal auditor of the Company from April 1, 2015.
However, the surprises for the investor continued when in FY2016, the company declared that during
shifting of a plant, it found fixed assets of about ₹9 cr, which were not usable anymore and it was carrying
the same on its books.
During the shifting of one plant, the management identified certain assets having book value of Rs. 907.99,
which are no longer actively usable and has accordingly provided for accelerated depreciation on the same.
In FY2018, the company intimated to its shareholders that it had lost/misplaced the license issued to it by
the Director General of Foreign Trade (DGFT) under the Export Promotion Capital Goods (EPCG) scheme.
Matter pending before Director General of Foreign Trade, New Delhi in respect of EPCG licence obtained
by the Group, however, the same was lost without being used in 2008. The Group is under an obligation to
surrender the licence in case of non utilisation and has received a letter from the office of DGFT for the
same.
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In the next year, FY2019, the company received a demand from the sales tax department for non-submission
of a form named “form F”.
Sales tax department has raised demand for non submission of form F.
In FY2020, the company received notices from stock exchanges for late submission of the annual report
and non-appointment of the women director. The fine imposed by the stock exchanges for the late
submission of the annual report was later waived off by the exchanges. However, the company had to pay
a fine for the delay in the appointment of the women director. (as per the FY2020 annual report, page 45)
In the light of such instance where the internal controls and processes of the company have shown a scope
of improvement, it is advised that an investor should be cautious while doing an analysis. She should study
all the financial statements and auditor’s reports carefully. This is because, in case of significant differences
in the value of the assets shown on the annual report and the actual assets present on the ground, the analysis
of the company’s financial health done by the company may not be highly accurate.
4) Incidences of Jamna Auto Industries Ltd not complying with accounting

policies:
While analysing the annual reports of the company, an investor notices that the auditors of the company
have highlighted incidences where Jamna Auto Industries Ltd did not comply with the accounting norms
while preparing the financial statements.
In FY2005, the auditor of the company pointed out that Jamna Auto Industries Ltd did not follow accounting
norms while treating miscellaneous expenditure.
In our opinion, the Profit and Loss Account and the Balance Sheet and cash flow of the Company comply
with the Accounting Standards referred to in Sub-section (3C) of Section 211 of the Companies Act, 1956
to the extent applicable except “Miscellaneous expenditure not written off amounting to Rs. 139.26 lacs
refer Note No. 14 of Schedule- 16(11)”
The company explained in the same annual report (FY2005) that it had not deducted these expenses from
the P&L because of losses during FY2005.
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Miscellaneous expenditure amounting to Rs. 139.26 lacs (previous year 139.26 lacs) is not charged to
Profit & Loss in view of loss during the year. Due to this Company has under stated loss to that extent. The
same is in contravention of Accounting policy no 13 regarding charging of miscellaneous expenditure.
Apart from highlighting that the company did not comply with the accounting policies, the above disclosure
also highlights that the company did it to show a lower loss in FY2005. This is equivalent to presenting a
better picture to the shareholders than the true financial situation of the company.
Additionally, an investor is confused when she notices that in FY2005, the company had reported a profit
of ₹1.86 cr (i.e. ₹186 lac) whereas, in the above disclosure, Jamna Auto Industries Ltd stated that it incurred
a loss in FY2005.
Therefore, even if the company had deducted the miscellaneous expenditure of ₹1.39 cr (₹139 lac) from
the P&L, it would have still reported a profit. Therefore, it looks like in the FY2005 annual report, the
company made a factual error about the profit it made during the year.
Nevertheless, despite highlighting by the auditor, Jamna Auto Industries Ltd continued to break the
accounting norms for miscellaneous expenditure in the subsequent years as well.
In our opinion, the Profit and Loss Account and the Balance Sheet and cash flow of the Company comply
with the Accounting Standards referred to in Sub-section (3C) of Section 211 of the Companies Act, 1956
to the extent applicable except “Miscellaneous expenditure not written off amounting to Rs. 126.03 lacs
refer Note No, 16 of Schedule-19 (II)”.
In another instance, in FY2009, Jamna Auto Industries Ltd in its standalone financial statements disclosed
that it has earned a non-compete fee of ₹5 cr from its wholly-owned subsidiary, Jai Suspension Systems
Ltd.
Miscellenous income includes non compete fee of Rs. 500 lacs charged from 100% subsidiary i.e. Jai
Suspension Systems Ltd.
Under the conventions of consolidation of financial statements, an investor would expect that when a
company prepares its consolidated financial statements, then all the intra-group transactions are
cancelled/netted off so that the consolidated financials represent only the transactions of the group with the
outside third parties.
In its accounting policies, Jamna Auto Industries Ltd had also stated the same principles.
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Principal of Consolidation: The Consolidated Balance Sheet, Profit & Loss Account , Cash Flow Statement
comprises the Balance Sheets, Profit & Loss Accounts and Cash Flow Statements of Jamna Auto Industries
Limited and Jai Suspension Systems Limited and have been combined on a line by line basis by adding
together the book value of the items of assets, liabilities, income and expenditure after fully eliminating
intra – group transaction resulting in unrealized profit or loss.
Therefore, an investor would expect that in the consolidated financial statements, the non-compete fee of
₹5 cr earned by Jamna Auto Industries Ltd from its wholly-owned subsidiary, Jai Suspension Systems Ltd
would be eliminated.
However, the investor is surprised when she notices that in the consolidated financials as well, Jamna Auto
Industries Ltd has included the ₹5 cr non-compete fee as income.
Miscellaneous income includes non compete fee of Rs. 500 lacs charged from wholly owned subsidiary i.e.
Jai Suspension Systems Limited.
Therefore, it looks like while preparing the consolidated financials for FY2009, Jamna Auto Industries Ltd
did not adhere to the conventional principles of consolidation, which it had also affirmed in its significant
accounting policies.
In FY2010, in the standalone financials, Jamna Auto Industries Ltd recognized a non-compete fee of ₹10
cr from its wholly-owned subsidiary. However, it did not include it in its consolidated financials.
Miscellaneous income includes non compete fees of Rs 1000 lacs charged from 100% subsidiary i.e. Jai
Suspension Systems Limited
An investor may contact the company directly in case she needs any clarifications about the treatment of
the non-compete fee by the company.
Issues in the calculation of cash flow from operations by Jamna Auto Industries Ltd
An investor would appreciate that while calculating cash flow from operations (CFO), in order to remove
the impact of financing activities from the CFO, companies add back the interest expense in CFO and
deduct it as an outflow under cash flow from financing activities (CFF).
This is done to segregate all the transactions related to operating activities under CFO and all the transaction
related to financing activities under CFF.
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However, when an investor analyses the calculation of cash flow from operations in the annual reports of
Jamna Auto Industries Ltd, then she notices that until FY2011 Jamna Auto Industries Ltd used to first add
the interest expense in the CFO calculation and surprisingly, then instead of deducting the interest expense
as an outflow under financing activities, it used to deduct it from CFO itself.
In the above table, an investor would notice that Jamna Auto Industries Ltd first added the interest expense
in the CFO calculation. However, later on, it deducted the interest expense from the CFO itself. Ideally, the
company should have deducted interest expense as an outflow under financing activities (CFF).
The impact of the above steps is that the CFO of the company is understated and the CFF is overstated.
In FY2012, Jamna Auto Industries Ltd changed its existing auditors to BSR & Co. Thereafter, the company
stopped doing the above steps and changed its CFO calculation to the usual conventions where the interest
expense is added in operating activities and deducted as an outflow in financing activities.
Changing accounting assumptions to improve the profits of the company:
While analysing the developments around the changes in the accounting norms done by Jamna Auto
Industries Ltd over the years, an investor notices that during FY2011, the company changed its method of
inventory valuation. The company could show a higher profit due to the change in the method of inventory
valuation.
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The company has changed the method of valuation of inventories as compared to the method as adopted
by the company in earlier years. The company has valued the stock by considering weighted average
purchase price on the basis of rolling average due to wide fluctuation in purchase price, whereas, earlier
Inventory had been valued by considering the weighted average price of goods for the entire period of
relevant financial year. As a result of such change, value of inventory has increased by ₹393.78 lacs and
accordingly the profit for the period is higher with the similar amount.
In FY2011, Jamna Auto Industries Ltd reported a net profit of about ₹37 cr. An investor would appreciate
that the increase in profits by about ₹4 cr due to the change in the method of inventory valuation had a
significant impact on the profitability of the company.
It is advised that while analysing any company, an investor should focus on such changes in the accounting
assumptions and then adjust the reported financials accordingly so that she is able to assess the true financial
position of the company.
5) Inability of Jamna Auto Industries Ltd to make aftermarket segment a meaning

contributor:
While reading about various strategic business initiatives highlighted by Jamna Auto Industries Ltd to its
shareholders, an investor notices that for very long, the company has stated its focus on the growing the
contribution of aftermarket segment in its revenue.
Jamna Auto Industries Ltd started to highlight its focus on the aftermarket segment in FY2009.
The company decided to increase its share in the domestic and export replacement markets. We are happy
to inform that we have increased our share in the domestic replacement market.
In FY2012, the company again emphasized that growth in the aftermarket segment is essential for the future
growth strategy of the company.
An aggressive ramping up of sales in the After-Markets – India/Export and a higher proportion of Parabolic
sales is crucial to our growth strategy.
The major aim of increasing the share of the after-market segment for auto component manufacturers is
two-fold:
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 The after-market demand is not as cyclical as the demand from OEMs. This is because OEM
demand is related to the sale of new vehicles whereas the aftermarket demand is related to the wear
and tear of existing vehicles already sold and running on the roads. An investor would appreciate
that the vehicles, which are used by drivers, would need the replacement of parts as they undergo
wear and tear during vehicle usage.
 The second factor attracting auto component manufacturers to the aftermarket is comparatively
higher margins in the aftermarket segment. This is because the customers in the aftermarket
segment do not have a high negotiating power like the OEMs.
Therefore, an investor would appreciate that if a company builds a significant aftermarket presence then it
would have a higher profit margin than what OEMs would have permitted and during the industry
downturns, the company would have a lower decline in sales as the revenue from the aftermarket segment
would not decline as much as the OEMs’ sale of new vehicles.
However, when an investor reads about the decline in the sales of new vehicles in the CV industry and the
decline in the sales of Jamna Auto Industries Ltd in the downturn of FY2020, then she notices that the
decline of operating profits of the company was much more than the decline in the sales of new commercial
vehicles.
It indicated that the company’s strategy of increasing the share of the aftermarket segment in its revenue
and thereby using it as a cushion during downturns to protect a decline in its performance is not working as
expected.
The credit rating agency, ICRA, in its report of March 2020 for Jamna Auto Industries Ltd highlighted that
the business performance of the company declined more than the CV industry during FY2020.
Credit rating report of Jamna Auto Industries Ltd by ICRA, March 2020, page 3:
This impact was visible during 9M FY2020, whereby the M&HCV (trucks) production contracted by 48.1%,
while the Group’s operating profits declined by 58.4%. Despite the management’s initiatives to develop a
widespread network for the after-market segment, its ability to scale up its after-market supplies to a level
that can offset any sharp decline in CV OEM volumes in case of any downturn, is yet to be demonstrated.
Therefore, investors should appreciate that even though the aftermarket segment looks like a solution to
many problems faced by auto ancillary companies in the OEM segment. However, establishing a presence
in the aftermarket segment is not an easy task. Companies like Jamna Auto Industries Ltd despite being the
largest producer of suspension springs in India, could not build the desired scale in the aftermarket segment
even in 10-years.
6) Related party transactions of Jamna Auto Industries Ltd:
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While analysing the transactions of Jamna Auto Industries Ltd with the companies owned by the promoter-
family-members, an investor gets to know that the promoters have established many companies, which
have their units near the plants of Jamna Auto Industries Ltd. The promoters have entered into agreements
with Jamna Auto Industries Ltd where the company gives raw material to the promoter entities, which in
turn process it, give the product back to Jamna Auto Industries Ltd, and earn profits.
The notice for the annual general meeting (AGM) put by Jamna Auto Industries Ltd to the shareholders for
approval in 2014 has details of many such arrangements between the company and the promoter-owned
entities.
i) Jamna Agro Implements Private Limited:
The promoters via their entity, Jamna Agro Implements Private Limited (JAIPL), have entered into an
arrangement with Jamna Auto Industries Ltd where the company gives raw material to the unit of JAIPL
near the Yamuna Nagar plant. JAIPL converts the raw material into clamps, gives it back to the company,
and earns a profit.
FY2014 AGM notice, page 8:
The Company supply raw material to Jamna Agro Implements Private Limited for conversion into clamp
for its Yamuna Nagar Unit. After doing the job work Jamna Agro Implements Private Limited supplies
clamps at Yamuna Nagar Unit.
ii) MAP Auto Limited:
The promoters via MAP Auto Limited (MAL) have entered into an arrangement with Jamna Auto Industries
Ltd where the company gives flat steel to the unit of MAL near the Malanpur plant. MAL cuts the flat steel
into smaller parts, gives it back to the company, and earns a profit.
Malanpur Unit of the Company supply raw material (steel flat) to MAP Auto Limited for cutting into the
required sizes and length. MAP Auto Limited does the job work of sharing and cutting and returns the
material after cutting it into the requisite size and length.
In addition, the promoters have taken over the services for providing the products of Jamna Auto Industries
Ltd to its customer in Alwar and Pune, which includes transportation, warehousing and delivery via their
entity MAP Auto Ltd (MAL)
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Presently MAP Auto Limited is providing services to Company for Alwar (Rajasthan) and Pune
(Maharashtra). Under the arrangement, MAP Auto Ltd. is responsible for entire transportation,
warehousing, JIT delivery at customer plant.
Apart from the above arrangements, the promoters have given a few properties like guesthouses to Jamna
Auto Industries Ltd on lease.
An investor may do further due diligence in terms of the charges collected by these promoter entities from
Jamna Auto Industries Ltd for providing these services. She may assess whether Jamna Auto Industries Ltd
can get these services from other independent third-party entities for a better price and terms.
A deeper analysis of the arrangements between public-listed companies and their promoter-entities is
essential because these arrangements have the possibility of shifting the economic benefits from the
public/minority shareholders to the promoters. If the company supplies the raw material to the promoter
entity at a cheaper price or buys the completed product from the promoter entity at a higher than the market
price or pays a higher price for the services provided by the promoter entity than the price what any
independent third-party can work, then it is similar to giving undue economic benefits to the promoters.
Therefore, we believe that the investor should analyse the related party transactions of Jamna Auto
Industries Ltd with its promoters in detail. She may contact the company directly if she needs any
clarifications.
The Margin of Safety in the market price of Jamna Auto Industries Ltd:
Currently (June 19, 2021), Jamna Auto Industries Ltd is available at a price to earnings (PE) ratio of about
47 based on consolidated earnings of FY2021. The PE ratio of the company is about 40 based on the average
consolidated earnings for the last 3 years (FY2019-2021). An investor would appreciate that a PE ratio of
40-47 does not offer any margin of safety in the purchase price as described by Benjamin Graham in his
book The Intelligent Investor.
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Analysis Summary
Overall, Jamna Auto Industries Ltd seems a company, which is operating in a very uncertain business
environment. The demand for its products is dependent on the commercial vehicle (CV) industry, which is
highly cyclical. As a result, the company witnessed periods of poor performance after a stretch of a few
years of good growth.
The key raw material of the company is steel, whose prices are very volatile and are difficult to hedge. In
addition, Jamna Auto Industries Ltd has a low pricing power with its customers who are very large original
equipment manufacturers ((OEMs) of commercial vehicles. As a result, the company frequently faces tough
times where at one end raw material prices increase and simultaneously, the customers put a pricing
pressure.
Moreover, the largest contributor of the revenue for Jamna Auto Industries Ltd is leaf springs, which is a
commoditized product, which contributes to the lower pricing power of the company. As a result, the
company faces high pressure on its profit margins.
As a result of these factors, the business performance of the company goes through cyclical phases where
the good performance of a few years is suddenly followed by a poor performance. During the downturn,
the sales of the company declined by up to 50% and its profit margins witnessed a sharp decrease. In the
past, during a downturn, the company has reported losses as well as liquidity constraints where it failed to
repay lenders on time and in turn defaulted to them.
During the downturn of FY2000-2003, the company reached near bankruptcy and its lenders had to
restructure its debt. Infusion of funds by a private equity investor who bought 28% in the company helped
the company repay its lenders and get out of restructuring.
Therefore, the key essence of the business of Jamna Auto Industries Ltd is that it is very difficult to project
its recent financial performance, whether good or bad, into the future. There have been instances where
during the uptrend of the CV industry, Jamna Auto Industries Ltd faced capacity constraints and it could
not fulfil all the business opportunities. However, when it started to build new capacity, then the industry
hit the downturn and it had to abandon the expansion plans and even had to close down existing
manufacturing plants and lay off employees.
The sudden sharp fluctuation in the business prospects of Jamna Auto Industries Ltd presents a situation
where an investor has to do a much deeper analysis of the business position of the company. This is because
the overview of the year-on-year annual financial performance of the company may not show the liquidity
stress that the company had faced in short stretches.
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There had been times in the past where the financial position of the company at the start of the year as well
as at the end of the year was stable; however, during the year, the company faced periods of severe liquidity
stress and it defaulted to its lenders. On one such occasion, the credit rating agency, ICRA, downgraded its
credit rating to D.
Despite the continued focused efforts of Jamna Auto Industries Ltd for more than 10 years, the company is
yet to make any meaningful revenue contribution from the aftermarket segment. As a result, even in recent
times, when the CV industry hit the downturn, the impact on the business performance of Jamna Auto
Industries Ltd was more than the decline in the industry sales.
The large fluctuations in the sales and profitability of Jamna Auto Industries Ltd make it very difficult to
do any trend-based analysis of the operating efficiency parameters of the company. As a result, an investor
is not able to assess whether the efficiency of asset-utilization of the company is improving or deteriorating.
Therefore, an investor notices many instances where there were discrepancies between the record of assets
like inventory and fixed assets on the books and the actual inventory and assets on the ground.
The promoters of the company did not take any commission as a part of their remuneration in FY2020 due
to the adverse impacts of the coronavirus pandemic. However, in the past, there have been many occasions
when the promoters took home salaries above legal limits and Jamna Auto Industries Ltd had to take special
approvals for it. At times, the promoters have taken the near maximum possible remuneration from the
company. At times, it is seen that the promoter-chairman of the company took remuneration from the
company without attending any board meeting in the whole year.
The promoters of the company have formed many entities, which have entered into agreements with Jamna
Auto Industries Ltd where the company gives raw material to these entities and in turn, these entities process
it, give it back to Jamna Auto Industries Ltd, and earn profits. Promoters have other business dealings with
Jamna Auto Industries Ltd like providing services like transportation of goods, warehousing and delivery
to the customer. In addition, the company has taken various properties on lease from the promoters. An
investor needs to analyse these related party transactions in detail as these have the possibility of shifting
the economic benefits from the public shareholders to the promoters.
There have been various instances in the past, which indicate that the internal processes and controls of
Jamna Auto Industries Ltd have a lot of room for improvement. There have been instances of significant
differences in the assets recorded on the books and the actual assets on the ground. There have been
instances of poor oversight due to which the company did not deposit undisputed statutory dues and various
required forms and reports like annual reports on time. The company did appoint an internal auditor for
strengthening its processes; however, despite it, every now and then, instance reflecting weak internal
controls and processes keep on appearing in the company.
At times, Jamna Auto Industries Ltd has not complied with the accounting norms while dealing with certain
expenses and the auditors of the company have highlighted it to the investors. At times, the company
changed its accounting assumptions like the valuation method of inventory, which has led to a higher profit
for the company. Once the company showed a non-compete fee received from its wholly-owned subsidiary
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in its consolidated financials as well, which ideally, it should have removed, as it was an intra-group
transaction.
Going ahead, an investor should keep a close watch on the factors affecting the CV industry, if she wishes
to make any prediction of the future performance of Jamna Auto Industries Ltd. This is because otherwise,
it is highly uncertain to project the recent performance of the company, whether good or bad, into the future.
An investor should not restrict her analysis only to the overview of the annual financial results. Instead, she
must read all the disclosures by the company including annual reports in detail. It is only through line-by-
line reading of these disclosures that she can get to know of issues like short period defaults to the lenders
due to transient liquidity stress or issues related to verification of inventory and fixed assets or use of any
accounting assumptions to inflate profits etc.
The investor should keep a track of the related party transactions of the company with its promoters
including the remuneration drawn by the promoters. She should be cautious if the size of the related party
transactions increases significantly or the promoters draw a higher remuneration even when the business
performance of the company declines.
These are our views on Jamna Auto Industries Ltd. However, investors should do their own analysis before
making any investment-related decisions about the company.
P.S.

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3) PNC Infratech Ltd

PNC Infratech Ltd is an India infrastructure developer focusing on the roads/highways sector, airport
runways, water distribution, power transmission etc. In the roads sector, the company acts as an
engineering, procurement & construction (EPC) player as well as develops projects based on build, operate
& transfer (BOT) as well as under the hybrid annuity model (HAM).
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An investor should note that the analysis of an infrastructure/EPC player (Engineering, Procurement and
Construction) is different from other companies. It is because of the following factors that we need to keep
in mind whenever we interpret the financial results of any infrastructure/EPC player:
 An EPC contractor’s business is nothing but an accumulation of all its projects under execution.
Unless each of these projects is assessed individually, it is difficult to understand the complete
business position of the EPC contractor. However, many times, from the information in the annual
reports, we find it difficult to assess whether these projects have achieved important milestones like
land acquisition, govt. approvals etc. Similarly, it is difficult to assess the cost estimates shared by
companies in the publically available information whether these are the real ones or there have been
escalations, which the companies may not have disclosed.
 The revenue of the EPC players is derived from the cost incurred by them as these companies use
the percentage of completion method (POCM) for revenue recognition. The reported revenue may
not have a 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 yet sent to the customers, which is called “Unbilled
Revenue”. Frequently, there are disputes between the stage of the project claimed by the EPC player
and the Govt Departments/project allottee who have to release the payments. From the publically
available information, it is difficult to assess how the situations are on this front.
 The infrastructure/EPC players usually have many subsidiaries and joint ventures. To assess the
overall financial position of the company, the financials of each of the subsidiaries and the joint
venture has to be assimilated into the main company. This consolidation exercise provides many
areas of accounting manipulations, which always raises an alarm in the assessment.
Therefore, whenever an investor studies any infrastructure/EPC player, then she should keep the above-
mentioned points in her mind and remind herself that despite best efforts, her analysis may turn out to be
erroneous or incomplete.
While analysing PNC Infratech Ltd, an investor would notice that on June 30, 2021, the company had 19
subsidiaries and 4 joint ventures (JV) (source: Q1-FY2022 presentation, page 20).
such a picture.
Therefore, in this analysis of PNC Infratech Ltd, we have studied the consolidated financial performance
of the company.
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Financial and Business Analysis of PNC Infratech Ltd:

While analyzing the financials of PNC Infratech Ltd, an investor notices that the sales of the company have
grown at a pace of about 18% year on year from ₹1,273 cr in FY2012 to ₹5,788 cr in FY2021. Further, the
sales of the company have increased to ₹6,157 cr in the 12-months ended June 30, 2021, i.e. during July
2020-June 2021. The revenue growth of the company over the last 10-years has been consistent except
FY2017 when the sales had declined by more than 20% to ₹2,252 cr from ₹2,837 cr in FY2016.
While looking at the profitability of the company, an investor notices that the operating profit margin
(OPM) of the company improved from 12% in FY2012 to 24% in the 12-months ended June 2021. The
OPM of the company had increased to 32% in FY2018; however, since then, OPM has witnessed a decline
to 24% in FY2021.
To understand the reasons for the decline in the revenue of the company in FY2017 as well as to understand
the reasons for fluctuations in its OPM, an investor needs to read the publicly available documents like
annual reports, credit rating reports as well as its red herring prospectus (RHP: click here).
influence the business of PNC Infratech Ltd. An investor needs to keep these factors in her mind while she
makes any predictions about the performance of the company.
1) Almost the entire business of PNC Infratech Ltd depends on the infrastructure
projects/orders by the Govt:
While analysing the business activity of PNC Infratech Ltd notices that all the projects undertaken by the
company constitute the EPC work for the roads/runway projects being built by Govt. or the execution of
BOT and HAM (hybrid annuity model) project allotted by the Govt. to the subsidiaries and joint ventures
of the company.
A look at the list of the customers served by PNC Infratech Ltd indicates that the company derives almost
its entire business from govt. departments, public sector units (PSUs) and other govt. entities.
Q1-FY2021 results presentation, page 28:
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The presence of Govt. agencies as major customers is not a recent change. Even more than 10 years back,
in 2007, Govt. agencies used to be the only customers for PNC Infratech Ltd.
Credit rating report of PNC Infratech Ltd by CARE in March 2008:
PIL’s operations are dependent on infrastructure projects undertaken by governmental authorities.

Contracts awarded by central, state and local government authorities constitute its entire order book as on
Sep.30, 2007.
The company also highlighted its dependence on the investments/spending by Govt. on the infrastructure
sector for its business. The company stressed that any change in Govt. policy related to the infrastructure
sector can have a significant impact on its business.
RHP, May 2015, page 16:
Any change in government policies that results in a reduction in capital investment in the infrastructure
sector could affect us adversely. If there is any change in the government or in governmental policies,
practices or focus that results in a slowdown in infrastructure projects in such projects, our business,
prospects, financial condition and results of operations may be materially and adversely affected.
An investor would appreciate that if a company were significantly dependent on the govt. projects for its
business, then during the times where the priorities of the govt. change and it reduces spending on
infrastructure, then the company’s business would be impacted. An investor would also appreciate that the
infrastructure spending of the private sector is very small as compared to the Govt.
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Therefore, if, in future, the current govt. reduces spending on infrastructure or any future govt. that might
not prioritize infrastructure creation, then it would be difficult for the company to maintain its level of
business activity. This is because the available business opportunity from the private sector’s spending on
infrastructure would be very less and all the EPC players would be competing for the same.
A small example of how a business may get impacted due to Govt. policy change is the decline in the
revenue of PNC Infratech Ltd in FY2017 when the sales had declined by more than 20% to ₹2,252 cr from
₹2,837 cr in FY2016. As per the company, the key reason for such a decline was demonetization done by
the Govt. in Nov. 2016.
The Consolidated Revenue for FY17 was ₹ 2,252 crore as compared to ₹ 2,837 crore in FY16. The decline
was a bit optical due to application of Indian Accounting standards (Ind-As) during the year, and were also
significantly affected due to the demonetization drive in Q3 FY17.
Therefore, while analysing PNC Infratech Ltd, an investor should keep in her mind that PNC Infratech Ltd
would face challenging times if the govt. shifts its priorities away from infrastructure creation. Any adverse
govt. policy may have a serious impact on its business.
2) Infrastructure sector faces cyclicity: alternate periods of growth and de-growth:

While reading the credit rating reports of PNC Infratech Ltd prepared by the credit rating agency, CARE,
then she notices that throughout its rating coverage, CARE has highlighted to the investors that the
construction sector is faced with cyclical trends.
Credit rating report of PNC Infratech Ltd by CARE, November 2020:
The ratings, however, remain constrained by its geographical concentration risk,…inherent cyclical trends
associated with the construction sector.
An investor would also appreciate from the above discussion that the infrastructure sector is highly
dependent on the spending priorities of the govt. of the day. The priorities of the govt. keep on changes as
per the changing socio-political situations. As a result, an investor would notice that there are periods when
govt. spends a lot of money on infrastructure creation and there are periods when the govt.’s infrastructure
spending almost comes to a halt.
In addition, infrastructure spending by Govt. as well as the private sector is linked to the economic activity
in the country, which follows a cyclical pattern. When economic growth picks up, then the private sector
increases its capital investments. At the same time, increased revenues for the govt. by way of increased
tax inflow leads to the increased Govt. spending on infrastructure. On the contrary, when economic growth
slows down, then both the private sector as well as the Govt. cut down on infrastructure spending.
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Therefore, a combination of the factors of dependence on economic growth as well as the priorities of Govt.
spending makes the construction sector a cyclical industry, which witnesses periods of good growth
followed by periods of poor growth/de-growth.
An investor should keep the cyclical nature of the infrastructure industry in her mind whenever she analyses
any infrastructure player.
3) There are very low entry barriers in the infrastructure sector:

An investor would appreciate that in the infrastructure sector, a player does not need to create any
manufacturing plant. A company can outsource almost all of its man and material sourcing. As a result,
during good times when the Govt. is spending a lot of money on infrastructure and is tendering many
projects, then many new infrastructure players come up rapidly that increases the competition within a short
period.
In the FY2017 annual report, PNC Infratech Ltd acknowledged the challenges faced by it due to low entry
barriers in its business. The company highlighted how it creates a problem especially during the period
when the project announcement by the Govt declines and only a few projects are available for allotment to
EPC players.
Due to low entry barriers, the sector has witnessed entry of many large and small players which on one
hand created a healthy competitive scenario however on the other hand, in the phase of low projects being
awarded, it has becomes fiercely competitive which creates difficult operating environment.
Therefore, an investor would notice that during good times, many new EPC players come up, who earlier
might be working as subcontractors or working as employees with the other EPC players. At times,
erstwhile govt. employees also enter the EPC/infrastructure sector where they intend to use their network
to obtain business contracts.
The fact that in the infrastructure sector, almost entire execution including workers, material as well as
construction can be outsourced makes it possible for people to increase the supply/competition quickly.
Therefore, during good times, the competition increases significantly and tenders for every project witness
intense competition by a large number of bidders. On the other hand, as the govt. spending on infrastructure
slow down or the economy enters a down-phase, then the players start competing on prices to gain contracts.
As a result, the profit margins in the construction activity decline and many EPC players are not able to
survive the downturn.
An investor can assess the impact of cyclical phases of the construction industry on the EPC players when
she reads the red herring prospectus (RHP) of PNC Infratech Ltd filed by the company before its IPO in
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2015. In the RHP, PNC Infratech Ltd disclosed that previously, in FY2011-FY2012, the competition was
very tough and every project witnessed bidding by almost 25-30 bidders whereas now (in 2015), the
competition has reduced and only about 5 players bid for every project. The company also mentioned that
now (2015); many projects are not witnessing even a single bid.
RHP, 2015, page 110:
Competition for bagging BOT projects has narrowed significantly over the past year. As against 2011-
2012, when there were about 25-30 bidders for most projects, currently there are only around five bidders,
with many projects not attracting even one bid.
Therefore, an investor would notice that in FY2011-2012, the construction industry witnessed very high
competition and within 2-3 years by FY2015, the competition had reduced because many players would
have gone out of the business.
Later, in FY2017, the competition increased once again when as discussed above, PNC Infratech Ltd
highlighted to its investors that due to low entry barriers, many small and large players have entered the
construction sector increasing the competition.
Due to low entry barriers, the sector has witnessed entry of many large and small players which on one
hand created a healthy competitive scenario however on the other hand, in the phase of low projects being
awarded, it has becomes fiercely competitive which creates difficult operating environment.
Therefore, after witnessing a decline in competitive intensity in FY2015, the construction sector again saw
an increase in competition in FY2017.
Because of increasing competition, PNC Infratech Ltd started to focus on large projects by stressing that
large projects have lesser competition.
Mitigation: Our target is to bid larger projects as there is lesser competition.
However, it seems that the competition in the infrastructure segment has increased so much that even the
large projects e.g. of value more than ₹1,000 cr have started witnessing many bids. In the Q3-FY2021
conference call, PNC Infratech Ltd highlighted that the competition is very steep as currently, even the
large HAM projects of more than ₹1,000 cr value are getting more than 10 bidders for each project.
Q3-FY2021 conference call, February 2021, page 25:
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T. R. Rao: We cannot say, which project, the competition is equally steep in both the cases, EPC as well
HAM. In the HAM projects also we are getting more than 10 bids for a project of Rs.1,000 Crores value so
we cannot say anything.
The company also intimated to the investors that it is not considering bidding for metro train projects
because this segment has intense cut-throat competition.
Q4-FY2021 conference call, June 2021, page 13:
Yogesh Kumar Jain: We are not bidding metro projects because the competition is very high in the metro
sector.
From the above discussion, an investor would appreciate that the construction industry follows a cyclical
pattern with periods of intense competition (FY2011-2012, FY2017-2021) followed by periods of declining
competition (FY2015). The low entry barriers in the construction space play an important role in the
fluctuating levels of competition as the ability to outsource almost the entire workforce, material sourcing
and construction makes it easy for supply to come up in short periods.
An investor should always keep this aspect of the construction industry with low entry barriers and a sharp
increase in competition within a short period in her mind while she makes any prediction about the
construction industry and the company participating in it. So, even if any EPC contractor shows high profits
during a certain period, then due to low entry barriers, competition may come up very soon, which might
bring down the profit margins.
4) Low bargaining power of EPC contractors with the customers (Govt. agencies):
An investor would appreciate that the primary customers of EPC contractors are govt. agencies and
departments, who dictate terms as per the existing policies of the govt. The contractors can only accept or
reject the offered terms. At times, there is no room for negotiation in the offered terms.
Such a situation puts the contractors in a difficult situation if after winning a contract, the business
conditions change for worse.
PNC Infratech Ltd highlighted its position of low negotiating power with its customers in its red herring
prospectus in 2015.
RHP, 2015, page 28:
Our ability to negotiate the terms of contracts with government authorities and state instrumentalities is
limited and we may be required to accept unusual or onerous provisions in contracts in order to be engaged
to execute such projects.
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The company stressed that it cannot make the govt. change terms to suit it and at times, it has no other
option to accept the offered terms even if they are detrimental to the business/profitability prospects. For
example, in the tolling projects, the company cannot increase the toll on its own even if its costs increase.
It is dependent upon the Govt. agencies agreeing to an increase in toll. Even if the Govt. agencies increase
the toll, it may not sufficiently cover the increased costs, thereby, may affect profit margins.
The company highlighted its inabilities to increase toll rates in the RHP in 2015 on page 28:
The nature of contracts for our BOT projects and our OMT project are such that we have limited control
over the terms relating to collection of tolling revenues. Generally, the government entity that has granted
the relevant BOT concession to us unilaterally determines the terms on which we may collect toll revenues,
and we are not permitted to amend such tolling rates without the prior written consent of such government
entity… We cannot assure that the tolling rates set would be sufficient to recover our costs. Additionally,
our ability to receive compensation on account of termination by the Government entities is limited.
Therefore, an investor would appreciate that if the Govt. agencies refuse to stipulate clauses in the contracts
that provide for increasing revenue whenever there is an increase in costs, then the EPC/construction players
can hardly do anything to negotiate with the Govt. agencies. It might be a “take it or leave it” proposition
for the companies.
Therefore, an investor should keep in mind that first, the infrastructure players are highly dependent on the
Govt. for their business and second, they do not have any pricing/negotiating power over the Govt.
Therefore, if in a given period, the Govt. shows understanding to the contractors and provides then contracts
with good profitability, then over time, the situation may change and the same or a different Govt. may
choose to leave very little profit margins for the infrastructure players.
Therefore, an investor should always be cautious while projecting the business performance of
infrastructure players.
5) Improving profit margins of PNC Infratech Ltd over last 10-years:

From the above discussion, an investor would remember that the operating profit margin (OPM) of PNC
Infratech Ltd improved from 12% in FY2012 to 24% in the 12-months ended June 2021 i.e. July 2020-June
2021. Let us try to understand the key factors leading to an improvement in the profit margins of the
company over the last 10-years.
5.1) Economies of scale:
While analysing the business history of PNC Infratech Ltd, an investor gets to know that one of the reasons
for improving profit margins of the company as it has increased its size of operations is the “economies of
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scale”, which comes with the execution of a bigger order book. This is because, the company can execute
more orders without proportionate spending on resources like workforce, material mobilization etc.
The credit rating agency, CARE highlighted the effect of “economies of scale” on the business of PNC
Infratech Ltd in its credit report for the company in March 2011.
The profitability margins also improved on account of increased efficiency and economies of scale
emanating from growing order book.
Even in March 2008, the credit rating agency, CARE mentioned that the increase in profit margins of PNC
Infratech Ltd in FY2007 over FY2006 was due to the increasing ticket size of the contracts, which indicates
economies of scale.
PBILDT margin have increased during FY06 and FY07 to 13.75% to 14.29% respectively due to increase
in ticket size of the contracts
Therefore, an investor would notice that when PNC Infratech Ltd grew its business to almost 5-times over
the last 10-years from ₹1,273 cr in FY2012 to ₹6,157 cr in 12-months ended June 2021 (July 2020-June
2021), the economies of scale worked and as a result, the profit margins of the company increased.
5.2) Increase in toll/annuity revenue:
Another factor, which has led to the improvement of OPM over the last 10-years, is the increasing share of
annuity/toll revenue in the overall consolidated sales of PNC Infratech Ltd.
As per the RHP filed by the company in 2015, page 301, in FY2012, PNC Infratech Ltd did not have any
annuity/toll revenue. The company started to earn toll revenue in FY2013 and annuity revenue in FY2014.
From the above table, an investor would notice that in FY2012, PNC Infratech Ltd did not have any
toll/annuity revenue. By FY2014, the company had toll and annuity revenue of about ₹150 cr, which was
about 11% of its consolidated sales.
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While analysing the FY2021 performance of the company, an investor notices that the toll and annuity
revenue of PNC Infratech Ltd had increased to ₹919 cr, which is about 15% of the overall revenue.
Q1-FY2022 results, page 12, consolidated segmental results:
Looking at the above table, an investor notices that the profit margin of toll/annuity revenue is about 60%
(FY2021: 55,259.85/91,948.97 = 0.6), which is much higher than the profit margin on contract revenue
(EPC) of about 10% (FY2021: 50,202.30/486,807.88 = 0.1).
Therefore, an investor would appreciate that as the share of toll/annuity revenue in the overall sales of a
company would increase, then the overall profit margin for the company would improve. This is another
reason for the increase in the OPM of PNC Infratech Ltd from 12% to 24% over FY2012-FY2021.
5.3) Focus of PNC Infratech Ltd only on projects with a minimum level of profit margin:
When an investor reads the comments of the management of PNC Infratech Ltd about their business strategy
regarding obtaining contracts and profit margins, in the conference calls, then she notices that the company
prefers to stick to a threshold of profit margin while bidding for projects. As per the management, it does
not bid for projects with low-profit margins to show higher revenue growth.
In February 2021, the company intimated that it intends to get an EBITDA margin of about 13.5% on
construction contracts whereas, on its equity investments in the HAM (hybrid annuity model) projects, it
expects a return on equity of about 14%-15%.
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D. K. Maheshwari: In the HAM projects, there are two impacts, one is the EPC. So here we are expecting
the EBITDA around 13.5% to 14% and as an equity part, where we bid on the equity return in the range of
14% to 15%
In June 2021, while discussing the Q4-FY2021 results, the management said that the company targets
projects with EBITDA margins of 13.5% and it would not compromise on profit margins while bidding.
D. K. Maheshwari: As already told earlier that we will consider the EBITDA around 13.5%. We will not
compromise with the margins for taking the orders.
Therefore, the strategy of the management to bid only for projects of at least a minimum profit margin
might also have led to an improvement in profit margins over the years.
5.4) Construction contracts with pass-through of increase in raw material costs:
On multiple occasions, PNC Infratech Ltd highlighted to the investors that the contracts entered by it with
the customers (govt. agencies) allow for passing on of an increase in the raw material costs.
In the FY2015 annual report, the company intimated to its investors that it puts in price escalation clauses
in its contracts with the customers.
The Company also puts in relevant clauses in the contracts to account for provable material cost
escalations and thus protect margins.
The company once again highlighted the same in its FY2016 annual report at page 34.
The contracts we enter with government client are generally have with relevant cost escalation provisions
that protect our margins.
In the conference call of the company in February 2021, while discussing Q3-FY2021 results, the
management of the company indicated that the recent increase in raw material costs is not expected to have
a significant impact on its profit margins due to price escalation clauses in the contracts entered by it with
its customers.
February 2021 conference call, page 16:
Parvez Akhtar Qazi: Sure. And if I may ask one question. I mean recently, we have seen an increase in
commodity prices so what is the kind of impact that we see on our margins in let us say Q4 or FY2022?
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T. R. Rao: There is an escalation clause. So, we do not think any impact in the profitability because there
is a price variation cause in the HAM projects as well as in the EPC projects.
From the above discussion, an investor would appreciate that the Govt. agencies tend to protect the
contractors from raw-material-price-escalation-risk by permitting a pass on of the price increases. The
ability of PNC Infratech Ltd to recover such an increase in raw material prices has allowed it to benefit
from economies of scale with increasing business leading to improving profit margins over the years.
In the absence of such escalation clauses i.e. if these were fixed-price contracts, the company would have
been severely impacted by highly volatile commodity price cycles like steel, cement etc. In such a situation,
it would have been difficult for PNC Infratech Ltd to maintain its profit margins over the years.
The company highlighted the risk of fixed-price contracts in its RHP to the investors in 2015 on page 14.
Our ability to pass on increases in the purchase price of raw materials and other inputs may be limited in
the case of contracts with limited, or no price escalation provisions and we cannot assure you that these
variations in cost will not lead to cost-overruns. Further, other risks generally inherent to the development
and construction industry may result in our profits from a project being less than as originally estimated
or may result in us experiencing losses due to cost and time overruns, which could have a material adverse
effect on our cash flows, business, financial condition and results of operations
From the earlier discussion, an investor would remember that infrastructure players have very low
negotiating power over their customers, which are primarily Govt. agencies. Therefore, if any company has
entered into a fixed-price contract, and later on costs increase, then it may have to complete the project at
a loss.
An investor should keep this aspect in her mind while she projects the current performance of any
infrastructure player. Even if the current profit margins are good, then in the future, the approach of the
same govt. or the next govt. may change and it may force the infrastructure players to accept tough terms
in the contracts.
5.5) Backward integration and other strategies to control costs by PNC Infratech Ltd:
While reading the annual reports of the company, an investor notices that PNC Infratech Ltd has taken steps
for backward integration of its operations by setting up its own sources of key raw material like construction
aggregates etc. In addition, the company has invested in its own equipment, which protects it from changing
lease rates for equipment and as a result, it is able to keep the variations of its input costs under control.
In the FY2016 annual report, the company disclosed to the investors the benefits that it has received by the
way of backward integration, at page 13:
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Backward integration: The core of our cost management is derived from the captive in-sourcing of two of
the biggest cost items – road construction equipment and construction aggregates. At PNC, we invested
over ₹400 cr in gross block (select construction equipment) that has catalyzed timely projects completion;
we invested in mines for the captive availability of aggregates, moderating our raw material costs.
PNC Infratech Ltd also highlighted that the decision of the company to produce the key raw material in-
house and to own the construction equipment has allowed it to control its costs as well as to complete the
projects in time. This is because, it is now less dependent on third-party vendors for material and equipment,
which otherwise would lead to risks of disruption in the project construction for the factors outside its
control.
The company has also highlighted its decision to execute the projects independently, thereby, protecting
itself from dependence on other parties as one of the reasons for its record of timely construction of projects.
the Company undertakes construction activities of all its DBFOT projects (BOT-toll and BOT-annuity)
independently making it less dependent on third parties for project implementation. These multifarious
capabilities enhance control leading to scheduled project completion.
The Company owns a large equipment fleet, reducing its dependence on external vendors, facilitating timely
and before-schedule completion of projects.
Apart from producing in-house construction aggregates, owning the road-construction-equipment and
independently executing the construction contracts, PNC Infratech Ltd has also highlighted other aspects
of its strategy like creating storage facilities of key raw material to ensure timely supplies as well as directly
dealing with the largest suppliers for material as the reasons for keeping its costs under control.
The Company invested in storage facilities for petroleum products, machinery components and cement,
among others, to ensure uninterrupted work at sites.
Apart from this, the Company procures other critical raw materials like cement and steel directly from
leading manufacturers with whom we have developed strong relationships over a period, which ensures
the best prices, quality and in-time supplies.
Another factor that has worked in the favour of the company is its decision to focus primarily on the projects
in North India, as per the company, a radius of 500km. This has helped the company in quick movement of
man and material as well as sharing resources among many projects leading to lower costs and fast
execution of projects.
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Geographical footprint: At PNC Infratech, we have selected to do business in a concentrated geographical

area as opposed to working across the largest stretch of the Indian land mass. This focus has made it
possible for us to generate huge logistic benefits: a faster sharing of road building equipment between
projects as well as lower transportation costs of raw materials (aggregates) from mines to project sites.
The result of this deliberate focus translated into nearly 90% of our projects being conducted within a
radius of 500kms in North India (Haryana, Madhya Pradesh, Maharashtra, Rajasthan, Uttar Pradesh,
Uttarakhand, Punjab and West Bengal).
An investor would appreciate that the above-mentioned strategies of PNC Infratech Ltd like owning the
equipment, production of aggregates, buying material from large manufacturers, creating storage facilities,
low dependence on other parties etc. have enabled it to control costs and complete projects within time.
These seem to have protected the company from raw material price increases as well as cost overruns
associated with project delays.
As a result, the company could keep its costs under control and enjoy improving profit margins as
economies of scale worked in its favour with increasing project-ticket-sizes as well as a bigger order book.
5.6) Timely execution of projects by PNC Infratech Ltd:
From the above discussion, an investor would appreciate that PNC Infratech Ltd has taken many steps to
control its costs, fast movement of man, material and equipment as well as a strategic decision to avoid
dependence on third parties by executing the projects itself. These steps have helped it to complete its
projects within time and at times, significantly earlier than the project deadline. As a result, for many
projects, PNC Infratech Ltd has received an early completion bonus from the Govt. authorities, which has
increased its profit margins.
The company highlighted its strategy to complete projects ahead of schedule to earn a bonus as a tool to
improve its profit margins in the FY2018 annual report, page 20.
We aim to complete the project before the scheduled completion date and within the budgeted cost, which
help us to earn bonus where ever there is such provision.
In the past, there have been many instances where PNC Infratech Ltd completed its projects before time.
As a result, the company earned a significant amount of bonuses from Govt. authorities, which improved
its profit margins.
As early as 2003, the company completed the four-laning road project of the Agra-Gwalior section before
schedule and earned a bonus. The company also completed the Gwalior-Bhind road project before time and
started toll collection three months earlier than the scheduled (FY2014 annual report, page 9).
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In 2018, PNC Infratech Ltd received a bonus of about ₹58 cr when it completed its section of the Agra
Lucknow Expressway before the deadline. In addition, the company also received a bonus annuity of about
₹33.7 cr when it completed Raebareli-Jaunpur section before time (FY2018 annual report, page 3).
In 2019, the company completed the Aligarh-Moradabad section of the road project about 73 days before
the scheduled date and as a result, entitled it to an early completion bonus (FY2019 annual report, page 7).
Therefore, an investor would appreciate that PNC Infratech Ltd has taken steps, which have enabled it to
complete many projects before the scheduled date of completion. As a result, the company has benefited in
two manners; first, it could avoid cost overruns associated with project delays and second, it could get a
bonus, which increased its profit margins.
Therefore, the instances of timely/early completion of projects are also one of the reasons for the improved
profit margins of the company over the last 10-years from 12% in FY2012 to 24% in FY2021.
Overall, if an investor attempts to summarize the key business characteristics of PNC Infratech Ltd or for
any infrastructure player, then she notices that such companies are highly dependent on Govt. agencies for
their business. These companies do not have any pricing power over these Govt. agencies.
In addition, there are very low barriers to entry in the construction space. This is because almost everything
from the workforce, material sourcing and construction can be outsourced. As a result, during good times,
many new players enter the construction sector, which increases the competition.
The construction activity in the infrastructure sector is highly dependent on the Govt. spending and the
phase of the economic cycle. Both of these factors are cyclical. As a result, during the down phase, the
intense competition reduces the profit margins of the infrastructure players.
Therefore, to run the business efficiently, infrastructure players need to keep their costs under strict control,
complete the projects on time to avoid cost overruns and selectively bid for projects that allow for pass-
through of cost escalations. If any infrastructure player is not able to manage these different aspects of the
business efficiently, then it may not survive the down phase of the economic cycle. There have been
numerous instances of infrastructure firms, which have become bankrupt during an economic down-cycle.
From the analysis of different public documents of PNC Infratech Ltd, it seems that the company has
managed its operations efficiently over the years. As a result, it has increased the size of its business
operations and it has kept its costs under check. Therefore, it has managed to increase its profit margins
significantly over the last 10-years.
However, going ahead, an investor needs to keep in her mind various factors like cyclicity of the
infrastructure spending by Govt., high competition, low entry barriers, low bargaining power over the
customers etc. before she projects the current performance of the company into the future. This is because;
in the infrastructure sector any change in the priorities of the current or the future govt. may change the
business fortunes of any company.
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While analysing the tax payout ratio of PNC Infratech Ltd., an investor notices that for most of the years,
However, during FY2016-FY2019, the company has reported a negative tax payout ratio i.e. its profit after
tax is higher than its profit before tax.
While going through the annual reports of the company during this period, an investor notices that it is
because of the tax incentives of previous years, which were withheld by the Income Tax Department in the
past; however, now the company got the decisions in its favour. As a result, the availing of past income tax
incentives in the current years led to a negative tax payout ratio.
The following table from the FY2018 annual report, page 163, shows the reconciliation of the income tax
expense reported by the company in the profit & loss statement (P&L) with the standard corporate tax rate
for FY2017 and FY2018. During these two years, PNC Infratech Ltd had reported a negative tax payout
ratio of (28%) and (12%) respectively.
An investor would notice that the key reasons for a very low/negative tax payout ratio of PNC Infratech
Ltd during these years were the tax incentives of earlier years, which are adjusted in the current period as
well as the other tax holidays available to the company.
Going ahead, an investor may keep a close watch on the tax payout ratio of the company and understand
more about the tax incentives available to the company.
Operating Efficiency Analysis of PNC Infratech Ltd:
a) Net fixed asset turnover (NFAT) of PNC Infratech Ltd:
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When an investor analyses the net fixed asset turnover (NFAT) of PNC Infratech Ltd in the past years
(FY2013-21), then she notices that the NFAT of the company declined consistently during the initial period
from 4.7 in FY2013 to 0.9 in FY2017. However, afterwards, the NFAT has increased consistently sharply
to 3.1 in FY2021.
To understand the reasons behind such a contrasting change in the efficiency of asset utilization by PNC
Infratech Ltd, an investor needs to understand how the business of the company has evolved over the years.
An investor notices that in the initial part of the last decade, PNC Infratech Ltd was working primarily as
an EPC contractor. As a result, its fixed assets primarily consisted of road construction equipment and other
material required for building roads. However, since FY2012, the company started focusing on toll/annuity
projects.
The following table from the RHP filed by the company in May 2015 containing the breakup of
consolidated fixed assets shows that until FY2011, PNC Infratech Ltd had very little assets under
“intangible assets” and “intangible assets under development”, which represent toll/annuity projects like
BOT (build, operate and transfer) and HAM (hybrid annuity model) projects.
From the above table, an investor would notice that from FY2012 onwards, PNC Infratech Ltd started
building many BOT/annuity projects and the share of intangible assets (IA) and intangible assets under
development (IAUD) in its fixed assets started increasing. In FY2012, the share of intangible assets (IA)
and intangible assets under development (IAUD) in the total fixed assets of the company was about 63%.
The following disclosure by PNC Infratech Ltd in its annual reports would help an investor understand that
as per the accounting norms, the money spent by the company on creating toll/annuity assets is capitalized
under intangible assets and intangible assets under development.
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Service Concession Arrangements: The group constructs or upgrades infrastructure (construction or up-
gradation services) used to provide a public service and operates and also maintains that infrastructure
(operation services) for the specified period of time…The intangible asset model is used to the extent that
the group receives a right (i.e. a franchisee) to charge users of the public service.
By FY2016-FY2017, the share of intangible assets (IA) and intangible assets under development (IAUD)
in total consolidated fixed assets had increased to 85-90%.
To assess the net fixed asset turnover of each of the two major business segments of PNC Infratech Ltd, an
investor may calculate how much revenue each rupee of assets generally earns in the toll/annuity business
and EPC/contract business.
The following table from the FY2017 annual report, page 199 shows the revenue earned by the two business
segments of PNC Infratech Ltd: contract/EPC and toll/annuity.
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From the above data of the segment revenue and the assets deployed by PNC Infratech Ltd in each of the
two business segments, an investor may calculate the net fixed asset turnover (NFAT) of each of the
business segments.
In FY2017, about ₹350 cr of assets in the EPC/contract business earned a revenue of about ₹1,650 cr
indicating an NFAT of about 4.7 (= 1,650 / 350). On the other hand, in FY2017, about ₹2,050 cr of assets
deployed in the toll/annuity segment earned a revenue of about ₹600 cr indicating an NFAT of 0.3
(=600/2,050).
Therefore, an investor would appreciate that as the share of intangible assets (IA) and intangible assets
under development (IAUD) in total consolidated fixed assets would increase, the NFAT of the company
would decline. On the contrary, if the share of intangible assets (IA) and intangible assets under
development (IAUD) in total consolidated fixed assets decreases, then the NFAT of the company would
increase.
During the first half of the last 10-years, the share of intangible assets (IA) and intangible assets under
development (IAUD) in total consolidated fixed assets of PNC Infratech Ltd increased sharply from
FY2012 (63%) to FY2016-FY2017 (85%-90%). As a result, the NFAT of the company declined from 4.7
in FY2013 to 0.9 in FY2017.
Later on, the share of intangible assets (IA) and intangible assets under development (IAUD) in total
consolidated fixed assets of PNC Infratech Ltd started declining and by FY2021, it had declined to 63% of
fixed assets.
Q4-FY2021 results, page 15:
As a result of the decline of the share of intangible assets (IA) and intangible assets under development
(IAUD) in total consolidated fixed assets, the NFAT of PNC Infratech Ltd increased from 0.9 in FY2017
to 3.1 in FY2021.
b) Inventory turnover ratio of PNC Infratech Ltd:
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While analysing the efficiency of inventory utilization by PNC Infratech Ltd, an investor notices that during
the last 10 years, the consolidated inventory turnover ratio (ITR) of the company has increased from 10.2
in FY2013 to 18.6 in FY2021.
An improvement in the ITR over the years indicates that PNC Infratech Ltd has improved the efficiency of
inventory utilization over time.
From the above discussion, an investor would remember that the business of PNC Infratech Ltd constitutes
EPC/construction and toll/annuity segments. The EPC business is primarily a part of the standalone entity
whereas the toll/annuity projects are majorly a part of the SPVs/subsidiaries/joint ventures.
Therefore, if an investor wants to assess the inventory utilization efficiency of the EPC business PNC
Infratech Ltd, an investor may assess the standalone performance of the company. On a standalone basis
also, the ITR of PNC Infratech Ltd has increased from 10.3 in FY2013 to 15.9 in FY2021.
It seems that the various strategic steps taken by the company, which have been discussed above like
limiting its geographical presence mainly in a 500 km radius in North India, having a captive construction
aggregate unit etc. have resulted in the efficient utilization of its assets including inventory.
Going ahead, an investor may keep track of the inventory level of the company to understand whether the
company is able to maintain its inventory utilization efficiency after mergers.
c) Analysis of receivables days of PNC Infratech Ltd:

Over the last 10 years, the receivables days of PNC Infratech Ltd have improved from 82 days in FY2013
to 21 days in FY2021. A reduction in the receivables days over the years indicates that PNC Infratech Ltd
has been able to collect its dues from its customers (Govt. agencies) in time.
Even on a standalone basis, the receivables days of PNC Infratech Ltd have declined from 114 days in
FY2013 to 61 days in FY2021. It indicates that even in the EPC business, the company is able to collect its
money from the customers (govt. agencies).
From the initial discussion, an investor would remember that in the case of infrastructure players, the
companies raise bills to the customer based on their estimate of the work done/stage of completion.
However, the customer does its own evaluation for the project progress and releases the payment only after
it is convinced.
An investor would appreciate that in such an arrangement, there is always a probability of dispute/difference
in the opinion of the company and the customer with respect to the stage of project completion as well as
the quality of the work done. The company highlighted this aspect of its business in its FY2014 annual
report, page 21:
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Disputes between project owners and contractors on issues (quantity variation, incremental billing,
payment terms and timelines) have often warranted time-consuming government intervention.
Therefore, there is a possibility of the customer withholding the payment. As a result, in the case of
infrastructure players, especially those dealing with Govt. agencies, many times, investors would notice
that the companies face delays in getting payment from customers.
PNC Infratech Ltd had highlighted this risk to the investors in its RHP in May 2015 on pages 16-17:
Further, payments from the Central, state and local governmental authorities in India may be subject to
several delays due to regulatory scrutiny and long procedural formalities, including any audit by the
Comptroller and Auditor General of India.
We may further encounter disputes with certain governmental authorities in respect of the projects awarded
by them, which may cause delay to our receiving payments due from such parties, or may inhibit our ability
to recover our costs.
In the RHP, PNC Infratech Ltd also mentioned an example of a case where its joint venture company had
to initiate an arbitration against the National Highways Authority of India (NHAI).
For instance, while the construction in respect of the four laning of National Highway 24 from Hapur to
Moradabad in Uttar Pradesh… that we have undertaken through our joint venture, PNC-BEL JV, has been
completed, arbitration proceedings were initiated by PNC-BEL JV against the NHAI in respect of alleged
breach of certain terms and conditions of the project agreements.
While reading the annual reports of PNC Infratech Ltd, an investor comes across numerous instances where
the company had disputes with the Govt. agencies. As a result, it had to resort to arbitration for recovering
its dues.
As per the FY2020 annual report, SPVs of the company have pending disputes with NHAI for more than
₹1,000 cr.
PNC Kanpur Highways Ltd. has a pending arbitration case against National Highways Authority of India
(NHAI)… The company has raised claims for total amount of ₹ 61,876.10 Lakhs including interest in the
said arbitration against NHAI. The arbitration proceedings are underway.
PNC Raebareli Highways Pvt. Ltd. has a pending arbitration case against National Highways Authority
of India (NHAI)… The company has raised EPC claims for total amount of ₹ 38,925.93 Lakhs including
interest in the said arbitration against NHAI. The arbitration proceedings are underway.
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Therefore, an investor should be aware of the risks that companies face in getting payments while dealing
with govt. agencies. The Govt. agencies are subject to various audits, investigations, regulatory scrutiny,
which leads to delays in the release of payments to the vendors.
Even if the company has been able to receive its payments on time until now; however, going ahead, an
investor should closely monitor the trend of receivables days. This is because any change in the policies of
the current govt. or the next govt. may lead to delays in payments and in turn, may increase the working
capital requirements of the company.
When an investor notices that PNC Infratech Ltd has improved its inventory turnover ratio as well as
receivables days over the last 10-years, then she can understand that the company has improved its overall
working capital efficiency.
Such a performance on the working capital management looks good because as per the company, its
business operations are working-capital-intensive. PNC Infratech Ltd highlighted that for any project a
significant amount of working capital is used for man and material mobilization and at times, its customers
make it mandatory to spend its money for such project mobilization.
Our business requires a high amount of working capital. In many cases, significant amounts of working
capital are required to finance the purchase of materials and the performance of engineering, construction
and other work on projects before payments are received from clients. In certain cases, we are contractually
obligated to our clients to fund the working capital requirements of our projects.
operations (cCFO) of PNC Infratech Ltd for FY2012-21 then she notices that the company has converted
all of its profits into cash flow from operating activities.
Over FY2012-21, PNC Infratech Ltd reported a total cumulative net profit after tax (cPAT) of ₹2,268 cr.
During the same period, it reported cumulative cash flow from operations (cCFO) of ₹2,539 cr.
The Margin of Safety in the Business of PNC Infratech Ltd:
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target growth.
Where,

While analysing the SSGR of PNC Infratech Ltd, an investor would notice that over the years, the company
had a low SSGR ranging from negative values to low single digits of 2%-4%. However, an investor notices
that PNC Infratech Ltd has grown at a CAGR of about 18% in the last 10-years from ₹1,273 cr in FY2012
to ₹5,788 cr in FY2021.
As PNC Infratech Ltd has grown at a pace higher than what its internal resources could afford; therefore,
over the years, the company has to rely on additional capital in the form of equity dilution and debt to meet
its funds’ requirement.
 Attempted IPO in January 2008: PNC Infratech Ltd tried to raise money by an IPO; however, it
deferred the IPO even after getting a go-ahead from SEBI due to global financial meltdown.
(DRHP, January 15, 2008)
 FY2009: Raised ₹10 cr from promoters: As the plans of the IPO could not materialize in FY2009,
therefore, the company had to raise ₹10 cr from its promoters (FY2009 annual report, page 27 &
31).
 FY2010: IPO again deferred: PNC Infratech Ltd attempted to raise ₹160 cr via an IPO. However,
despite getting all the regulatory approvals, the company once again deferred its IPO due to weak
stock market conditions (DRHP, Nov. 17, 2009).
 FY2010: Raised ₹19 cr by issuing shares under preferential allotment. As the company could not
raise money via IPO; therefore, the company raised ₹19 cr by preferential allotment of shares
(FY2010 annual report, page 20 & 26).
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 FY2011: Raised ₹150 cr from NYLIM Jacob Ballas India (FVCI) III LLC by diluting a 14.29%
stake in the company (FY2011 annual report, page 3 & 27).
 FY2016: IPO: PNC Infratech Ltd raised ₹434.7 cr by issuing 11,500,000 shares at ₹378 per share.
In addition, the IPO also comprised of the sale of 1,421,708 shares by NYLIM Jacob Ballas India
(FVCI) III LLC at ₹378 amounting to ₹53.7 cr.
 An incremental debt of ₹3,383 cr: In addition to the above-discussed equity dilutions, PNC
Infratech Ltd also raised a total of ₹3,383 cr by way of debt over FY2012-FY2021 because the total
debt of the company increased from ₹373 cr in FY2012 to ₹3,755 cr in FY2021 (3,755 – 372 =
3,383).
Therefore, an investor would notice that the business of PNC Infratech Ltd is very capital intensive and the
company is not able to achieve its desired growth rate only from its business profits. As a result, over the
years, the company had to resort to raising more & more debt as well as multiple instances of equity dilution
where it had to raise money from the promoters, preferential allotment, and private equity funds as well as
from the public via IPO.
An investor arrives at the same conclusion when she analyses the free cash flow (FCF) position of PNC
Infratech Ltd.
b) Free Cash Flow (FCF) Analysis of PNC Infratech Ltd:

While looking at the cash flow performance of PNC Infratech Ltd, an investor notices that during FY2012-
2021, it generated cash flow from operations of ₹2,539 cr. During the same period, it did a capital
expenditure of about ₹3,397 cr.
Therefore, during this period (FY2012-2021), PNC Infratech Ltd had a negative free cash flow (FCF) of
(₹858) cr (=2,539 – 3,397).
of ₹2,293 cr. As a result, the company had a net negative free cash flow of (₹2,701) cr (= -858 + 450 –
2,293). Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.
As mentioned in the earlier discussion, PNC Infratech Ltd has attempted to meet this funds’ shortfall by
raising debt as well as equity dilution.
In recent times, the company is attempting to sell its completed road projects to raise money to meet the
cash shortfall. It is trying to sell one of its BOT projects, Ghaziabad-Aligarh Highway and has entered into
an agreement with Cube Highways on April 1, 2021.
Corporate announcement by PNC Infratech Ltd dated April 2, 2021, page 1:
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Company has on 01.04.2021 entered into a Share Purchase Agreement and other related transaction
documents inter alia, with Cube Highways for sale of its holding in Ghaziabad Aligarh Expressway Private
Limited (GAEPL), an “Associate” of the Company.
In addition, the company is also trying to sell some of its completed HAM (hybrid annuity model) projects
to raise money.
D. K. Maheshwari: As intimated to you earlier that the two BOT road projects are going to be completed
in 2021, but we have given the mandate for monetisation of 6 HAM projects, and one BOT project Bareilly
to Almora and one annuity project Raebareli.
Mohit Kumar: I think we were in talks to monetize our HAM portfolio or a part of HAM portfolio. Do you
expect this we can close some of the deal in this particular fiscal year?
D. K. Maheshwari: We are in discussions with two interested investors andwe are expecting that before
the end of FY22 this should be finalized, if we get minimum expected valuation.
Therefore, an investor would appreciate that the business of PNC Infratech Ltd is capital intensive where
the company is not able to meet its funds’ requirements from its business profits. As a result, the company
has to raise additional money by way of debt, equity dilution as well as sell its existing assets.
An investor would notice that the company is continuously under pressure to raise fresh money from equity
dilution/selling assets or raising more debt to meet its funding requirements. An investor should also note
that the cash & investments balance reflecting in the balance sheet may not be entirely usable by the
company freely for its funding needs. This is because a significant amount of cash balance is usually held
up by the lenders of different projects as a part of their security for the loans.
The management of PNC Infratech Ltd intimated to the shareholders that on March 31, 2021, out of the
total cash & investments of about ₹1,400 cr, a sum of about ₹600 cr is not available for use by the company
because it is held up by the lenders.
D. K. Maheshwari: As against the total cash and the bank in consolidated position is Rs. 1400 crores, out
of that Rs. 800 crores around is on standalone. Remaining Rs. 600 crores of cash and bank balance is
mainly because of DSCRA balances and the margins we have given.
Ashish Shah: It is not available. Basically the Rs. 600 crores of all the SPVs put together is not available
for use for the parent company, correct? It is a locked with the banks for some commitments or margin?
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D. K. Maheshwari: Right.
Going ahead, an investor should keep a close watch on the free cash flow generation by PNC Infratech Ltd
to understand whether the company is able to generate surplus cash from its operations or it has to
continuously infuse money by way of additional sources like debt and equity dilution.
Additional aspects of PNC Infratech Ltd:

On analysing PNC Infratech Ltd and after reading annual reports, DRHP, its credit rating reports and other
public documents, an investor comes across certain other aspects of the company, which are important for
any investor to know while making an investment decision.
1) Management Succession of PNC Infratech Ltd:

PNC Infratech Ltd is promoted by four brothers: Mr Pradeep Kumar Jain (Chairman and Managing
Director, aged 63 years), Mr Naveen Kumar Jain (aged 59 years), Mr Chakresh Kumar Jain (Managing
Director & Chief Financial Officer, aged 57 years) and Mr Yogesh Kumar Jain (Managing Director, aged
49 years).
Except Mr. Pradeep Kumar Jain, Chairman and Managing Director, Mr. Naveen Kumar Jain, Whole time
Director, Mr. Chakresh Kumar Jain, Managing Director, Mr. Yogesh Kumar Jain, Managing Director who
are the brothers, none of the directors are relative of any other directors.
The phrase PNC in the name of the company seems to be the initials of Pradeep, Naveen and Chakresh.
Until December 2, 2017, all the four brothers were a part of the board of directors in the executive positions.
However, from December 2, 2017, Mr Naveen Kumar Jain resigned from the position. However, the
remaining three brothers are holding executive positions in the company.
During the year under review, Mr. Naveen Kumar Jain has resigned from the post of whole time director
w.e.f. December 02, 2017
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As per the RHP (May 2015, page 165-166) of the company, two other relatives of the promoter brothers
held executive positions in the company.
 Mr Ashish Jain, age 45 years (in 2015), who is brother-in-law of the promoter brothers, worked as
project director in the company.
 Ms Ishu Jain, age 33 years (in 2015), who is daughter-in-law of Mr Pradeep Kumar Jain, worked
as the Deputy Director, Project Planning and Execution in the company.
An investor may contact the company directly to understand the exact planning of the promoters about the
succession of leadership in the company.
2) Political risk faced by PNC Infratech Ltd:

While reading about the promoters of the company, an investor notices that the promoters of the company
look close to the political party, Bharatiya Janata Party (BJP). This is evident from the fact that one of the
promoters of the company, Mr Naveen Kumar Jain is a member of BJP and is currently, the mayor of Agra
Municipal Corporation since 2017 (Source).
In FY2011, Mr Naveen Kumar Jain was part of a group, which conducted a mock funeral of the then chief
minister of Uttar Pradesh (UP), Ms Mayawati. Thereafter, an FIR (first information report) was filed against
Mr Naveen Kumar Jain. PNC Infratech Ltd disclosed these details in its RHP in May 2015.
An FIR dated March 17, 2011 was filed at the Hari Parvat police station, Agra against our Promoter, Mr.
Naveen Kumar Jain and others on account of the fact that they were allegedly involved in carrying out a
mock funeral of the then Chief Minister of Uttar Pradesh, Ms. Mayawati.
In August 2018, another political party, Congress, targeted the current BJP govt. in UP when there was an
accident on the section of Agra-Lucknow Expressway built by PNC Infratech Ltd. (Source: Congress
targets Yogi government over bonus to firm of Agra mayor’s brother: Times of India, August 5, 2018)
The Congress on Saturday attacked the Yogi Adityanath led state government for awarding a Rs 58 crore
bonus to PNC Infratech Ltd for early completion of a stretch of Agra-Lucknow Expressway, which caved
in within six months of the bonus being given. The firm, owned by the brother of Agra’s mayor Naveen Jain
of BJP, had constructed the 56 km stretch of the expressway from Agra to Firozabad.
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On Wednesday, an SUV had plunged into a 50-foot-deep ditch after a service road of the expressway caved
in. The four occupants of the car had a narrow escape.
From the above incidences, an investor would appreciate that PNC Infratech Ltd seems to have political
exposure due to the closeness of its promoters with the BJP.
An investor would notice that political affiliations might help the promoters/companies in getting more
business when the political environment is in favour. However, political affiliations may work against the
promoters/companies when the political environment is not in their favour.
The company itself recognised in its RHP (2015) that there are political influences/interferences have the
potential of affecting the project allotments.
we rely heavily upon central and state governments and governmental authorities for executing large scale
infrastructure projects in India, including the NHAI and public works departments of various state
governments (“PWD”). Such governmental authorities can be subject to political influence, and contracts
awarded thereby may be subsequently rescinded for reasons not connected to the project or the successful
party.
Therefore, an investor should always keep in mind that political affiliations may act as a double-edged
sword. While these may help the company in good times, these may have significant negative impacts on
the company when political tables turn. Therefore, an investor should also keep the political dimension in
her assumptions while projecting the performance of PNC Infratech Ltd.
Apart from the political risk, PNC Infratech Ltd faces another risk due to its dealing with Govt. entities and
officers. It is the risk of getting involved in enquiries involving corruption charges against govt. officers.
In one such instance, premises of PNC Infratech Ltd and its promoters were raided by the Central Bureau
of Investigation (CBI) in April 2012 on the charges of corruption involving a tender for construction at
Lucknow Airport (Source: Lucknow airport scam: CBI conducts raids in four states: Indian Express, April
12, 2012)
CBI sources said they found that AAI officials and the proprietors of the firms were involved in criminal
conspiracy in the two projects
The officials and the proprietors of the firms allegedly inflated the estimated costs of the projects.
Searches were also conducted at the residence and office of proprietor of IPL BB Bhaskar Reddy in
Hyderabad and proprietor of PNC Infratech Ltd Pradeep Jain and his brothers in Agra
In the RHP filed by the company in May 2015, PNC Infratech Ltd disclosed that CBI did not find anything
objectionable during these searches.
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For instance, in 2012, the Central Bureau of Investigation, Anti-Corruption Branch, Lucknow undertook a
search at certain premises of our Company….the search was conducted in the presence of our Promoter
and Director, Mr. Yogesh Kumar Jain, and report dated April 11, 2012 was issued to our Company stating
that no articles, documents or information were seized pursuant to such search proceedings. Our Company
has not received any intimation, notice, summons or any other information or correspondence in this
respect from the Central Bureau of Investigation…
However, an investor should always be aware that in the businesses, which have continued dealings with
Govt. agencies where decisions about the large deployment of public money are taken, the companies are
always at a risk of getting involved in anti-corruption investigations. PNC Infratech Ltd had highlighted it
as a risk in its RHP in May 2015 at page 17:
we may be included in investigations or other proceedings in respect of offences alleged against the
personnel of government authorities that we engage with in the ordinary course of business.
Therefore, an investor should always keep this aspect of business dealings of infrastructure companies in
her mind while she analyses them.
3) Project execution by PNC Infratech Ltd:

As discussed above, an investor would appreciate that PNC Infratech Ltd has completed many projects
before the scheduled completion date and earned a bonus from Govt. agencies like NHAI. Completion of
projects ahead of schedule indicates good project execution skills by PNC Infratech Ltd.
However, while analysing the company, an investor comes across a few instances where it seems that the
project execution by PNC Infratech Ltd left scope for improvement.
For example, the construction done by the company for Dholpur-Morena highway construction was not up
to the mark. As a result, the Indian Institute of Technology (IIT), Kanpur was involved to overcome the
shortcomings. PNC Infratech Ltd intimated the investor about it in its RHP in May 2015 on page 20:
For instance, in fiscal 2013, design-related deficiencies were discovered in certain parts of the construction
in respect of the four laning of the Dholpur to Morena Section… The Indian Institute of Technology, Kanpur
approved a rehabilitation scheme for strengthening the construction, and our supervision consultant,
Wilbur Smith Associates, issued instructions on September 4, 2013, pursuant to which rehabilitation work
was commenced in October 2013 and completed in December 2014.
The construction of a bridge over Chambal River by PNC Infratech Ltd was not up to the mark. As a result,
IIT Kanpur was involved to recommend the rectifications.
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Similarly, design-related deficiencies were discovered in respect of the Chambal Bridge construction
forming part of the same project, and remedial design requirements were suggested by the Indian Institute
of Technology, Kanpur.
An investor also gets to know that due to deficiencies in construction in the project, a public interest
litigation (PIL) was also filed in the court requesting for cancellation of project-allotment to PNC Infratech
Ltd, a fresh issue of tender for the project and an enquiry against guilty officials.
Mr. Sanjay Gupta filed a PIL (No. DBWP 3986/2014) before the High Court….directing NHAI to take
action against our Company for allegedly using sub standard concrete and other raw materials for
construction of four lane road on National Highway 3, service roads and over bridge in the city of Dholpur.
It was also requested that the court direct a fresh initiation of the tender process on account of the report
submitted by a professor of Indian Institute of Technology, Kanpur in addition to the request made for a
consequent departmental inquiry against the guilty officials.
In the case of Ghaziabad-Aligarh Highway, PNC Infratech Ltd had a significant amount of delay in the
construction. The originally scheduled completion date of this 126.30 km long highway project was March
2015. However, PNC Infratech Ltd could not complete it in time.
Later, NHAI extended the completion date to April 26, 2016. However, PNC Infratech Ltd could not meet
this deadline. By November 25, 2016, the company could complete 123.30 km and work on the remaining
3.0 km was still pending.
Credit report of Ghaziabad Aligarh Expressway Private Limited prepared by CARE on April 24, 2017:
The project had already commenced partial tolling whereby 103.89 k.m. of stretch out of total project
stretch of 126 k.m. had become operational from June 23, 2015, onwards vis-à-vis the scheduled COD of
end of March, 2015. Such scheduled COD of the project had been further extended to April 26, 2016 by
NHAI. The company has received provisional completion certificate for additional length of 19.40 k.m. on
November 25, 2016 and tolling has started for this additional length from December 22, 2016. Hence, now
the total operational length is 123.30 k.m. out of the total project length of 126.30 k.m.
In another instance, a portion of the road constructed by PNC Infratech Ltd on the Agra-Lucknow
Expressway caved in creating a 20m deep sinkhole due to rainwater accumulating on the road. (Source:
Agra-Lucknow e-way cave-in: UPEIDA asks PNC Infra Tech to carry out repair: Times of India, August
1, 2018)
Taking cognizance of 20-meter deep cave-in at service lane of Agra-Lucknow expressway, Uttar Pradesh
Expressways Industrial Development Authority (UPEIDA), CEO Awanish Kumar Awasthi has called for a
probe.
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Speaking to TOI, he said, “Due to heavy downpour and accumulation of water at service lane, the sinkhole
was formed, but we called the third party- RITES (Rail India Technical and Economic Service), who will
conduct a thorough investigation and submit its report in 15 days to ascertain the cause of 20-meter deep
sinkhole. The stretch was constructed by PNC Infra Tech and they would restore the stretch at their own
cost.”
An investor may contact the company directly to understand more about the reasons for the formation of a
sinkhole on a newly constructed road. She may get clarification about whether it was due to some designing
issue or construction defect or any other reason.
On one of the occasions, PNC Infratech Ltd could not achieve financial closure of one of the projects
allotted to it by NHAI, within the stipulated time. As a result, the company had to compensate NHAI as it
did not meet the deadline stipulated for the project and the allotment of the project to PNC Infratech Ltd
was cancelled. The company intimated the same to the investors in its RHP, May 2015 at pages 13-14:
Separately, Hospet Bellary Highways Private Limited (“HBHPL”), a special purpose vehicle (“SPV”)
formed by our Company, had entered into a concession agreement dated March 28, 2012 with the National
Highways Authority of India (“NHAI”)…, in respect of which financial closure was not achieved within
the stipulated period giving NHAI the right to encash performance security furnished by HBHPL in such
respect of ₹ 91.00 million. HBHPL and the NHAI subsequently entered into a close-out and settlement
agreement dated March 4, 2014, pursuant to which HBHPL agreed to submit a demand draft to the extent
of ₹ 91.00 million as consideration towards complete closure of all existing and future claims and disputes
with the NHAI in relation to such concession agreement dated March 28, 2012.
Therefore, an investor would appreciate that even though PNC Infratech Ltd had completed many projects
before the scheduled time, which indicates good project execution skills. However, there have been some
instances where the construction done by the company as well as meeting other benchmarks like financial
closure was not found to be up to the mark.
Therefore, an investor should keep a close watch on the media coverage of the company to know if any
more projects undertaken by PNC Infratech Ltd face any problems.
4) Weakness in internal processes and controls of PNC Infratech Ltd:

While reading the annual reports and other publicly available information, an investor comes across a few
instances that indicate that internal processes and controls of PNC Infratech Ltd have a scope for
improvement.
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4.1) Weakness in inventory verification processes:
An investor notices that the auditor of the company have repeatedly pointed out that the processes of
physical verification of inventory at PNC Infratech Ltd are weak and they need strengthening.
In the FY2015 annual report, on page 72, the statutory auditor of the company highlighted the weakness in
the physical verification processes.
The process of recording of physical verification needs to be further strengthened considering the nature
and cycle of various projects.
The statutory auditors of the company repeated the same observation in each of the subsequent years.
However, the weakness was not rectified by the company.
The process of recording of physical verification needs to be further strengthened considering the
expansion and nature & cycle of various projects.
4.2) Misplacement of share transfer deeds:
In its RHP in May 2015, PNC Infratech Ltd intimated to investors that the company has misplaced almost
all the transfer deeds for a period of more than 6 years (August 1, 2000, to September 28, 2006). As per the
company, it lost them while transporting and these transfer deeds are not traceable.
The transfer deeds for the period August 1, 2000 to September 28, 2006 (transfer serial No.001 to serial
No. 157) in relation to the transfer of shares of our Company were misplaced while transporting them for
certain purposes. Although we have, in this regard, filed a complaint dated March 31, 2010 at the Police
Station, Agra, the misplaced transfer deeds are currently not traceable.
An investor may contact the company directly to know whether it has found the lost transfer deeds and if
the company has to face any issues/penalties due to the loss of transfer deeds.
An investor may remember from the analysis of Quick Heal Technologies Ltd that the company had lost
the records related to the issuance of some equity shares. At the same time, the company was fighting a
dispute with Manohar Malani, managing director of a firm NCS Computech Ltd, related to his shareholding
in the company where the shares were allotted to him in the year 2000.
Read: Analysis: Quick Heal Technologies Ltd
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4.3) Delays in filing of statutory forms by PNC Infratech Ltd:
The secretarial auditor of the company has repeatedly highlighted that PNC Infratech Ltd has delayed filing
of some of the required statutory forms and has a result has to pay penalty/additional fees.
In FY2016 annual report, page 52:
Late Filing of e-forms: The Company has been generally filing the forms and returns with the Registrar
within the prescribed time. However, there are few instances where there have been delays, which were
filed on payment of additional fees.
Despite pointing out by the statutory auditor, in every subsequent year, the company had delays in filing of
e-forms and had to pay penalties/additional fees.
Late Filing of E-forms: The Company has filed few e-forms with additional fees and has complied with the
requirement of the Act.
4.4) Delays in payment of undisputed statutory dues by PNC Infratech Ltd:
An investor would notice that the statutory auditor of the company have repeatedly highlighted in its report
that PNC Infratech Ltd has not deposited wealth tax dues to the Govt. authorities despite there being no
dispute in its liabilities.
In the FY2013 annual report, on page 18, the auditor highlighted that the company has not paid the wealth
tax.
Company is generally regular in depositing undisputed statutory dues including Provident Fund…with the
appropriate authorities except out of total wealth tax payable of ₹7.51 Lacs at the close of year more than
six month payable at the year end is ₹5.35 Lacs.
However, despite pointing out by the auditors, PNC Infratech Ltd continued to delay the payment of
undisputed wealth tax every year and the amount of the delayed tax increased in the subsequent years.
As per the FY2015 annual report, page 108, the pending wealth tax increased to ₹13.39 lac.
except out of total wealth tax payable of ₹13.39 Lacs at the balance sheet date, out of which outstanding
for more than six months is ₹9.89 Lacs at the balance sheet date.
The said undisputed but delayed wealth tax of ₹13.39 lac was paid by the company after about 4-years in
FY2019. This is because the statutory auditor repeatedly highlighted these delays every year until FY2018.
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except the wealth tax payable of ₹13.39 Lakhs outstanding for more than six months at the balance sheet
date.
4.5) Expired security certificate (SSL) of PNC Infratech Ltd.’s website:
When an investor visits the website of PNC Infratech Ltd (www.pncinfratech.com), then the first thing she
notices is a prominent warning by the web-browsers stating that the browser is not able to connect securely
to the website. As a result, the investor has to click on the warning message of accepting the risk to visit
the website of the company.
On checking the details of the security message, an investor notices that the SSL certificate of the website
of PNC Infratech Ltd expired on March 25, 2021; however, it has not been renewed by the company even
after 5 months.
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An investor would appreciate that in the current times where the focus of the internet community is to make
the entire web/internet secure, letting the SSL certificate of the website expire and making a user go through
strict warning messages from the web-browsers does not reflect well on any company.
The cost of renewal of an SSL certificate is only a couple of thousand rupees. Therefore, it seems that the
expiry of the SSL certificate is more of an oversight than any cost-cutting measures by the company. As a
result, the expiry of the SSL certificate without renewal in time may represent a case of weak internal
control and processes at PNC Infratech Ltd.
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5) Importance of consolidated financial analysis for PNC Infratech Ltd:

As per the above discussion, an investor would remember that in the case of infrastructure players, many
times, companies for SPVs for each of their different projects. As each SPV is a separate legal entity;
therefore, many times, investors prefer to look at the standalone financials of the parent/listed entity for
their analysis. This is under the assumption that each of SPVs is a separate limited liability entity and its
failure would not affect the parent/listed entity.
Many times, investors assume that the parent/listed entity is completely protected/ring-fenced from the fate
of its SPVs. Investors believe that the risk of the parent entity is only limited to its equity contribution in
the SPV and the rest of the risk is born by the lenders of the SPV.
However, by looking at the experience of PNC Infratech Ltd with some of its SPVs, an investor would
appreciate that in the practical world, the linkages between the parent entity and the SPVs go much deeper.
If any of the SPVs is under stress, then the parent companies end up supporting the SPV irrespective of the
status of a separate legal entity with limited liability.
While analysing the history of PNC Infratech Ltd, an investor gets to know that some of the SPVs formed
by the company are not doing well. These SPVs are not able to generate sufficient money to repay their
lenders and meet their expenses. Therefore, PNC Infratech Ltd had to infuse money into these SPVs so that
these could meet their funding requirements.
The credit rating agency, CARE, highlighted it in many of its reports for the company. E.g. credit rating
report by CARE in March 2018:
The ratings are partially offset due to…moderate level of financial support towards few SPVs in which PIL
has majority/substantial minority stakes,
However, PIL is supporting few of the SPVs (both toll based and annuity based, namely Ghaziabad Aligarh
Expressway Private Limited, PNC Delhi Industrial Infra Private Limited and PNC Bareilly Nainital
Highways Private Limited) for meeting their funding commitments
An investor may appreciate that if the parent company has to support the SPVs under stress even if the
SPVs are separate legal entities with limited liability, then only looking at the standalone financials of the
parent company may not present the complete financial picture to the investor.
An investor may take an example of one of the SPVs, Ghaziabad Aligarh Expressway Pvt. Ltd (GAEPL),
which is a joint venture formed by PNC Infratech Ltd with two other partners.
An investor would remember from the above discussion that this project was delayed. In addition, the toll
collections from the highway were not sufficient to meet the requirements of project expenses and
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repayments to lenders. As a result, the SPV failed to repay its bankers. It was declared a defaulter with a
“D” rating by CARE.
Credit rating report of Ghaziabad Aligarh Expressway Private Limited (GAEPL) by CARE, April 2017:
Inadequate toll collection vis-à-vis the repayment obligation of the company has resulted in stretched
liquidity position of the company, leading to delays in debt servicing. However, the promoters have been
continuously infusing funds in the company in the form of unsecured loans to fund the project cost and debt
repayments of the company.
In the Q4-FY2021 conference call, PNC Infratech Ltd intimated to its shareholders that it had put in about
₹400 cr in GAEPL by way of equity and unsecured loans etc.
D. K. Maheshwari: Total investment including equity, unsecured loan and EPC is around Rs. 400 crores.
An investor would also appreciate from the earlier discussion that PNC Infratech Ltd is in the process of
selling its 35% stake in GAEPL. It has entered into an agreement with Cube Highways on April 1, 2021, to
sell its stake at an enterprise value (equity + debt) of up to ₹1,600 cr.
The corporate announcement by PNC Infratech Ltd to BSE on April 2, 2021:
Company has on 01.04.2021 entered into a Share Purchase Agreement and other related transaction
documents inter alia, with Cube Highways for sale of its holding in Ghaziabad Aligarh Expressway Private
Limited (GAEPL), an “Associate” of the Company.
The said transaction is being done at an Enterprise Value (EV) of upto Rs. 1600 crs.
An investor may appreciate from the above disclosure that the maximum enterprise value that GAEPL may
get under the agreement is ₹1,600 cr. This is significant because, in the past, a similar sale agreement was
signed by PNC Infratech Ltd with Cube Highways to sell its stake in GAEPL in May 2019 for an enterprise
value of ₹1,835 cr. However, the sale could not materialize apparently due to differences in the value of the
transaction.
The Company has entered into a Share Purchase Agreement (SPA) dated 4th May 2019 with a Purchaser
inter alia, with Cube Highways and Infrastructure Pte Ltd. (”Cube Highways”) for sale of its entire stake
As per the proposed transaction the Enterprise value of the entire project is ₹1,834 Crores
It seems that Cube Highways was not willing to pay an enterprise value of ₹1,834 cr for GAEPL and
therefore, it renegotiated the deal at a lower enterprise value of ₹1,600 cr.
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However, if an investor looks at the amount of money spent by PNC Infratech Ltd and other joint venture
partners to complete the project, then it is more than ₹2,266 cr.
Credit rating report by CARE for GAEPL, April 2018:
Out of the project cost, Rs.2266.82 crore has already been expended as on September, 2017 (incl. cash loss
of Rs.49.80 crore). However, the work on a stretch of 2.30 k.m. is still pending.
Therefore, even if an investor assumes ₹2,266 cr as the total cost spent by the JV partners on the highway
project, then it seems that at the sale consideration of ₹1,600 cr enterprise valuation, the equity shareholders
and lenders would not be able to recover their money. As a result, its equity shareholders like PNC Infratech
Ltd might have to bear a loss on its investment of about ₹400 cr in GAEPL.
Therefore, from the above example, an investor would appreciate that even if PNC Infratech Ltd and
GAEPL are legally separate limited liability entities, still, when GAEPL was not able to repay its lenders,
then PNC Infratech Ltd had to infuse funds in GAEPL over and above its equity commitment by way of
unsecured loans. Now, it seems that the company would have to take a loss on the money infused by it in
GAEPL because the sales consideration (enterprise value) is much lower than the cost spent on the project.
Such instances indicate that while assessing companies, which execute many projects in different SPVs, an
investor should always focus on the consolidated financial statements. She should not restrict her analysis
to standalone financial statements, as these may not present the complete financial picture to the investor.
As a result, her analysis may remain incomplete and her decisions may be erroneous if she ignores the
consolidated financial statements.
6) Order book of PNC Infratech Ltd:

While analysing the order book of PNC Infratech Ltd year on year, an investor notices that consistently,
the company had maintained an order book of about 2.5-3.5 times of last year’s revenue. Such a size of the
order book seems to give great comfort to the investors because the size of the order book indicates assured
revenue visibility for the next few years.
However, while assessing the projects/order book of any company, an investor should always be cautious
while taking the comfort of the order book. This is because there is no standard benchmark followed by
companies while reporting the order book.
Some companies may report a project/order into its order book when it has been selected as the lowest
bidder. However, in such cases, there remains a possibility that the project bidding/tender itself may be
scrapped before the final award.
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Some companies may report a project/order in their order book when it has received the letter of
allotment/award. However, there have been instances where even after the awarding of the letter of
allotment, PNC Infratech Ltd could not start work on the project before it received the “appointed date”.
The appointed date is allotted by the Govt. agency like NHAI after it has acquired a certain portion of land
and other approvals. All the scheduled timelines like the achievement of financial closure, construction
progress benchmarks and completion date etc. are calculated from the appointed date.
There have been instances even in the case of PNC Infratech Ltd where it got the letter of allotment of the
project; however, it did not receive the appointed date even after a delay of three years.
For example in the case of Challakere – Hiriyur HAM Project, PNC Infratech Ltd was awarded this project
in June 2018; however, it received its appointed date after more than 3.5 years, in January 2021.
Credit rating report by CARE, April 2019:
company is awaiting declaration of AD in Challakere Hariyur HAM Project awarded in June 2018
(financial closure for the same already achieved).
PNC Infratech Ltd in the corporate announcement to BSE on February 3, 2021, disclosed that it received
the appointed date of Challakere – Hiriyur HAM Project on January 25, 2021.
Similarly, the company faced delays in getting the appointed date for many other projects. In fact, in
FY2019, the company mentioned that the subdued performance in the previous two years was primarily
due to a delay in getting appointed dates from govt. authorities.
During earlier two years, on majority of new projects secured by our Company, physical execution couldn’t
be commenced due to prolonged delay in declaration of appointed dates by the authorities owning to
persistent holdups in timely acquisition and possession of vacant land by them.
Therefore, it is advised that an investor should always be cautious before she takes the comfort of the order
book declared by the companies. This is because there might be significant delays from the day the project
is included in the order book and the day when the actual construction starts on the project after getting all
the requisite approvals.
7) Error in the annual report of PNC Infratech Ltd:

While analysing the FY2018 annual report, an investor notices that PNC Infratech Ltd has represented its
revenue from EPC and Toll/Annuity business in FY2017 and FY2018 in the form of pie charts. In the pie
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chart, the company has shown the FY2017 revenue from Toll/Annuity as almost 3/4th of total revenue
(₹1,687 cr) and EPC as 1/4th of total revenue (₹567 cr).
However, the actual situation is totally opposite inverse of the stated situation. On page 172 of the FY2018
annual report, the investor notices that the company earns a higher share of the revenue from EPC (₹1,687
cr) and a lower share from Toll/Annuity business (₹567 cr).
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An investor may appreciate that it seems to be an error of oversight while preparing and verifying the annual
report. Nevertheless, an investor should appreciate that such errors may be repeated for critical information
as well. Therefore, an investor should always be cautious while reading the annual reports.
The Margin of Safety in the market price of PNC Infratech Ltd:

Currently (August 28, 2021), PNC Infratech Ltd is available at a price to earnings (PE) ratio of about 14.9
based on consolidated earnings of the last 12-months (July 2020-June 2021). An investor would appreciate
that a PE ratio of 14.9 offers a small margin of safety in the purchase price as described by Benjamin
Analysis Summary
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Overall, PNC Infratech Ltd seems a company, which has grown its sales at a growth rate of 18% year on
year along with an improvement in profitability over the last 10-years. The company has benefited from
economies of scale with increasing order book as well as project sizes. An increase in the share of
toll/annuity revenue, focus on bidding only for projects with minimum profitability, backward integration
for raw material and early completion of projects with bonuses has helped the company improve its profit
margins.
Despite good growth in the past, an investor should always keep in her mind that the business of PNC
Infratech Ltd is highly dependent on the Govt. policies and the focus of the Govt. on infrastructure spending.
In case of any change in the priorities of the Govt., the business of the company would be significantly
impacted because the spending on infrastructure by the private sector is very low when compared to
spending by Govt. /public sector. As a result, infrastructure players like PNC Infratech Ltd have very little
bargaining/pricing power over their customers who are large govt. entities. The Govt. agencies can easily
make the infrastructure players accept very harsh and unfavourable terms in their contracts.
PNC Infratech Ltd operates in a sector with very low barriers to entry because almost every aspect of project
execution like the workforce and material sourcing as well as construction can be outsourced. As a result,
the sector witnesses high competition where many players go out of business when the sector witnesses a
down cycle.
Despite being in a working capital intensive business, PNC Infratech Ltd has managed its working capital
well. Over the years, the company seems to have improved its working capital efficiency.
However, when an investor analyses the overall cash flow position of PNC Infratech Ltd, then she realizes
that its business profits are not sufficient to sustain its growth rate. As a result, the company has raised
money from additional sources like debt, IPO, private equity, preferential allotment etc. In addition, the
company is attempting to sell its existing projects to raise money to meet its funding requirements.
The company has shown good project execution skills by completing many projects ahead of the scheduled
completion date. In turn, the company has earned a performance bonus on many projects. However, in some
instances, the work done by the company was not up to the mark. As a result, at times, IIT Kanpur has to
suggest improvements to rectify the shortcomings. In the case of the Ghaziabad-Aligarh highway, the
company could not complete the project in the scheduled time and estimated costs. In the case of Agra-
Lucknow Expressway, a portion of the road completed by the company was damaged and resulted in an
accident.
The Ghaziabad-Aligarh highway has been a pain point for the company for a long time, as the project could
not be completed in time. Moreover, the project did not generate sufficient toll income to meet the expenses
and debt repayments. As a result, PNC Infratech Ltd had to invest more money to repay the lenders. Now,
the sale consideration for the proposed sale of the project to Cube Highways seems insufficient to recover
the investments done by the company in the project. It seems that PNC Infratech Ltd would have to accept
losses on its investments in the project.
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The company has consistently maintained an order book of more than about 2.5 times the previous year’s
revenue. However, in the past, there have been instances where the projects allotted to the company by
NHAI could not start on time because NHAI could not provide it with the appointed date. At times, the
appointed date was received more than 3-years after the project allotment date. As per the company, its
performance was subdued in FY2017 and FY2018 due to delays in receiving appointed dates for many
projects. Therefore, an investor should be cautious while taking the comfort of the order book of any
company.
Currently, three of the four promoter brothers are executive members of the board of directors of the
company. In addition, a few other relatives of the promoters seem to be in executive positions within the
company.
The promoters seem to be politically aligned to Bharatiya Janata Party (BJP) as one of the promoter
brothers, Mr Naveen Kumar Jain is a BJP member and is the current mayor of Agra. As a result, when a
portion of the Agra-Lucknow Expressway constructed by PNC Infratech Ltd suffered damages, then
opposition parties like Congress protested against the BJP Govt. in UP as well as the company. Congress
raised questions on the performance bonus paid by the Govt. to the company for Agra-Lucknow
Expressway.
During analysis, an investor finds many instances that indicate weakness in the internal processes and
controls at PNC Infratech Ltd. On multiple occasions, the auditor of the company has highlighted issues
with the inventory verification process. The company has delayed payment of undisputed taxes for many
years. The company misplaced share transfer certificates for over 6 years. The SSL certificate of the website
of the company expired on March 25, 2021; however, it has not yet renewed the SSL certificate despite a
delay of more than 5 months.
Going ahead, an investor should focus on the competition level in the sector and the profit margins of the
company. The investor should also monitor the working capital position as well as the free cash flow
generation by the company. The investor should attempt to assess each of the projects of the company to
understand whether any large project is facing execution and liquidity issues that may prove to be a burden
for the company. The investor needs to analyse the consolidated financial position of the company.
The investor should monitor the developments in the political environment in the key states where PNC
Infratech Ltd has operations. This is because the promoters of the company seem to be aligned to one
political party and any change in political equations may affect the company adversely.
These are our views on PNC Infratech Ltd. However, investors should do their own analysis before making
any investment-related decisions about the company.
P.S.

Videos
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Analysis Excel
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4) Valiant Organics Ltd

Valiant Organics Ltd is an India speciality chemical manufacturer producing Chlorophenols, Para Nitro
Aniline (PNA) etc. It is a part of the Aarti group, which has Aarti Industries Ltd and Aarti Drugs Ltd among
the prominent companies.
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Valiant Organics Ltd, which is a part of the Aarti group, came up with its initial public offer (IPO) in 2016.
Therefore, the company’s website has annual reports from FY2017 onwards. However, the draft red herring
prospectus (DRHP) of the company available in the public domain contains the financial performance of
the company for many previous years. Therefore, reading the DRHP of Valiant Organics Ltd becomes an
essential exercise for any investor to understand the company in detail.
While analysing the past financial performance of the company, an investor notices that Valiant Organics
Ltd was involved in a couple of restructuring exercises where the Aarti group merged some of its companies
in Valiant Organics Ltd. Abhilasha Tex Chem Ltd merged with Valiant Organics Ltd in FY2018. In
addition, Amarjyot Chemicals Ltd merged with Valiant Organics Ltd in FY2020.
As a result of these mergers, Valiant Organics Ltd reported only standalone financials until FY2018 and
started reporting consolidated financials from FY2019 onwards. As per the latest results declared by Valiant
Organics Ltd for Q4-FY2021 (page 10), it has the following three subsidiaries:
 Dhanvallabh Ventures LLP

 Bharat Chemicals (Partnership Firm)
 Valiant Speciality Chemical Limited
such a picture.
Therefore, in the analysis of Valiant Organics Ltd, we have analysed standalone financial performance until
FY2018 and consolidated financial performance after that.
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Financial and Business Analysis of Valiant Organics Ltd:

While analyzing the financials of Valiant Organics Ltd, an investor notices that the sales of the company
have grown at a pace of about 42% year on year from ₹33 cr in FY2012 to ₹755 cr in FY2021. As discussed
above, Aarti Group of Companies has done a few restructuring exercises in the past where some of its group
companies were merged with Valiant Organics Ltd like Abhilasha Tex Chem Ltd and Amarjyot Chemicals
Ltd. These mergers have played a big role in the increase in the business size of Valiant Organics Ltd
including its sales and profits.
While looking at the profit margins of Valiant Organics Ltd, an investor notices that its operating profit
margin (OPM) used to be about 20% during FY2012-FY2015, which increased sharply to 30% in FY2016.
Thereafter, the OPM declined to 22% in FY2018 and now, has recovered to 27% in FY2021.
To understand the reasons for such fluctuations in the profitability, the impact of different mergers and the
factors affecting the business of Valiant Organics Ltd, an investor needs to read the DRHP of the company
as well as its annual reports and credit rating reports in detail. An investor comes across the following key
characteristics of the business of Valiant Organics Ltd.
1) Valiant Organics Ltd is the leading producer of India for its key products:
The largest contribution to the sales of Valiant Organics Ltd is from two products: Chlorophenols and Para
Nitro Aniline (PNA). As per Valiant Organics Ltd, it is the main producer in India for both these products.
Your Company is at present the leading manufacturer of Chloro Phenol and Para Nitro Aniline in India
and has the best economic scale to compete the other domestic manufacturers in India.
In 2016, in the DRHP before its IPO, Valiant Organics Ltd said that the demand for its products is more
than the supply. As a result, it was operating at near-full capacity utilization.
DRHP, page 25-26:
Over the years we have built our goodwill amongst our customers and export markets and we believe the
demand for our products are more than our supply capacity
We currently operate at almost full utilizations of our installed capacities.
While reading the DRHP further, an investor notices that the capacity utilization of Valiant Organics Ltd
had been increasing continuously over the last 3-years (FY2014-FY2016) and it had reached 99.76% in
FY2016.
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DRHP, page 78:
In FY2017, Valiant Organics Ltd stated that it had achieved 100% capacity utilization.
During the last year we have achieved record production and have achieved 100% capacity utilization of
the plant capacity
From the above disclosures by Valiant Organics Ltd, an investor would appreciate that the segment in which
the company operates does not have many players competing for customers. The demand for its products
is more than the supply capacity. As a result, Valiant Organics Ltd is able to fully utilize its manufacturing
capacities.
From the above information, an investor may also interpret that higher demand for products than the supply,
gives Valiant Organics Ltd a higher negotiation power over its customers. A higher negotiation/pricing
power gives a company the ability to pass on any increase in its input costs to its customers and protect its
profit margins.
Let us see if Valiant Organics Ltd has such pricing power.
2) Valiant Organics Ltd claims to have pricing power over its customers:
In the DRHP at the time of its IPO in 2016, Valiant Organics Ltd claimed that markets that there are no
dedicated producers of its key product, Chlorophenols in India as well as its export markets. Therefore, it
does not face a lot of competition for its products and as a result, it is able to get good pricing from its
customers.
DRHP, page 72-73:
We believe that there are not many dedicated manufacturers of this product in India or in our export
markets and hence we are able to price our products without substantial competition.
The credit rating agency, CRISIL, in its report for Valiant Organics Ltd in December 2020, highlighted that
the company has the ability to pass on the changes in its raw material costs.
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The integrated operations, order backed sales, and pass on of volatility in raw material prices to customers,
will continue to support VOL’s business risk parameters.
While reading more about the raw material used by Valiant Organics Ltd, an investor notices that its key
raw material are derivatives of crude oil. As a result, their prices are very volatile.
Credit rating report by CRISIL, December 2020:
The prices of raw material inputs, which are derivatives of crude oil, are volatile, thus impacting
profitability. The international market prices of raw materials follow the petrochemicals cycle.
An investor would appreciate that the prices of crude oil are very volatile. The following chart of the history
of crude oil prices for the last 20-years from Macrotrends clearly shows the significant fluctuations over
the years. She would notice that in 2020, the crude oil prices reached the same level that they were more
than 20 years back.
Therefore, an investor would notice that over the years, the prices of both crude oil and accordingly, the
prices of derivatives of crude oil, have fluctuated a lot. Nevertheless, due to the ability of Valiant Organics
Ltd to pass on the changes in the cost of its raw materials, it has been able to maintain its profit margins.
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An investor would notice that during FY2012-2015, the operating profit margin (OPM) of the company
was almost stable at 19%-20% despite volatility in crude oil prices. It indicates that the company could pass
on the changes in the raw material costs.
Moreover, during FY2016, when the crude oil prices declined sharply from about USD 110 per barrel to
about USD 35 per barrel, the business performance of Valiant Organics Ltd showed two changes.
First, the sales of the company declined in FY2016 to ₹52 cr from ₹59 cr in FY2015. The company disclosed
that this declined was due to a sharp reduction in the raw material prices. The company had to pass on the
benefit of lower raw material prices to its customers.
DRHP, page 141-142:
The decrease in the year 2016 was due to lower revenue from sale of products as compared to last year as
well as overall drop in commodity prices.
The decrease was mainly due to considerable decrease in import value of raw material Phenol.
It seems that as the raw material costs for Valiant Organics Ltd declined, it had to reduce the price of its
products, which resulted in lower sales. This was despite an increase in capacity utilization by the company
during FY2016 to 99.76% from 94.48% in FY2015. From the capacity utilization table shared earlier, an
investor would notice that the company produced 4,788 MT of chlorophenols in FY2016 as compared to
4,535 MT in FY2015.
At the same time, an investor would notice that despite a reduction of product prices by Valiant Organics
Ltd in FY2016, its OPM increased to 30% in FY2016 from 19% in FY2015. This indicates that the company
could retain some of the benefits of the lower raw material prices. As a result, despite a decline in sales
from ₹59 cr in FY2015 to ₹52 cr in FY2016, the operating profit margin of Valiant Organics Ltd increased
from ₹11 cr in FY2015 to ₹16 cr in FY2016.
It seems that due to good pricing power, Valiant Organics Ltd could retain some benefits of the lower raw
material prices and did not pass on the entire reduction in raw material prices to its customers.
Even in the later years, after mergers with Abhilasha Tex Chem Ltd and Amarjyot Chemicals Ltd, the OPM
of Valiant Organics Ltd, after declining to 22% in FY2018, has recovered to 27% in FY2021, which as
stated by CRISIL, indicates its ability to pass on the changes in the raw material costs to its customers.
Nevertheless, an investor may note that the ability of any company to maintain its profit margins by passing
on the changes in the raw material costs is dependent on the competition in the industry. If the competition
level is low, then the company may enjoy stable or improving profit margins. However, as the competition
increases, then maintaining profit margins becomes difficult. This is because, as the competition becomes
intense in any industry, then many producers/suppliers/manufacturers compete for the same customers by
cutting down prices, which results in lower profit margins for all the manufacturers.
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Moreover, as the competition in the industry increases, the customers also have the option to buy products
from many producers. Therefore, they also tend to negotiate as low prices as possible from their suppliers.
If one supplier refuses to offer lower prices, then the customers can easily switch to other suppliers. As a
result, the pricing power shifts from suppliers to the customers.
Therefore, as the competition increases in any industry, the manufacturers face the tough situation where
during the periods of increasing raw material prices, they have to take a hit on their profit margins because
all the producers target the same customers with lower prices than others. On the contrary, when the raw
material prices decline, then the manufacturers have to reduce their prices for the customers because,
otherwise, the customers can switch to other suppliers.
To read a live example of how the pricing/negotiating dynamics change when in any industry the customers
gain high pricing power and how the manufacturers end up making low-profit margins, which fluctuate
wildly when the raw material prices change, an investor may read the analysis of an auto-ancillary
manufacturer, Jamna Auto Industries Ltd.
Advised reading: Analysis: Jamna Auto Industries Ltd
Therefore, while analysing Valiant Organics Ltd and making an opinion about the prospects of its business,
an investor should assess how the competition in its industry is expected to evolve. This is because, if the
competition increases, then it will affect the ability of Valiant Organics Ltd to pass on changes in the raw
material costs and its profitability.
An investor should always keep in mind that both the raw material suppliers as well as the customers of
Valiant Organics Ltd are a part of cyclical and volatile industries.
Credit rating report of Valiant Organics Ltd by CRISIL, December 2020:
rating strengths are partially offset by VOL’s exposure to volatile commodity prices and cyclicality in
domestic end-user industries.
Therefore, an investor should be aware that whenever the industry of Valiant Organics Ltd witnesses an
increase in the competition, then the factors of cyclicity of demand and volatility of prices in the raw
material as well as customer industries would affect Valiant Organics Ltd and its stable profit margins may
become cyclical.
3) Valiant Organics Ltd does not have long-term contracts with its customers:
When an investor analyses the business characteristics of Valiant Organics Ltd in detail, then she notices
that the company does not have any long-term contracts with its customers. Its sales to the customers are
on an order-to-order basis. It means that once Valiant Organics Ltd has delivered goods against an order
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from the customer, then contractually, there is not further long-term commitment from the customers and
they can start buying from any other supplier without any consequences.
Valiant Organics Ltd highlighted this aspect of its business in its DRHP before the IPO.
DRHP, page 12:
we have not entered into any specific contracts with these customers and we cater to them on an order-by-
order basis. As a result, our customers can terminate their relationships with us without any notice and,
without consequence, which could materially and adversely impact our business. Consequently, our
revenue may be subject to variability because of fluctuations in demand for our products. Our Company’s
customers have no obligation to place order with us and may either cancel, reduce or delay orders.
Even in recent times, the credit rating agency, CRISIL, highlighted in its report of December 8, 2020, that
Valiant Organics Ltd primarily only has sales, which are backed by orders that may indicate that it is still
not able to get long-term contracts for sales with its customers.
The integrated operations, order backed sales, and pass on of volatility in raw material prices to customers,
will continue to support VOL’s business risk parameters.
An investor would appreciate that such short-term business arrangements expose any company to the risk
when it plans any capacity addition and intends to invest any large sum of money in capital expenditure.
Long-term contracts with the customers reduce the risk of the manufacturing plant lying idle in the absence
of orders.
Moreover, in the case of companies that have only short-term order based contracts with their customers,
the impact of adverse developments in the operating environment is seen immediately. This is because
whenever the customers face a decline in the demand, they can immediately cancel their orders and the
manufacturing plants of the suppliers have to be shut for the lack of orders. Such kind of short-term
contracts with customers make long-term production planning very difficult.
4) Valiant Organics Ltd does not have any long-term agreement with its raw
material suppliers:
While analysing the business of Valiant Organics Ltd, an investor notices that the company does not have
any long-term supply agreement with its raw material suppliers.
An investor would appreciate that in the absence of long-term supply commitments, the raw material
suppliers may sell their products to anyone who is willing to offer a higher price and in turn, a company
like Valiant Organics Ltd may not be able to get the raw materials when it needs them.
The company highlighted this aspect of its business in the DRHP in 2016.
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DRHP, page 11:
there are no fixed suppliers for our raw material purchases and we have not entered into any fixed supply
agreement or MoU or any other arrangement with any of our suppliers… We typically transact on an
invoice basis for each order… in the absence of written agreements, our suppliers are not bound to supply
goods to us and can withdraw their commitments from us at any time. There can be no assurance that there
will not be a significant disruption in the supply of raw materials from current sources…
Valiant Organics Ltd also highlighted to the investor that its raw materials are toxic and therefore, sensitive
in nature and as a result, their supply is regulated by the governments. As a result, if the existing suppliers
were not able to supply raw material to it, then it would be difficult to find another approved raw material
supplier willing to sell goods to it.
DRHP, page 11-12:
Most of our raw materials are of sensitive nature and their supply may be regulated by various government
/ regulatory authority. If we are unable to maintain our relationship with our current raw material suppliers
it may prove difficult to obtain the same from other regulated players.
An investor would appreciate that in a situation where the raw materials used by any company are sensitive
and regulated and there are limited approved suppliers for the same, then the absence of long-term supply
contracts can expose the company to the risk of business disruption. If the existing suppliers refuse to give
the required raw material to the company when needed, then the company would have to urgently run
around seeking other suppliers. In such a situation, in all probability, the company would have to pay a
higher price to get the raw material supplies, which would affect the profitability of the company.
This fear came true for the company in the very next year, in FY2017 when it could not get its key raw
material, which it imports from overseas suppliers (primarily, Phenol). The import shipment was delayed
and as a result, Valiant Organics Ltd had to buy the raw material from other suppliers at a very high price,
which affected the profits of the company.
Net profit was ₹ 9,83,39,846/- against ₹ 10,24,47,074/- which is marginally lower by 4% because of delay
in import shipments and due to which Company had to source the RM from the spot market at much higher
rates for the last full quarter.
In FY2017, the operating profit margin (OPM) of the company declined to 25% from 30% in FY2016.
An investor may contact the company directly to understand whether it has now entered into long-term
supply agreements with its raw material suppliers or it is still bearing the risk of business disruption and
lower profitability if any of its suppliers refuse to sell goods to it taking advantage of order-to-order based
short-term supply commitments.
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Going ahead, an investor should try to understand the nature of the contractual arrangements of Valiant
Organics Ltd with its customers as well as raw material suppliers and the increase in the competition in the
industry. An investor should note that the key competitors of the company are Chinese manufacturers.
DRHP, page 17:
There are very few manufacturers of chlorophenol in India. We see Chinese manufacturers of
chlorophenols as our primary competitors.
In the past, the Chinese chemical manufacturers have faced challenging times due to strict environmental
regulations in China, which benefited chemical manufacturers of other countries, including India.
Our major Asian rival China’s specialty chemicals market has seen a downturn in recent years, for more
reasons than one, the most prominent being the introduction of stringent environmental and safety norms,
which have led to the shutdown of several chemical plants. The cost of compliance has increased as well.
However, going ahead, an investor should keep a close watch on the level of chlorophenol production by
the Chinese manufacturers. This is because continued if the company continues the use of short-term
contracts with its customers and suppliers and the competition in the industry increases, then Valiant
Organics Ltd would not be able to retain its pricing/negotiating power over its customers. As a result, the
company may end up facing a deterioration in its business strengths that may lead to cyclically fluctuating
sales and profit margins.
While looking at the tax payout ratio of Valiant Organics Ltd., an investor notices that the tax payout ratio
of the company has been in line with the standard corporate tax rate prevalent in India. The decline in the
tax payout ratio in recent years seems to be in line with the reduction of the corporate tax rate by India from
earlier 30% to the current rate of 25%.
Operating Efficiency Analysis of Valiant Organics Ltd:
a) Net fixed asset turnover (NFAT) of Valiant Organics Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Valiant Organics Ltd in the past years
(FY2013-21), then she notices that the NFAT of the company increased during the initial period from 3.4
in FY2013 to 7.7 in FY2019. However, afterwards, the NFAT declined sharply to 2.0 in FY2021.
To understand the reasons behind such a contrasting change in the efficiency of asset utilization by Valiant
Organics Ltd, an investor needs to understand how the business of the company has evolved over the years.
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An investor would recollect that initially, Valiant Organics Ltd used to be a single product company. It used
to deal only in Chlorophenols.
DRHP, page 11:
We derive our entire operational revenues from sale of chlorophenols in the domestic as well as overseas
market.
From the above discussion on the business of Valiant Organics Ltd, an investor would remember that during
FY2012-FY2017, the capacity utilization of the company was continuously increasing and it had reached
100% capacity utilization by FY2017.
During the last year we have achieved record production and have achieved 100% capacity utilization of
the plant capacity
An investor would appreciate that increasing capacity utilization improves asset utilization efficiency. As
a result, during this period when the company was only dealing in Chlorophenols, its NFAT was
continuously increasing. Thereafter, Valiant Organics Ltd got involved in mergers with Aarti group
companies, namely, Abhilasha Tex Chem Ltd (in FY2018) and Amarjyot Chemicals Ltd (in FY2020).
An investor would appreciate that after mergers, the nature of the business taken over by Valiant Organics
Ltd would influence the consolidated asset utilization efficiency of the company.
In FY2018, Valiant Organics Ltd merged Abhilasha Tex Chem Ltd (ATCL) with itself. As per the audited
financials of ATCL provided by Valiant Organics Ltd on its website, an investor notices that the business
of ATCL had an NFAT of 3.08 in FY2016 and 3.02 in H1-FY2017.
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Therefore, an investor would notice that the business of ATCL taken over by Valiant Organics Ltd had a
lower NFAT than the Chlorophenols business of Valiant Organics Ltd. As a result, in FY2018, after the
merger, the consolidated NFAT of Valiant Organics Ltd declined.
When an investor analyses the financial position of Amarjyot Chemicals Ltd (ACL) from the audited
financials provided by Valiant Organics Ltd on its website, then she notices that the business of ACL had
an NFAT of 2.06 in FY2017 and 2.47 in 9M-FY2018.
An investor would appreciate that when a business of lower NFAT is merged with the business of a higher
NFAT, then the consolidated business would have a lower NFAT than earlier. As a result, an investor would
notice that after the merger of ACL with Valiant Organics Ltd, the consolidated NFAT of the company
declined.
Moreover, an investor would notice that the decline in the NFAT after the merger with ATCL in FY2018
was minimal whereas there was a very sharp decline in the NFAT of Valiant Organics Ltd after its merger
with Amarjyot Chemicals Ltd (ACL) in FY2020. The key reason was that Amarjyot Chemicals Ltd (ACL)
was a much bigger company than ATCL. Therefore, the impact of its low NFAT business on the overall
NFAT of the combined entity was much more than the merger with ATCL.
In addition, during FY2020 and FY2021, Valiant Organics Ltd did a lot of capital expenditure to create
additional capacities. In FY2020, the company completed its capacity expansion for hydrogenation,
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ammonolysis as well as chlorophenols. The company was nearing the completion of plants for Para Amino
Phenol (PAP) and Ortho Amino Phenol (OAP).
We have increased the capacities of our hydrogenation products from the earlier 18,000 MT per annum to
26,000 MT per annum. Further, we are increasing the Ammonolysis capacity at Tarapur and Vapi plants
from ~13,000 MT per annum to 16,000 MT per annum. We are likely to commence operations of Para
Amino Phenol (PAP) and Ortho Amino Phenol (OAP), which are import substitutes, in the second half of
FY 2020-21.
During the year, we completed the expansion of Chloro Phenols capacity at Sarigam. With this, we achieved
a capacity of 18,000 MT per annum in the expected timeframe. Thus, from 4,800 MTPA in FY 2017-18, we
have trebled our capacity within a span of two years.
An investor would appreciate that when any company completes a new expansion project, then it takes
some time for the company to start optimal/full utilization of the new plant. It takes some time to find
customers to sell the new production. As a result, until the optimal utilization level of the new plant is
achieved, its asset utilization efficiency remains subdued.
Therefore, an investor would note that during the recent years of FY2020 and FY2021, the merger of a
large business of Amarjyot Chemicals Ltd (ACL), which had a low NFAT and the large capital expenditure
done by Valiant Organics Ltd had led to a sharp decline in the NFAT of the company.
Going ahead, an investor should monitor the NFAT of Valiant Organics Ltd to understand whether it is
able to efficiently use its assets.
b) Inventory turnover ratio of Valiant Organics Ltd:

While analysing the efficiency of inventory utilization by Valiant Organics Ltd, an investor notices that
during the last 10 years, the inventory turnover ratio (ITR) of the company has been in the range of 10-12.
At times, the ITR has fluctuated significantly like increasing to 25.2 in FY2019 and then declining to 12.9
in FY2021. However, it seems primarily the impact of the merger with Amarjyot Chemicals Ltd (ACL).
This is because if an investor notices the level of inventory of the company over the last 10-years (FY2012-
2021), then she would notice that Valiant Organics Ltd used to maintain inventory of about ₹7 cr to ₹9 cr
whereas, after merger with ACL, the inventory levels suddenly increased significantly to the range of ₹45
cr to ₹70 cr.
company is able to maintain its inventory utilization efficiency after mergers.
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c) Analysis of receivables days of Valiant Organics Ltd:

Over the last 10 years, the receivables days of Valiant Organics Ltd have stayed in the range of about 70
days. Even though, in between, the receivables days improved to 47 days in FY2019. However, in FY2021,
the company reported receivables days of 70 days, which is almost at the same level as the receivables days
reported in FY2013 of 69 days.
It indicates that the company has maintained stable credit terms with its customers over the last 10-years.
When an investor notices that Valiant Organics Ltd has maintained a stable inventory turnover ratio as well
as stable receivables days over the last 10-years, then she can understand that the company has kept its
working capital efficiency at a stable level.
operations (cCFO) of Valiant Organics Ltd for FY2012-21 then she notices that the company has converted
almost 95% of its profits into cash flow from operating activities.
Over FY2012-21, Valiant Organics Ltd reported a total cumulative net profit after tax (cPAT) of ₹433 cr.
During the same period, it reported cumulative cash flow from operations (cCFO) of ₹414 cr.
Learning from the article on CFO will indicate to an investor that the cCFO of Valiant Organics Ltd is a
little lower than the cPAT due to the increased requirement of funds in the inventory and receivables as the
size of its business has grown from sales of ₹33 cr in FY2012 to ₹755 cr in FY2021. During this business
growth, the inventory of the company increased from ₹3 cr in FY2012 to ₹72 cr in FY2021. In addition,
the amount of trade receivables increased from ₹6 cr in FY2012 to ₹157 cr in FY2021.
The Margin of Safety in the Business of Valiant Organics Ltd:

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target growth.
Where,

While analysing the SSGR of Valiant Organics Ltd, an investor would notice that up to FY2018, the
company has an SSGR in the range of 30%-35%, which increased in the recent years (FY2019-FY2021) to
more than 60%. However, an investor notices that Valiant Organics Ltd has attempted to grow at a very
high CAGR of about 84% every year in the last 3 years and a CAGR of 71% in the last 5 years.
As during the recent years, Valiant Organics Ltd has attempted to grow at a pace higher than what its
internal resources could afford; therefore, in recent years, the company has to rely on additional capital in
the form of debt to meet its funds’ requirement. As a result, the total debt of the company has increased
from less than ₹1 cr in FY2018 to ₹186 cr in FY2021.
An investor arrives at the same conclusion when she analyses the free cash flow (FCF) position of Valiant
Organics Ltd.
b) Free Cash Flow (FCF) Analysis of Valiant Organics Ltd:

While looking at the cash flow performance of Valiant Organics Ltd, an investor notices that during
FY2012-2021, it generated cash flow from operations of ₹414 cr. During the same period, it did a capital
Therefore, during this period (FY2012-2021), Valiant Organics Ltd had a negative free cash flow (FCF) of
(₹164) cr (=414 – 578).
In light of the same, an investor would appreciate that the company had to use debt to meet its cash shortfall.
During FY2012-FY2021, the total debt of the company increased by ₹184 cr from ₹2 cr in FY2012 to ₹186
cr in FY2021.
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Going ahead, an investor should keep a close watch on the free cash flow generation by Valiant Organics
Ltd to understand whether the company is able to generate surplus cash from its operations.
Additional aspects of Valiant Organics Ltd:

On analysing Valiant Organics Ltd and after reading annual reports, DRHP, its credit rating reports and
other public documents, an investor comes across certain other aspects of the company, which are important
for any investor to know while making an investment decision.
1) Management Succession of Valiant Organics Ltd:

Valiant Organics Ltd is a part of the Aarti group. The company has given the status of Chairman Emeritus
to Mr Chandrakant V. Gogri who is the founder of the Aarti group.
Mr. Gogri is a stalwart in the Indian chemical industry and the founder of the Aarti Group of Companies.
A look at the list of entities under the promoters’ shareholding on March 31, 2021 (Source: BSE) shows
that apart from members of the Gogri family, members of the Chheda and Gala families are present as
promoters.
Currently, Mr Arvind Chheda (age 62 years as per FY2019 annual report, page 128), one of the promoters
is the Managing Director (MD) of the company. From May 26, 2021, the company has appointed Mr Mahek
Manoj Chheda (age 30 years as per FY2017 annual report, page 10) as Chief Financial Officer (CFO) of
the company.
As per the FY2017 annual report (page 14), Mr Mahek Manoj Chheda was appointed as a director of the
company on July 6, 2017.
As per the DRHP of the company, page 49 and the FY2017 annual report, page 40, a person named Ms
Meena Manoj Chheda owned 12.50% shares of the company before its IPO. Ms Meena Manoj Chheda sold
about a 4.5% stake in the IPO under offer for sale and at the end of FY2017, held an 8% stake in the
company.
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On March 31, 2021, Ms Meena Manoj Chheda is classified under public shareholders and owns a 2.15%
stake in the company (Source: BSE)
An investor would notice the similarity in the names Mr Mahek Manoj Chheda (CFO) and Ms Meena
Manoj Chheda (a large investor). She would appreciate how names in many communities in India are
written with father or husband’s name written as the middle name. She would note that it might be a
situation where Mr Mahek Manoj Chheda (CFO) and Ms Meena Manoj Chheda are related to each other.
If this is the case, then the appointment of Mr Mahek Manoj Chheda (aged 30 years) as a director in FY2017
and his appointment as CFO in May 2021 may indicate that the company has started to give a higher
responsibility to the members of the next generation of promoters/large shareholders.
are still handling responsibilities, is a preferable succession plan. This is because the young members can
learn about the fine nuances of the business under the guidance of senior members until the seniors decide
to take retirement.
To form a firm opinion in this regard, an investor may contact the company directly and seek information
on whether Mr Mahek Manoj Chheda (CFO) is related to Ms Meena Manoj Chheda who was one of the
large shareholders of the company before IPO. She may seek clarifications whether he is a part of the
family, which is close to the promoters or other large shareholders, which do not fall under the technical
definition of promoters.
2) Merger of Abhilasha Tex Chem Ltd with Valiant Organics Ltd:

While reading the annual reports of Valiant Organics Ltd, an investor gets to know that the company merged
with one of the companies of the Aarti group, Abhilasha Tex Chem Ltd (ATCL) with itself in FY2018. As
consideration for the merger, Valiant Organics Ltd issued 2,224,030 shares to the existing shareholders of
ATCL on March 15, 2018.
The Company had allotted additional 2,224,030 Equity Shares of ` 10/- each on March 15, 2018 to the
shareholders of Abhilasha Tex-chem Limited (Transferor Company) in terms of the said Scheme.
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As per the BSE website, the closing share price of Valiant Organics Ltd on March 15, 2018, was ₹830/-
(before the impact of the 1:1 bonus issue of FY2021). As a result, an investor may ascertain that by issuing
2,224,030 shares to the shareholders of ATCL, Valiant Organics Ltd paid a consideration of ₹184.6 cr
(=2,224,030 * 830).
To assess the value of assets received by the shareholders of Valiant Organics Ltd by paying a consideration
of ₹184.6 cr, an investor needs to study the financial position of ATCL before the merger.
As per the audited financials of ATCL provided by Valiant Organics Ltd on its website, an investor notices
that as per the recent most data, ATCL reported a profit after tax (PAT) of ₹2.76 cr in H1-FY2017, which
can be annualized to ₹5.52 cr for 12 months (=2.76 * 2). ATCL had reported PAT of ₹4.34 cr in FY2016
and ₹4.19 cr in FY2015.
Therefore, an investor would note that before the merger, the business of ATCL had a net profit in the range
of ₹4.2cr – ₹5.50 cr. If an investor compares it with the price paid by Valiant Organics Ltd (₹184.6 cr), then
it equals a price to earnings ratio (PE ratio) of 35 to 45.
If an investor attempts to assess the merger of ATCL from another valuation parameter of price to book
value ratio (PB ratio), then an investor notices that before the merger, on Sept 30, 2016, ATCL had a net
worth (book value) of ₹17.75 cr. When an investor compares it with the price paid by Valiant Organics Ltd
(₹184.6 cr), then it equals a PB ratio of 10.4.
An investor would notice that from both the parameters of PE ratio as well as PB ratio, ATCL had enjoyed
a rich valuation while it was merged with Valiant Organics Ltd.
When an investor wishes to analyse the shareholding of ATCL, then she notices that ATCL was an Aarti
group company as the Gogri family members owned a significant stake of ATCL as well as Valiant
Organics Ltd and were classified as promoters of both the companies.
Notice of the court-convened meeting of shareholders, dated July 7, 2017, page 16:
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An investor would appreciate that if a company owned by promoters is merged with a public-listed company
at a rich valuation, then it effectively means a transfer of economic benefits from minority/public
shareholders to the promoters.
An investor may do deeper due diligence in the merger of ATCL with Valiant Organics Ltd and may contact
the company for any clarification to make up her mind about the valuation paid by Valiant Organics Ltd to
the shareholders of ATCL.
3) Merger of Amarjyot Chemicals Ltd with Valiant Organics Ltd:

While reading the annual reports of Valiant Organics Ltd, an investor gets to know that the company merged
another company of Aarti group, Amarjyot Chemicals Ltd (ACL) with itself in FY2020. As consideration
for the merger, Valiant Organics Ltd issued 6,482,868 equity shares, 1,833,087 optionally convertible
preference shares (OCPS) and 38,400 Redeemable Non-cumulative Preference Shares (RNPS) to the
shareholders of ACL.
Each OCPS was convertible into one equity share of Valiant Organics Ltd. FY2020 annual report, page
110:
OCPS (convertible into Equity in the ratio of 1:1)
Out of the total allotted 1,833,087 OCPS, 1,427,526 were converted into equity shares of Valiant Organics
Ltd on October 11, 2020 (Source: BSE)
38,400 Redeemable Non-cumulative Preference Shares (RNPS) of ₹100/- each represented a debt of about
₹0.38 cr taken by ACL from its shareholders, which was taken over by Valiant Organics Ltd.
Therefore, if an investor assesses the predominant value received by the shareholders of ACL upon its
merger with Valiant Organics Ltd, then it amounts to 8,117,955 equity shares (= 6,284,868 shares +
1,833,087 OCPS) on May 4, 2019.
As per the BSE website, the closing price of Valiant Organics Ltd on May 3, 2019 (Friday) was ₹1,829.90
and on May 6, 2019 (Monday) was ₹1,919.80 (before the impact of the 1:1 bonus issue of FY2021).
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As a result, an investor may ascertain the value paid by Valiant Organics Ltd to the shareholders of ACL
was ₹1,558 cr (=8,117,955 * 1,919.80 share price after allotment of shares & OCPS). An investor may note
that the share price on May 6, 2019, is expected to reflect all the changes due to the allotment of additional
shares and OCPS, which happened on May 4, 2019. An investor may note that the markets change the share
price of the stocks at the ex-date even before the allotted shares are credited to investors’ accounts.
Therefore, we believe that the share price of Valiant Organics Ltd on May 6, 2019, incorporates the impact
of allotment of shares done to the shareholders of ACL on May 4, 2019.
An investor may also ascertain the value of allotted shares and OCPS by comparing the proportion of the
market capitalization represented by them.
From the above table on share allotment, an investor would notice that before allotment on May 4, 2019,
the existing shareholders of Valiant Organics Ltd had 5,864,350 shares. After allotment, the total shares
and OCPS of the company increased to 13,982,305. Therefore, on May 6, 2019, when the market opened,
the existing shares represented 42% of the total number of shares (= 5,864,350 / 13,982,305) and the newly
allotted shares and OCPS represented 58% of the total number of shares (= 8,117,955 / 13,982,305).
On May 6, 2019, the market capitalization of Valiant Organics Ltd was about ₹2,600 cr. Out of this, the
existing shares represented ₹1,092 cr (= 2,600 * 42%) and the newly allotted shares and OCPS represented
₹1,508 cr (=2,600 * 58%).
Therefore, from both aspects, an investor realizes that after the merger was completed, the shareholders of
ACL accounted for about ₹1,500 cr of the market capitalization of Valiant Organics Ltd.
To ascertain the valuation of the business brought in by the shareholders of ACL as a part of the merger for
which they received ₹1,500 cr worth of equity shares and OCPS, an investor needs to see the financial
position of ACL.
An investor may find the latest available financial position of Amarjyot Chemicals Ltd (ACL) of FY2018
from the audited financials provided by Valiant Organics Ltd on its website as a part of the notice dated
October 15, 2018, for the court-convened meeting of shareholders. In the FY2018 financials, the investor
would notice that the business of ACL had a net profit after tax (PAT) of ₹25.9 cr for FY2018.
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Moreover, when an investor reads the annual reports of Valiant Organics Ltd, then in the FY2019 annual
report, on page 87, the company intimated to its shareholders that in the merger with ACL, it had received
net assets/net worth of ₹73.7 cr.
Please note that in the above table, the purchase consideration of ₹8.50 cr paid by Valiant Organics Ltd for
ACL is only the face value of the different types of shares allotted by the company. An investor would
remember that the market value of these shares on May 6, 2019, was more than ₹1,500 cr.
Looking at the PAT of ACL in FY2018 of ₹25.9 cr and the acquired net worth of ₹73.7 cr, an investor
would appreciate that the value paid by the shareholders of Valiant Organics Ltd (more than ₹1,500 cr) is
a price to earnings ratio (PE Ratio) over 57.9 (=1,500 / 25.9) and a price to book value ratio over 20 (=
1,500 / 73.7).
An investor would notice that from both the parameters of PE ratio as well as PB ratio, Valiant Organics
Ltd had paid a rich valuation to the shareholders of ACL on the merger.
When an investor wishes to analyse the shareholding of ACL, then she notices that ACL was an Aarti group
company as the Gogri family members owned a significant stake of ACL as well as Valiant Organics Ltd
and were classified as promoters of both the companies.
Notice of the court-convened meeting of shareholders, dated October 15, 2018, page 14:
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Moreover, the credit rating agency, CRISIL, has also highlighted the strong linkages of Amarjyot
Chemicals Ltd and Aarti group in its report for ACL on April 4, 2019:
Association with Aarti Industries: Amarjyot procures bulk of its raw material, and derives a substantial
portion of its job-work revenue, from Aarti Industries. The latter’s promoters hold one-third stake in
Amarjyot in their personal capacity, along with Aarti Corporate Services Ltd (wholly-owned subsidiary of
Aarti Industries).
Moreover, in the notice dated October 15, 2017, for the court-convened meeting of shareholders for
approving the merger of ACL with Valiant Organics Ltd, on page 8, ACL had mentioned
“csteam@aartigroup.com” as its email address, which might indicate that for all practical purposes, the
corporate teams of Aarti group control major aspects of ACL.
The e-mail id for the Transferor Company is csteam@aartigroup.com.
An investor would appreciate that if a company owned by promoters is merged with a public-listed company
at a rich valuation, then it effectively means a transfer of economic benefits from minority/public
shareholders to the promoters.
In addition, in the notice dated October 15, 2017, for the court-convened meeting of shareholders for
approving the merger of ACL with Valiant Organics Ltd, on page 126, ACL has disclosed Valiant Organics
Ltd as one of the promoters of Amarjyot Chemicals Ltd (ACL).
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An investor may do deeper due diligence in the merger of Amarjyot Chemicals Ltd with Valiant Organics
Ltd and may contact the company for any clarification to make up her mind about the valuation paid by
Valiant Organics Ltd to the shareholders of ACL.
4) Withdrawal of capital by the promoters of Valiant Organics Ltd from the

company:
While analysing the history of the company, an investor comes across various instances where the
promoters of Valiant Organics Ltd have withdrawn capital from the company.
i) Offer for sale in the IPO in 2016:
An investor would notice that the IPO of Valiant Organics Ltd in 2016 was purely an offer for sale where
existing shareholders sold their shares to the public. The company did not get any part of the IPO proceeds.
DRHP, July 2016, page 53:
The objects of the Offer are to achieve the benefits of listing the Equity Shares on the Stock Exchanges and
to carry out the Offer for Sale… Our Company will not receive any proceeds from the Offer and all proceeds
from the Offer shall go to the Selling Shareholders.
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The IPO of Valiant Organics Ltd was a fixed price offer where the public was offered 964,800 shares at a
fixed price of ₹220/- per share. Therefore, effectively, via the IPO, the promoters of Valiant Organics Ltd
withdrew ₹21.2 cr (=964,800 * 220).
ii) Selling shares during H1-FY2021:
While analysing the trend of shareholding of promoters in Valiant Organics Ltd, an investor notices that
the promoters’ shareholding in the company declined from 47.77% on March 31, 2020 (Source: BSE) to
42.26% on September 30, 2020 (Source: BSE).
An investor would note that a decline in the shareholding by 5.51% (= 47.77 – 42.26) within 6-months is a
significant change in the promoter’s shareholding.
An investor would notice that during H1-FY2021, the share price of Valiant Organics Ltd (without the
impact of 1:1 bonus issue in December 2020) increased from ₹1,025/- on April 1, 2020, to ₹2,925.45 on
September 30, 2020.
An investor notices that the share price of Valiant Organics Ltd increased a lot during H1-FY2021. It nearly
tripled during this period. Therefore, the sale of about 5.51% stake by the promoters during this period
might look like a situation where the promoters capitalized on the sharp up move in the stock price to
withdraw capital from their investment in the company.
It might represent a situation where the promoters are booking profits on their investment in the company.
An investor may contact the company directly to understand the reasons for the sale of a significant stake
by promoters in H1-FY2021.
iii) Sale of shares shortly after the conversion of optionally convertible preference shares
(OCPS) by promoters:
While analysing the corporate announcements filed by the company to Bombay Stock Exchange (BSE), an
investor comes across a disclosure filed by one of the promoters of the company, Jaya Chandrakant Gogri,
on October 13, 2020 (click here). This disclosure contains details of the shares acquired by Jaya
Chandrakant Gogri and other promoters by way of conversion of OCPS and the number of shares sold by
the promoters during this period.
When an investor analyses the above-mentioned corporate announcement, then she notices that Jaya
Chandrakant Gogri and other promoters had acquired a 7.53% stake in the company by way of conversion
of OCPS. At the same time, the promoters sold a 5.37% stake in the company (652,300 shares).
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As per the above disclosure, these transactions took place on October 11, 2020. As per the BSE website,
the closing share price of Valiant Organics Ltd 2020 (without considering the impact of 1:1 bonus share of
December 2020) on October 09, 2020 (Friday) was ₹3,364.15 and on October 12, 2020 (Monday) was
₹3,619.65.
Considering the closing price of October 09, 2020 (Friday) of ₹3,364.15 for the sale of 5.37% (652,300
shares) by the promoters, an investor may note that the promoters withdrew ₹219.44 cr (=3,364.15 *
652,300) from their investments in Valiant Organics Ltd.
For any further clarifications, an investor may contact the company directly about the conversion of OCPS
by the promoters and the subsequent sale of shares by them.
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iv) Dividends funded by debt:
When an investor analyses the cash flow position of Valiant Organics Ltd year on year, then she notices
that in recent years, the company has paid increasingly higher amounts of dividend even when it could not
meet its capital expenditure requirements from its cash flow from operations (CFO).
For example, in FY2020, Valiant Organics Ltd reported a CFO of ₹161 cr; however, it spent ₹205 cr in
capital expenditure. As a result, it had a cash flow shortfall of (₹44) cr. The company raised debt to meet
the cash-flow deficit and its debt increased from ₹77 cr in FY2019 to ₹124 cr in FY2020. However, an
investor notices that in FY2020, Valiant Organics Ltd declared a dividend of ₹13 cr, which was almost
double of the dividend of ₹7 cr declared by it in FY2019.
Similarly, in FY2021, Valiant Organics Ltd reported a CFO of ₹113 cr; however, it spent ₹159 cr in capital
expenditure. As a result, it had a cash flow shortfall of (₹46) cr. The company raised debt to meet the cash-
flow deficit and its debt increased from ₹124 cr in FY2020 to ₹186 cr in FY2021. However, an investor
notices that even in FY2021, Valiant Organics Ltd increased its dividend to ₹14 cr, as compared to the
dividend of ₹3 cr in FY2020.
An investor would appreciate that a company should pay dividends from the surplus/free cash flow
generated by it after meeting capital expenditure requirements for future growth. If a company has a
negative free cash flow, then it indicates that all the cash generated by the company is being invested back
into the business. In such a case, any dividend payments are effectively debt funds being used to pay out
money to equity shareholders. This is because money is a fungible commodity.
An investor would note that promoters being the largest shareholders in the company are usually, the highest
beneficiaries of such dividends, which are funded by debt.
Going ahead, an investor should keep a close watch on the cash flow position of the company and monitor
whether it is able to generate a free cash flow or whether it continues to pay dividends, which are effectively
funded by debt.
5) Weak internal controls and processes at Valiant Organics Ltd:

While analysing Valiant Organics Ltd, an investor comes across many instances, which indicate that the
internal controls and processes at the company have room for improvement.
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i) Managing Director acting as Chief Financial Officer of the company:
Until August 28, 2020, the Managing Director (MD) of Valiant Organics Ltd, Mr Arvind Chheda, also used
to have responsibilities of Chief Financial Officer (CFO) of the company. The secretarial auditor of the
company highlighted this non-compliance with the law in the annual report of the company in FY2020.
Wholetime Director re-designated and appointed as the Managing Director of the Company effective from
April 20, 2019 has been continued as the Chief Financial Officer of the Company which in, my opinion, is
not in due compliance of Section 203 of the Act.
After pointing out by the secretarial auditor, the MD, Mr Arvind Chheda, resigned from the post of CFO
and from August 29, 2020, Valiant Organics Ltd appointed Mr Piyush Lakhani as CFO.
ii) Not registering the logo/trademark:
In the DRHP of the company in 2016, Valiant Organics Ltd highlighted to potential investors that it has not
registered its trademark/logo and as a result, it runs the risk of others launching duplicate products with
similar logo/trademark.
DRHP, page 10:
We have not applied for our registered trademark or logo and therefore, we do not enjoy the statutory
protection accorded with the registered trademark.
DRHP, page 13:
Since our trademark is not registered, it can allow any person to use a deceptively similar mark and market
its product which could be similar to the products offered by us. Such infringement will hamper our business
as prospective clients may go to such user of mark and our revenues may decrease.
An investor may expect that a company would have its logo/trademark registered. Nevertheless, an investor
may contact the company directly to understand whether it has now registered its logo/trademark or it is
still running the above-highlighted risk after 5 years of IPO.
iii) Not keeping safe custody of important documents:
While reading the DRHP of the company before its IPO in 2016, an investor comes across disclosure by
the company that it has lost many important documents like registration certificate and it does not have the
copies of the same as well.
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DRHP, page 10:
we have misplaced certain original documents/approvals/permissions and the same cannot be found,
neither do we have a copy of the same, including inter-alia our original Certificate of Registration under
Maharashtra State Tax on Professions, Trades, Callings and Employments Act, 1975.
iv) Delays in meeting statutory deadlines:
In FY2020, Valiant Organics Ltd did not meet statutory deadlines for many activities. The secretarial
auditor highlighted all these non-compliances in its report dated September 2, 2020, in the FY2020 annual
report, page 39:
 Listing of the shares and OCPS issued to shareholders of Amarjyot Chemicals Ltd was done after
111 days from the order of the National Company Law Tribunal (NCLT) instead of the required
period within 60 days from the order.
 Form IEPF – 2 for the Statements for unclaimed and unpaid dividend amounts as of March 31,
2019, which was to be filed within sixty days after the holding of AGM has not yet been filed after
a delay of more than one year.
 Board resolution passed for appointment of Internal Auditor on May 27, 2019, was yet to be filed
with Ministry of Corporate Affairs (MCA) even after more than one year.
 The required details of the Nodal Officer (s) were not filed with IEPF Authority within the
stipulated time. Moreover, it did not display the name of the Nodal Officer and his e-mail ID on its
website.
Such delays in meeting statutory deadlines in FY2020 was not the first such instance. Previously, in
FY2018, Valiant Organics Ltd did not file the board resolution passed on May 10, 2017, for variation of
terms of remuneration of the Managing and Executive Directors, with MCA on time.
The secretarial auditor highlighted these non-compliances in its report dated August 8, 2018, in the FY2018
annual report, page 32:
Company has complied with the provisions of the Act, Rules, Regulations, Guidelines, etc. mentioned above
except that board resolution passed on 10.05.2017 for variation of terms of remuneration of the Managing
and Executive Directors is pending to be filed with MCA
v) No technical support service contract with any competent party:
In the DRHP in 2016, Valiant Organics Ltd highlighted to the potential investors that it has not entered into
any support service contract for the equipment and machines, which it uses in production. The company
highlighted that it has entered into an annual maintenance contract (AMC) for some of the laboratory and
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electronic equipment. However, the disclosure by the company seemed to indicate that the company does
not have a proper maintenance system for many of its equipment and machines.
DRHP, page 16:
Our manufacturing operations involve daily use of technical equipment and machineries. They require
periodic maintenance checks and technical support in an event of technical breakdown or malfunctioning.
Our company has not entered into any technical support service contract with any competent third party.
However, we have entered into an annual maintenance contract for few laboratory / electronic equipment.
An investor may contact the company directly to understand whether it has now entered into any technical
support service contract for its equipment and machines or it is still managing the maintenance of its
equipment on an ad hoc basis.
6) Related party transactions of Valiant Organics Ltd:

An investor would appreciate that Valiant Organics Ltd is a part of the Aarti group of Companies. As per
the company disclosures in the DRHP before IPO, it was involved in various transactions like the sale of
products, purchase of goods and services from other Aarti group companies like Aarti Industries Ltd, Aarti
Drugs Ltd and DRL Cargo Carriers Ltd.
DRHP, page 13:
Similarly, Amarjyot Chemicals Ltd (ACL), which was merged by Valiant Organics Ltd with itself, also had
significant related party transactions like purchase of raw material and job-work with Aarti group
companies.
The credit rating agency, CRISIL, highlighted these transactions between Amarjyot Chemicals Ltd (ACL)
and Aarti group companies in its credit rating report for ACL in October 2017.
Amarjyot has a long-standing business relationship with Aarti Industries. The company procures a large
part of its raw material requirement from Aarti Industries and also derives a substantial portion of its job
work revenues. Additionally, the promoters of Aarti Industries, members of Gogri family hold ~30.68%
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stake in Amarjyot in their personal capacity along with Aarti Corporate Services Limited (100% subsidiary
of Aarti Industries).
Therefore, an investor would appreciate that both Valiant Organics Ltd, as well as Amarjyot Chemicals Ltd
(ACL), used to have business transactions with Aarti group companies.
However, when an investor reads the publicly available annual reports of Valiant Organics Ltd, then she
notices that the company has stopped mentioning Aarti group companies especially Aarti Industries Ltd
and Aarti Drugs Ltd as related parties.
As per the FY2020 annual report of Valiant Organics Ltd, page 80, the two entities shown under significant
influence of the management are Novel Spent Acid Management and Shanti Intermediates Pvt. Ltd.
An investor may contact the company directly to understand the details of its current level of transactions
with key Aarti group companies like Aarti Industries Ltd, Aarti Drugs Ltd and its logistics companies. If
Valiant Organics Ltd still has business dealings with these Aarti group companies, then she may ask the
company about the reasons why they are no longer shown under related parties in the annual report and
why business transactions with them are not disclosed.
7) Information in the annual reports of Amarjyot Chemicals Ltd:

While analysing the merger of Valiant Organics Ltd and Amarjyot Chemicals Ltd (ACL) when an investor
analyses the past annual reports of ACL, provided by Valiant Organics Ltd on its website, then she notices
a few interesting disclosures.
An investor notices that in the FY2015 annual report, Amarjyot Chemicals Ltd (ACL) has disclosed that it
is 100% owned by public shareholders and the promoter shareholding in the company is NIL.
Financial statements document (download), page 137:
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When an investor checks the name of the statutory auditor of ACL in FY2015, then she notices that the
company was audited by Madan Dedhia & Associates (as per the above mentioned financial statements
document, page 144). An investor should note that Madan Dedhia & Associates was the statutory auditor
of Valiant Organics Ltd until FY2018 (as per FY2018 annual report, page 35).
An investor may contact the company directly to understand why in the FY2015 annual report of ACL, the
promoter shareholding was shown as NIL and the public shareholders were shown to own 100% of the
company.
An investor may appreciate that if the above disclosure about the shareholding by ACL is incorrect, then
the investor may be very cautious while reading the information provided by ACL in its annual reports.
The Margin of Safety in the market price of Valiant Organics Ltd:

Currently (July 13, 2021), Valiant Organics Ltd is available at a price to earnings (PE) ratio of about 35
based on consolidated earnings of FY2021. An investor would appreciate that a PE ratio of 35 does not
offer any margin of safety in the purchase price as described by Benjamin Graham in his book The
Intelligent Investor.
Analysis Summary
Overall, Valiant Organics Ltd seems a company, which is growing at a very fast pace in the last 10-years
using both organic as well as inorganic methods i.e. by expanding the manufacturing capacity of its plants
as well as acquiring other companies. In recent years, Valiant Organics Ltd has been involved in a couple
of mergers where it took over the business of a few companies of the Aarti group.
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Until now, Valiant Organics Ltd has faced low competition in its business, which is also helped by the
tough environmental and safety regulations for the Chinese chemical industry. As a result, the company has
been able to get good pricing for its products from its customers and report good profitability. However, it
seems that Valiant Organics Ltd does not enter into long-term agreements with either its customers or its
raw material suppliers. As a result, the company faces the risk of losing its customers at short or no notice.
The customers can take away their business without any consequences.
In the past, in FY2017, the company faced a tough situation due to delays in import shipments of its raw
material. As a result of dealing with very few suppliers with no long-term supply agreements, the company
had to buy raw material from local suppliers in the spot market at very high prices, which affected its profit
margins as its OPM declined to 25% from 30% in FY2016.
In recent years, Valiant Organics Ltd has merged two Aarti group companies with itself namely, Abhilasha
Tex Chem Ltd (ATCL) and Amarjyot Chemicals Ltd (ACL). Valiant Organics Ltd issued shares to the
shareholders of both these companies in the merger. When an investor analyses the valuation paid by
Valiant Organics Ltd for ATCL and ACL, then she realizes that the company seems to have paid a very
rich valuation both from the perspectives of PE ratio as well as PB ratio. We believe that an investor should
do a deeper analysis of the valuation paid by Valiant Organics Ltd to ATCL and ACL shareholders in the
merger.
An investor comes across many instances where the promoters of Valiant Organics Ltd have withdrawn
their investment from the company in the form of an offer for sale in the IPO or by selling shares in FY2021
when the stock price of Valiant Organics Ltd increased. Also, the company had paid out a higher dividend
even when the company had a cash shortfall in recent years and had to raise debt to meet its capital
expenditure requirements. An investor would note that promoters being the largest shareholders benefit the
most when a company payout out dividends, which are funded by debt.
An investor comes across many instances that indicate weak internal processes and controls in Valiant
Organics Ltd. Until recent times, the company’s MD used to hold the charge of CFO as well. It seems that
the company had not registered its logo/trademark. It has lost many important registration documents and
does not have a copy of them. It is not able to meet statutory deadlines for filing many statutory obligations.
An investor also notes that Valiant Organics Ltd does not seem to have any technical support contract for
maintenance of machinery with any competent counterparty.
We believe that going ahead; an investor should focus on the competitive intensity in the industry of Valiant
Organics Ltd. She should monitor the profit margins in the future. She should keep a close watch on the
operating efficiency ratios like net fixed asset turnover and inventory turnover, which have declined in
recent years. She should keep a track of the generation of free cash flow by Valiant Organics Ltd and also
notice whether the company continues to pay a high dividend by raising debt even if it faces a cash shortfall.
The investor should monitor the transactions of Valiant Organics Ltd with its promoter group including any
further mergers, sale and purchase of goods and services. She should also keep a close watch on the
promoters’ shareholding to see if the promoters are focusing on taking the profits away from their
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investments in the company, which might indicate a declining commitment of the promoters towards
Valiant Organics Ltd.
These are our views on Valiant Organics Ltd. However, investors should do their own analysis before
P.S.

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Analysis Excel
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5) NGL Fine Chem Ltd

NGL Fine Chem Ltd is an Indian manufacturer of active pharmaceutical ingredients (API) primarily for
animal drugs.
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While analysing NGL Fine Chem Ltd, an investor would notice that until FY2019, the company used to
report only standalone financials. However, in May 2019, the company acquired a 100% stake in Macrotech
Polychem Private Limited.
The company has acquired 100% equity shareholding in Macrotech Polychem Private Limited in May 2019
for an inclusive consideration of ₹700 Lakhs, which includes the value of equity shares and loan given to
Macrotech to repay its existing liabilities.
Therefore, from FY2020 onwards, it started publishing standalone as well as consolidated financials.
such a picture.
Therefore, in this analysis of NGL Fine Chem Ltd, we have studied standalone financials until FY2019 and
consolidated financials from FY2020 onwards.
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Financial and Business Analysis of NGL Fine Chem Ltd:

While analyzing the financials of NGL Fine Chem Ltd, an investor notices that the sales of the company
have grown at a pace of 24% year on year from ₹36 cr in FY2012 to ₹258 cr in FY2021. Further, the sales
of the company have increased to ₹299 cr in the 12-months ended September 30, 2021, i.e. during Oct.
2020-Sept. 2021.
of the company have increased almost every year except FY2020 when the sales declined marginally to
₹152 cr from ₹153 cr in FY2019.
The profit margins of NGL Fine Chem Ltd have seen fluctuations over the years. The operating profit
margin (OPM) of the company increased every year from 11% in FY2012 to 26% in FY2017. In FY2018,
the OPM declined sharply to 19%. Thereafter, OPM improved to 21% in FY2019, only to again sharply
decline to 15% in FY2020. However, in FY2021, the OPM recovered sharply to 28% in the 12-months
ended September 30, 2021, i.e. during Oct. 2020-Sept. 2021.
To understand the reasons for such changes in the performance of NGL Fine Chem Ltd, an investor needs
to read the publicly available documents of the company like annual reports, credit rating reports, as well
as its corporate announcements.
influence the business of NGL Fine Chem Ltd. An investor needs to keep these factors in her mind while
she makes any predictions about the performance of the company.
1) NGL Fine Chem Ltd does not have pricing power over its customers and cannot
pass on increases in raw material prices:
While analysing the business of NGL Fine Chem Ltd, an investor notices that the company is not able to
pass on the increase in raw material costs to its customers.
The credit rating agency, ICRA, highlighted this aspect in its report for the company in September 2017:
The revision in rating outlook factors in the moderation in performance of NGL in Q1FY2018, primarily
in terms of profitability which reported a sharp decline compared to the same period last year (Q1FY2017)
as well as sequentially (Q4FY2017), due to inability to adequately pass on the raw material price rise
coupled with increase in overheads.
Therefore, an investor would appreciate that the sharp decline in the operating profit margin (OPM) of the
company in FY2018 to 19% from 26% in FY2017, was due to its inability to pass on an increase in raw
material prices to its customers.
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The credit rating agency, ICRA has highlighted the vulnerability of profit margins of NGL Fine Chem Ltd
to the raw material prices fluctuations in its report for the company in January 2019.
Vulnerability of profitability to volatility in raw material prices and forex rates: Given the elevated
inventory levels, the company’s operating profitability remains exposed to the adverse movements in the
raw materials prices that cannot be adequately passed onto the customers.
Moreover, while reading other publicly available documents about NGL Fine Chem Ltd, an investor comes
across multiple instances where the company has stated that it cannot pass on the raw material cost increases
to its customers.
In June 2021 conference call, on page 21, the management of NGL Fine Chem Ltd highlighted that it cannot
pass on the increase in raw material prices even if they have gone up by 50%-60%.
Rahul Nachane: We have seen prices go up quite a few products as the oil prices go up, so there are quite
a few chemicals that are dependent upon oil, so those have gone up by a good 50%-60% in the last 1 year.
Ayush Mittal: Do you plan to pass it on like you said with a lag or your pricing is largely stable?
Rahul Nachane: In the short term we cannot pass it on.
In the August 2021 conference call as well, on page 14, the management of NGL Fine Chem Ltd highlighted
that the pricing of its final products is inelastic and does not change even if raw material prices go up.
Rahul Nachane: Prices are pretty inelastic so if raw materials prices go up or go down, if it goes up it is
difficult to pass on the increase…
When an investor attempts to find out the reasons for the poor pricing power of NGL Fine Chem Ltd and
analyses it further, then she comes across multiple factors that lead to the low bargaining power of the
company. Let us see try to understand these factors.
2) Business of NGL Fine Chem Ltd is highly competitive with very severe price-
based competition:
While analysing NGL Fine Chem Ltd, an investor notices that it faces strong competition in its business.
As a result, all the players compete with each other by cutting down prices. Across various communications
with the investors, the company has highlighted a few key aspects about the extent of competition in its
business, which assume a lot of significance.
In the July 2020 conference call, the management of NGL Fine Chem Ltd highlighted that it is into B2B
(business to business sales) where the buyer is very educated and knows what she is buying. The buyer
knows to evaluate the quality of its purchase and thereafter prefers to buy from whoever sells the lowest
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price. The buyer is indifferent to the brand of the seller until the time the product is of acceptable quality
and is priced cheap.
July 2020 conference call, page 20:
Rahul Nachane: So see we are selling to, it’s a B2B business… The purchaser is also very educated and
very well experienced person. I have not come across any buyer who is willing to give a higher price
because of any brand recall of that sort. Only thing what he will do is, all things being the same he will
give preference but he will first challenge on the pricing.
The company has also highlighted that the buyers are companies who are interested in getting the best price
and do not show preference to the suppliers of any preferred country. Therefore, NGL Fine Chem Ltd faces
competition from suppliers across the world.
November 2020 conference call, page 15:
Rahul Nachane: We are in a B2B business. At any point of time, person who offers you more competitive
pricing is a preferred supplier. Customers shift to that company, and do not exercise preference in terms
of country.
NGL Fine Chem Ltd mentioned to the investors that the competition is so severe that even for the products
where it has more than 50% market share, it is not able to dictate prices to the customers. The competitors
are always ready to cut prices and take market share away from it.
Keshav Garg: Sir but if you are over 50% market share in your top products and the second player is
basically 15%-20% market share so basically then the industry that segment is quite consolidated basically
so then in that case and sense you are the biggest player so basically are you determining the prices?
Rahul Nachane: No, because others want market share they keep on challenging the price positions.
Even in FY2021, when the company could increase its business significantly due to the fast recovery of its
operations after the Covid-lockdown, it had to be very competitive on pricing to its customers.
June 2021 conference call, page 19:
Rahul Nachane: We are offering them a value proposition, we are offering them a good quality, it is not
that we are taking a premium for our products. We are being very cost competitive in our approach towards
customers.
Therefore, an investor would notice that even in the situations where the company has a dominant market
position, there too, it has to be very price-competitive. Otherwise, there is a high probability that it may
lose the market share.
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3) NGL Fine Chem Ltd does not have long-term contracts with its customers:
While analysing the company, an investor notices that NGL Fine Chem Ltd does not have long-term
contracts with most of its customers. The management of the company intimated its investors that except a
few customers, most of them do business on a spot orders basis i.e. they place orders when they need the
goods.
An investor would appreciate that when a company enters into long-term contracts with its customers then
it gets the option of some assurance on pricing for the near future. However, if it gets most of its business
in the form of spot orders, then every time it receives an order, then it has to sell the goods at the prevailing
market price even if it had purchased its raw material at a higher cost in the past.
The company highlighted this aspect of its business to its shareholders in the July 2020 conference call,
where it said that it has to follow the market price, as it is not a monopoly supplier and other competitors
are ready to take market share away from it.
Rabul Nachane: We don’t have any long term contracts with pricing. There are probably just two or three
customers who do price negotiation once a year. Rest of the businesses mainly spot business and prices
keep on fluctuating based on what the market is and we don’t have monopoly situation so there are other
competitors also. So we have to follow the market.
In June 2021 conference call, on page 18, the company highlighted that, out of more than 400 customers, it
is only about 1% of the customers (4-5) have a long-term contract with the company. The remaining 99%
of the customers buy the products on a spot basis from the company.
Rahul Nachane: On the sales side, we continue to have just probably a handful of customers, probably 5
or 6 who do long-term supply contracts with us. Most of our sales are on respond basis. So, they are more
3-month sales booking or 4-month sales booking. There are just about 4 or 5 customers who talk about a
yearly sales contract.
When an investor attempts to assess if there is any probability of the company entering into long-term
contracts in the future, then she gets to know that the focus of NGL Fine Chem Ltd is on the developing
countries, which are semi-regulated/less-regulated markets and in these markets, long-term contracts are
not available.
The company disclosed this aspect of its business strategy to the investors in its December 2019 conference
call, on page 15:
Ankit Gupta: A few years back, we had some 2 long-term contracts with the customers for the supply of
our products. Any breakthrough in getting more long-term contracts with customers?
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Rahul Nachane: …Therefore, if I were to sell to let’s say Latin America or West Asia or China, there is no
long-term contract available. But the growth is happening in these markets now because the European and
US markets are more or less maturing and you must be seeing that even in the large-scale companies now
their sort of growth is plateauing because they are hardly able to sell more to these markets. So, our focus
is completely the rest of the world, not the regulated markets.
The company explained to the investors that it had attempted to enter into the markets of the developed
world. However, it found that the cost of meeting the compliances/regulations of these countries was very
high. NGL Fine Chem Ltd realized if it had to spend so much money in its operations & processes to comply
with the regulations of developed countries, then due to the high cost of operations, it would not be able to
compete in other developing countries where it has been selling its goods until now.
Therefore, now, NGL Fine Chem Ltd has decided that it would focus solely on the developing countries,
which have fewer regulations where it can sell its products without a lot of investment in operations.
December 2019 conference call, on page 16:
Rahul Nachane: In fact, we went ahead and registered two of our products in Europe for sale over there.
This I think 3 years ago. But then we decided overall that it is really not worth the effort because
maintaining that sort of a thing would have meant putting a lot of money again into CAPEX and into
operational cost. We are back and changed our strategy and now are completely focused on the rest of the
world market.
Therefore, an investor would appreciate that the focus of NGL Fine Chem Ltd is on developing countries,
which do not have long-term contracts. Therefore, even in the future, the company would get most of its
business from spot business contracts.
Recently, in June 2021, while discussing the Q4-FY2021 results with the investors, the management of
NGL Fine Chem Ltd stated that going ahead; most of its business will continue to be on a spot basis.
Rahul Jain: …do we also see a possibility of some larger long-term contracts coming up for us in the near
future?
Rahul Nachane: We do not see that particular part growing up much, no. Our sales will continue to be
more on the spot business
As a result, an investor would appreciate that NGL Fine Chem Ltd would not be able to enjoy the price-
certainty provided by long-term contracts and it would continue to be exposed to the fluctuations of the
market prices.
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4) Small business size of NGL Fine Chem Ltd:

An investor would appreciate that the business size of NGL Fine Chem Ltd is not very large. As a result, it
is not able to generate necessary resources and create competitive strengths that might have given it a high
negotiating power.
The credit rating agency, CRISIL, highlighted the limitations of NGL Fine Chem Ltd due to its moderate
size of business in its report for the company in September 2019.
Moderate scale of operations: The moderate scale of operations restricts the ability to negotiate with
customers or suppliers vis-a -vis larger players in the sector because of their higher volumes and broader
product portfolios. This enables them to invest in better research and development and other infrastructure,
thereby fortifying their competitive advantage.
Therefore, an investor would appreciate that due to the small size and resources available with NGL Fine
Chem Ltd, it may not be able to benefit from many big business opportunities, where its competitors would
gain an upper hand due to their large size and resources.
5) Uncertainty about the availability of specialized raw materials of NGL Fine

Chem Ltd:
While analysing the business environment of NGL Fine Chem Ltd, an investor notices that at times, the
company has faced challenges in getting key raw materials for its products, which affected its business
negatively. As a result, the company could not achieve the optimal utilization of its plants and its sales
suffered.
For example, in FY2020, when the sales of the company declined over the previous year, FY2019, one of
the key reasons was the non-availability of raw material for four products of the company. NGL Fine Chem
Ltd highlighted this issue to its investors in a conference call in December 2019 on page 3:
With regard to lower sales, we have been constrained in procuring some key raw materials and have seen
sales drop of almost 4 different products due to low or no availability of raw materials.
The company highlighted that out of the four products where it was facing a shortage of raw material, for
one product, it has not received raw material from February 2019 i.e. for about 10 months.
December 2019 conference call, page 10:
Rahul Nachane: One product has been off since February. Another product we got only probably one-
fourth of what we required in July-August-September and also in October-November. In one product, again,
from June-July it has come down. So, we are out from 1 product for almost about 8 to 10 months…
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The credit rating agency, ICRA, also, in its report in October 2020, highlighted that in FY2020, the sales
of the company declined as it could not get its raw material from China.
Its operating income declined marginally to Rs. 151.69 crore from Rs. 153.17 crore in FY2019 on account
of loss of sale of certain products due to scarcity of raw material supply from China…
During its communications with the investors, NGL Fine Chem Ltd highlighted to its investors that it is
dependent on China for raw materials because these are specialized chemicals where in many cases, China
is the only supplier.
July 2020 conference call, pages 13-14:
Paras Adenwala: Do you have any—just to ensure that you don’t suffer once again if there is this kind of
a disruption do you have any—alternatives in place?
Rabul Nachane: No. China is the sole supplier for these products.
In addition, for many raw materials, China is the lowest cost supplier in the whole world.
June 2021 conference call, pages 17-18:
Rahul Nachane: The products which we do require some very specific key starting raw materials and close
to about 10% of our total materials are imported from China… So, that is how we have mitigated to a
certain extent, but not completely been able to mitigate that Chinese reliance because whatever we say they
continue to be the lowest cost suppliers for quite a few products.
Moreover, the company also acknowledged that FY2020 is not the only time in history when its business
was affected by the raw material shortage. NGL Fine Chem Ltd said that it had faced such a shortage in the
years 2010, 2012 and 2016 as well.
Umang Shah: The last question from my side would be that have you seen such quarters in the past as well
where availability of raw material has been scarce? Have such quarters happened in the past?
Rahul Nachane: It had happened in 2010, 2012, and 2016.
Therefore, an investor would appreciate that NGL Fine Chem Ltd needs a specialized nature of the raw
material. For many of its raw materials, China is the only supplier and in addition, China is the lowest cost
supplier in the world for these raw materials. Therefore, NGL Fine Chem Ltd keeps on facing severe raw
material shortages almost every 2-3 years. In FY2020, the shortage of raw material for one of the products
was so much that it could not produce it for at least 10 months.
The company acknowledged that for some of the raw materials, if it is not able to get them from China,
then it does not have any solution about getting them from any alternative sources.
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Rahul Nachane: The import from China, we have now turned to trying to see how we can get products
manufactured here in India now, raw materials. And it has been successful in 3 products. Three products
will go into production starting January. One product we still don’t have an answer…
An investor would also appreciate that during the times, when NGL Fine Chem Ltd is not able to run its
plants optimally, due to the non-availability of raw materials, then its fixed costs and overheads would be
shared by a smaller quantity of products. As a result, the fixed cost per unit of the product would increase
and it would face a decline in the profit margins.
It happened in FY2020 when the profit margins of NGL Fine Chem Ltd declined sharply to 15% from 21%
in FY2019. Non-availability of raw material in FY2020 was one of the key reasons leading to lower profit
margins of NGL Fine Chem Ltd.
The credit rating agency, ICRA, in its report of October 2020, highlighted raw material shortage and the
increased overheads as the reasons for lower profit margins in FY2020.
it declined to 14.96% in FY2020 from 23.37% in FY2019 due to increased overheads and shortage of raw
material, procured from China.
In addition, the company mentioned that out of four products, which faced raw material shortage, two were
high margin products. Due to a reduced sale of high margin products, the profit margin was sharply affected
in FY2020.
Ankit Gupta: Any of those products were relatively higher-margin products or they were in line with the
company’s margin of around 20% to 22%?
Rahul Nachane: Two of them were of higher margins.
Therefore, an investor would appreciate that the specialized nature of raw material of NGL Fine Chem Ltd
with limited availability puts its business performance at a risk.
From the above discussion, an investor would appreciate that the business model of NGL Fine Chem Ltd
is characterised by very tough competition where the players do not have pricing power over the customers.
The customers are experienced and knowledgeable corporates who give priority to lower prices and the
competitors are always ready to supply them by cutting prices. Therefore, NGL Fine Chem Ltd is in a
constant struggle to protect its market share.
The business of the company faces risk from its dependence on spot business contracts as well as its
moderate size of operations, which limits the amount of resources that it can put into research and
developments and other efficiency improvements. As a result, the comparatively larger competitors of the
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company are able to benefit from the large-sized business opportunities whereas NGL Fine Chem Ltd has
to focus on small-sized opportunities.
Nevertheless, when an investor analyses the profit margins of NGL Fine Chem Ltd over the years, then she
notices that the operating profit margin (OPM) of the company has improved significantly over the last 10-
years (FY2012-FY2021).
Let us see the reasons for such an improvement in the profit margins of NGL Fine Chem Ltd.
6) Improving profit margins of NGL Fine Chem Ltd:

A reading of the publicly available documents of NGL Fine Chem Ltd brings forward many factors, which
have influenced the profit margins of the company significantly. The first factor is the decision of NGL
Fine Chem Ltd to enter into high-margin products. The second factor is the dependence of its raw material
costs on crude oil prices. Other parameters like the improving operating leverage due to better utilization
of its manufacturing capacity have also contributed to increasing OPM of NGL Fine Chem Ltd.
Let us see how these factors have influenced the profit margins of NGL Fine Chem Ltd over the years.
6.1) Manufacture of high-margin products by NGL Fine Chem Ltd:
When an investor analyses the financial performance of NGL Fine Chem Ltd at the start of the last decade
from FY2010, then she notices that the operating profit margin (OPM) of the company used to be low
during FY2010-FY2011, which increased from about 10% to about 14% by FY2014.
One of the reasons for the sharp increase in the OPM of the company during this period was the decision
of NGL Fine Chem Ltd to enter high-margin products.
The credit rating agency, CRISIL, highlighted the entry of NGL Fine Chem Ltd into high-margin products
as the reason for the sharp improvement in the profitability in its report in January 2015.
Increase of operating margin over the three years through 2013-14 to 14 per cent has been supported by
the launch of new high-margin products.
An investor would also appreciate the dependence of NGL Fine Chem Ltd on high-margin products for its
improving OPM from the fact that in FY2020 when the company’s production was affected due to scarcity
of raw material for two of its high margin products, then its OPM declined sharply to 15% from 21% in
FY2019.
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6.2) Dependence of raw material prices of NGL Fine Chem Ltd on crude oil prices:
While analysing the financial performance of the company, an investor notices that the raw material prices
of NGL Fine Chem Ltd are dependent on crude oil prices.
In June 2021 conference call, the company highlighted that the cost of many chemicals that it uses is
dependent on crude oil prices, which had increased sharply up to 50%-60% in FY2021 when the crude oil
prices increased.
Conference call, June 2021, page 21:
Rahul Nachane: We have seen prices go up quite a few products as the oil prices go up, so there are quite
a few chemicals that are dependent upon oil, so those have gone up by a good 50%-60% in the last 1 year.
The following chart from Macrotrends shows the history of the crude oil price over the last 10-years. An
investor would notice that in FY2021, the crude oil prices have increased sharply from about $20 per barrel
to more than $80 per barrel. This is the fact, which is mentioned by NGL Fine Chem Ltd in the conference
call highlighting that the prices of many of its raw materials have increased by about 50%-60% due to this
sharp increase in crude oil prices.
In the above chart, an investor would notice that during 2014-2016, crude oil prices have declined sharply
from about $110 per barrel to $35 per barrel. An investor would appreciate that such a sharp decline in the
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crude oil prices would lead to a significant reduction in the raw material prices for NGL Fine Chem Ltd,
which, in turn, should lead to an improvement in the profit margins.
When an investor observes the operating profit margin (OPM) of NGL Fine Chem Ltd during this period,
then she notices that the OPM had increased sharply from about 14% in FY2014 to about 26% in FY2017.
6.3) Increasing utilization of manufacturing capacity by NGL Fine Chem Ltd i.e. improving
operating leverage:
An investor would appreciate that whenever any company achieves a high utilization level of its
manufacturing capacity, then its fixed costs i.e. overheads are distributed over a bigger quantity of products.
As a result, the profit margins of the company increase.
For example in FY2015, when NGL Fine Chem Ltd reached high capacity utilization for its plants, then it
reported high-profit margins.
The credit rating report in January 2015 by CRISIL:
NFC’s operational performance… was supported by diverse product portfolio and customer base helping
the company maintain the average capacity utilization of plant high.
The company elaborated to its investors that whenever it comes up with a new manufacturing capacity,
then for some time, it has to produce sample products (validation batches), which are sent to the regulators
and the customers. Only once the samples are approved by the regulators and the customers, then the
commercial production starts. This process takes time ranging from a few months to years.
In the pharma industry, whenever there is production from a new facility, we have to undertake validation
batches and subject them to stability studies prior to selling the produce into the market.
During this period, the company has to run the plant for all three shifts and accordingly has to employ
people for the full production process.
Rahul Nachane: there has been an increase in the total number of people which we have employed because
when the plant goes into validation, we need to staff it on all 3 shift basis. We can’t do it partially. And at
the same time, while the salaries have started hitting the revenues, there is no incremental revenue coming
in right now.
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The same holds good for electricity and fuel expenses. The fixed costs have gone up while proportionately
the revenues have not started flowing in.
An investor would appreciate that such an increase in costs at the start of a plant while there is no sale of
products from it, leads to higher costs with no incremental revenue. It leads to a decline in the profitability
of the company.
The credit rating agency, ICRA, also highlighted it as a reason for the decline in the profitability of the
company in its report in October 2020.
While, NGL incurred overheads on the validation process of four new products to be manufactured in the
new unit, revenue inflow from the unit did not commence during the year.
However, when the commercial production from the plant starts and the capacity utilization improves, then
fixed costs are spread over a larger quantity of the products and as a result, the profit margins improve. The
company highlighted that such an improvement in capacity utilization can easily improve the profit margins
by 20%-30%.
Rahul Nachane: See, it takes time for the capacity to kick-in when we make a CAPEX, for the entire
capacity to get used it takes a little while. So, something similar happened in FY20 where the capacity was
commissioned but we were doing the validation matches and the trials for different products. The benefits
of that came on to us in 2021. So, going forward we can see probably a couple of maybe an anomaly here
or there where there is a larger capacity which we have created but in the capacity utilization and that that
too might be only something like 20% or 30% for that particular year. In which case we see a higher fixed
asset cost which will depress our margins. But again, in the following years as the utilization goes up, it
will again get better results.
Therefore, whenever, NGL Fine Chem Ltd witnesses a higher capacity utilization, then its profit margins
improve. In recent times, the company is operating its plants at a capacity utilization of about 95%, which
is good.
August 2021 conference call, page 2:
Rahul Nachane: All our facilities are currently running at about 95% which is near to full capacity
utilization.
The company acknowledged that the improving operating leverage has helped it achieve high-profit
margins.
Q4-FY2021 results presentation, June 2021, page 8:
Improvement in EBITDA Margins driven by significant operating leverage…
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Therefore, an investor would appreciate that near-full capacity utilization is one of the reasons for a sharp
increase in the profit margins of NGL Fine Chem Ltd to 31% in FY2021 and 28% in the last 12 months
ending September 30, 2021, i.e. during Oct. 2020-Sept. 2021.
6.4) One-time benefits from Coronavirus (Covid) pandemic:
While reading the various disclosures made by NGL Fine Chem Ltd, an investor would notice that there
have been many one-time factors, which have contributed to the high-profit margins achieved by the
company in the recent times characterised by Coronavirus (Covid) pandemic.
Rahul Nachane: We have also had postponement of lot of expenses especially plant maintenance upkeep,
sales and marketing because there is no travel going on right now. We are not participating in any
international exhibitions because there are none taking place right now. Lot of other smaller expenses have
got postponed. So these will come back, and it is quite possible that the profitability in terms of margins
will decrease.
Therefore, an investor would appreciate that the recent sharp increase in the profit margins of the company
is also contributed by the deferment of many expenses that will come back in the future. Therefore, an
investor should keep it in her mind while she projects current high-profit margins of about 30%, into the
future.
This is especially true when an investor notices in the past; there have been periods where the company
witnessed its sales increase whereas the profits of the company declined. For example, during FY2010 to
FY2012, the sales of the company increased from ₹27.8 cr in FY2010 to ₹36.1 cr in FY 2012. However,
during this period, the net profit after tax of the company declined from ₹2.7 cr in FY2010 to ₹1.5 cr in
FY2012. It indicates that the net profit margin (NPM) of the company declined from about 10% in FY2010
to about 4% in FY2012, a decline of about 60% in two years.
An investor would note that the business of NGL Fine Chem Ltd is characterised by intense competition,
undercutting prices, powerful knowledgeable buyers, short-term/spot business contracts, and dependence
on specialized raw material suppliers. The company does not have pricing power over the customers. As a
result, even if the company has witnessed an increase in the profit margins over the years, nevertheless, an
investor should be cautious while she projects the business performance in the future.
While analysing the tax payout ratio of NGL Fine Chem Ltd., an investor notices that for most of the years,
In recent years, the tax payout ratio has declined to below 30% from the previous years’ level of above
30%, which seems to be in line with the recent changes in the corporate tax rates implemented by India.
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The tax rate used for the reconciliations above is the corporate tax rate of 25.17% payable by corporate
entities in India on taxable profits under tax law in the Indian jurisdiction
Operating Efficiency Analysis of NGL Fine Chem Ltd:
a) Net fixed asset turnover (NFAT) of NGL Fine Chem Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of NGL Fine Chem Ltd in the past years
(FY2013-21), then she notices that the NFAT of the company has stayed in the range of 4.0.
The NFAT of the company had declined during FY2017-FY2020 when the NFAT decreased from 4.6 in
FY2016 to 2.4 in FY2020.
An investor would note that during FY2016, the company had started work on a major capacity expansion
project.
The company is undertaking a capital expansion project at its existing plant in Tarapur. The necessary
statutory consents have been received and construction has commenced. The plant is expected to be
operational by first quarter of 2017-18. The total project expenditure is to the tune of Rs. 25 crores.
The trial runs of the expansion project started in FY2018.
The company’s expansion project in Tarapur has been completed and trial runs have been undertaken
successfully.
From the above discussion on the profit margins of NGL Fine Chem Ltd, an investor would recollect that
upon completion of a project, the company has to produce sample products for validation by the regulators
and customers. During this period, the company has to employ staff for all the three shifts, spend money on
electricity, fuel etc. However, the sales from the new plants do not start until the validation process is
complete.
Therefore, during the period of construction of the plant, its validation and the ramp-up of the capacity
utilization to the optimal levels, the company has to spend money on the plant without proportionate
addition to revenue from the plant. As a result, during this period, the NFAT of the company declines.
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An investor would appreciate that once the products from the plant are validated by the regulators and the
customers, then it starts contributing to the revenue and the NFAT of the company would increase.
NGL Fine Chem Ltd had gone through the same stages during FY2016 to FY2021 during its capacity
expansion project at Tarapur. Once its plant started operating at optimal capacity utilization in FY2021,
then its NFAT increased significantly to 3.9 in FY2021 from 2.4 in FY2020.
August 2021 conference call, page 2:
Rahul Nachane: All our facilities are currently running at about 95%, which is near to full capacity
utilization.
Going ahead, an investor should keep a close watch on the capacity utilization levels of NGL Fine Chem
Ltd so that she can assess whether the company is utilizing its assets efficiently or not.
b) Inventory turnover ratio of NGL Fine Chem Ltd:

While analysing the efficiency of inventory utilization by NGL Fine Chem Ltd, an investor notices that
over the last 10 years (FY2013-FY2021), the inventory turnover ratio (ITR) of the company has stayed in
the range of 7 to 9.
The ITR of the company declined to 6.5 in FY2020. As per the company, this decline was related to the
inventory, which the company had to create for the validation process of the new plant.
Yogansh Jeswani: Sir, one question on the inventory side. In September balance sheet, we see the inventory
a bit on the higher side. Is there any specific issue on that?
Rahul Nachane: Yeah, because 4 products are into validation. So, all the inventory is slow moving for
those.
In addition, the deferment of orders in March 2020 due to Coronavirus pandemic related lockdown, also
led to an increase in inventory and thereby a decline in the ITR for FY2020.
Ankit Gupta: Our inventories have also gone up compared to last year by almost 10 crores as on March
31, 2020…
Rabul Nachane: No, mainly it has been semi-finished goods. There is long order which we were executing
in the current quarter for which we had a little bit of inventory built-up plus FG dispatches did not move to
from mid-March onwards. So these two things ended in increasing inventory.
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Once the business restarted after easing of lockdown, the inventory utilization of the company improved
and the ITR of the company improved from 6.5 in FY2020 to 7.8 in FY2021.
Nevertheless, the company has to maintain a large amount of inventory with us, which is in the form of
work-in-progress (WIP). This is because, some of the production processes of the company take a long
time, up to 8 weeks, to be complete.
Credit rating report by ICRA in January 2019:
The company’s inventory levels generally remain on a higher side (76 days as on March 31, 2018), owing
to a sizeable WIP inventory (given that the production cycle varies from a few days for basic products up
to eight weeks).
In addition, when an investor attempts to understand the value proposition offered by NGL Fine Chem Ltd
to its customers, then she notices that the company attempts to focus on three things: low prices, best quality
and reliability.
December 2019 conference call, pages 7-8:
Rahul Nachane: We have our entire marketing strategy over 3 core ideas which we hold. The first is that
we believe that we should give the best possible pricing to the customer… The second foundation stone is
that we should deliver the best quality possible to the customer… And the third part is reliability that given
a commitment to a customer, we have to stick to it no matter what happens.
An investor would appreciate that if a company wishes to be reliable in meeting its delivery commitments
to its customers, then it has to maintain a higher amount of inventory with itself so that it can deal with
various operational and production planning risks.
The credit rating agency, CRISIL, highlighted in its report for the company in September 2017 that NGL
Fine Chem Ltd has to maintain a high inventory to remain competitive.
It has to maintain raw material inventory of 30-60 days to cater to urgent demand and remain competitive.
Therefore, it seems that due to the long production process and the aim of being a reliable supplier to the
customers, NGL Fine Chem Ltd ends up maintaining a high inventory with itself, which makes its
operations working capital intensive.
Going ahead, an investor should monitor the inventory turnover ratio of NGL Fine Chem Ltd so that she
can assess whether the company is utilizing its inventory efficiently or not.
c) Analysis of receivables days of NGL Fine Chem Ltd:
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While analysing the receivables days of NGL Fine Chem Ltd, an investor would notice that the company
used to have receivables days of 90 days or more until FY2018. While reading the credit rating reports for
NGL Fine Chem Ltd, an investor notices that the credit rating agency, CRISIL, mentioned in its report of
September 2017 that the company has to give a credit period of about 90-120 days to its customers.
Also, operations are moderately working capital intensive. The company extends credit of 90-120 days to
its clients.
An investor would appreciate that in a competitive industry where many suppliers are ready to eat into each
other’s market share by offering lower pricing to the customers, a company has to offer generous payment
terms to the customers.
Nevertheless, from FY2019 onwards, the receivables days of the company have improved significantly.
The receivables days of NGL Fine Chem Ltd declined from 115 days in FY2017 to 45 days in FY2021.
The company intimated to its investors that it has improved the monitoring of its receivables collection as
well as reduced the credit period that it offers to its customers, which has led to an improvement in the
receivables position.
Better collection monitoring and tighter credit limits implementation has resulted in better efficiency.
The recent improvement in the collection efficiency seems to be a result of the faster recovery of its
operations by the company after Covid-related lockdown. The company mentioned to its investors that it
could restart its operations faster when compared to its competitors. As a result, it could gain market share.
Rahul Nachane: We have been able to take part of the market share from some of our other competitors
because we were able to come back to normalcy probably a little faster than them. And customers saw that
flow of material started with us.
Therefore, even though, the company has shown an improvement in its receivables position, an investor
needs to understand that API manufacturing is an intensely competitive industry. In such an industry,
tightening of payment terms can lead to a loss of business opportunities as the competitors catch up.
An investor needs to understand that the industry of API manufacturing is highly competitive. In any
competitive industry, the manufacturers have to give good payment terms to the customers and maintain a
high inventory to remain competitive.
The credit rating agency, ICRA has highlighted in its report in January 2019 that the business of the
company is working capital intensive.
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the ratings remain constrained by the company’s high working capital intensity of operations due to high
inventory and receivable levels,
When an investor realizes the working-capital-intensive nature of its operations when she compares the
cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of NGL Fine
Chem Ltd for FY2012-21. She notices that over the last 10-years (FY2012-FY2021), the company has not
been able to convert its profit into cash flow from operations.
Over FY2012-21, NGL Fine Chem Ltd reported a total net profit after tax (cPAT) of ₹141 cr. During the
same period, it reported cumulative cash flow from operations (cCFO) of ₹106 cr.
The Margin of Safety in the Business of NGL Fine Chem Ltd:

target growth.
Where,

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While analysing the SSGR of NGL Fine Chem Ltd, an investor would notice that over the years, the
company had an SSGR of 25%-30%. Over the same period, the company has grown its sales at a CAGR
of about 24%.
As the company has grown its sales within its SSGR; therefore, despite growing its sales from ₹36 cr in
FY2012 to ₹258 cr in FY2021, the company has been able to keep its debt levels under check and without
raising money from equity. In FY2021, the company is net-debt free as it has reported a debt of ₹16 cr
whereas it has cash & investments of ₹34 cr.
An investor arrives at a similar conclusion when she analyses the free cash flow (FCF) position of NGL
Fine Chem Ltd.
b) Free Cash Flow (FCF) Analysis of NGL Fine Chem Ltd:

While looking at the cash flow performance of NGL Fine Chem Ltd, an investor notices that during
Therefore, during this period (FY2012-2021), NGL Fine Chem Ltd had a free cash flow (FCF) of ₹4 cr
(=106 – 102).
of ₹17 cr. As a result, the company had a total free cash flow of ₹6 cr (= 4 + 19 – 17). Please note that the
capitalized interest is already factored in as a part of the capex deducted earlier.
While looking at the overall cash-flow position of NGL Fine Chem Ltd over the last 10 years (FY2012-
2021), an investor notices that the company has been able to pay dividends of about ₹3 cr to its shareholders
from its free cash flow.
Going ahead, an investor should keep a close watch on the free cash flow generation by NGL Fine Chem
Ltd to understand whether the company continues to generate surplus cash from its operations.
Additional aspects of NGL Fine Chem Ltd:

On analysing NGL Fine Chem Ltd and after reading annual reports, DRHP, its credit rating reports and
other public documents, an investor comes across certain other aspects of the company, which are important
for any investor to know while making an investment decision.
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1) Management Succession of NGL Fine Chem Ltd:

NGL Fine Chem Ltd is promoted by Mr Rahul Nachane (age 57 years, FY2020 annual report, page 31) and
Mr Rajesh Lawande (age 45 years, FY2014 annual report, page 11). Mr Rahul Nachane is working in the
company as the managing director and chief executive officer (MD & CEO) whereas Mr Rajesh Lawande
is acting as the whole-time director and chief financial officer (WTD & CFO).
In June 2021, Mr Ahaan Nachane, son of Mr Rahul Nachane has joined the company as a vice president of
the company.
to appoint Mr. Ahaan Nachane, son of Mr. Rahul Nachane, Managing Director and CEO and Mrs. Ajita
Nachane, Non-Executive Director as Vice President w.e.f. 01st June, 2021
Going ahead, an investor may keep a close watch on the relationships among the promoter families, the
Nachane family and the Lawande family, to understand whether any ownership issues arise between them.
An investor may contact the company directly for any clarifications in this regard.
2) Strange calculation of cash flows statement by NGL Fine Chem Ltd:

While analysing the financial statements of NGL Fine Chem Ltd, an investor comes across some
transactions in its cash flow statement, which seem in contrast to the expected calculation of cash flows.
Such transactions are noted in both the cash flow from investing activities (CFI) as well as in cash flow
from operating activities (CFO).
2.1) Calculation of cash flow from investing activities (CFI) by NGL Fine Chem Ltd:
While assessing the cash flow statements of the company in its annual reports, an investor notices that the
company has included the inflows & outflows due to borrowings (both long-term borrowings as well as
short-term borrowings) and finance costs in the cash flow from investing activities (CFI).
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An investor would appreciate that the borrowings and finance costs are usually a part of the cash flow from
financing activities (CFF).
For example, the calculation of cash flow from investing activities in the FY2021 annual report, on page
139, includes finance cost as well as the long-term borrowings and short-term borrowings for FY2021 as
well as FY2020.
When an investor notices the calculation of cash flow for financing activities in the FY2021 annual report,
then she notices that the company has shown only dividend payments as an outflow in both FY2021 and
FY2020.
When an investor attempts to find out for how long, the company has been showing its financing cash flows
(i.e. borrowings and finance costs) under investing activities, then she notices that until the FY2017 annual
report, it used to properly show borrowings and finance cost under the cash flow from financing activities
(CFF).
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From the FY2018 annual report onwards, NGL Fine Chem Ltd started including borrowings and finance
costs under cash flow from investing activities (CFI) instead of cash flow from financing activities (CFF)
An investor would appreciate that presenting cash flows arising out of borrowings or finance costs under
investing activities may give an erroneous picture to any investor who relies on the cash flow from investing
activities to understand how much money is put by the company in capex or financial investments. If the
investor only relies on the data presented by the financial databases without reading the annual reports, then
she may unknowingly make an error in her analysis of the cash flow statement of the company.
The annual report of the company is silent on the assumptions/logic used by the company for classifying
the borrowings and finance cost under cash flow from investing activities. An investor is not able to find
any explanation by the company under its significant accounting policies.
Moreover, when the investor attempts to find any explanation by the company in the FY2018 annual report
when the company adopted the new Indian Accounting Standards (IndAS), even then she is not able to find
any explanation for such a change in the treatment of borrowings and finance costs in the cash flow
statement.
An investor may contact the company or the statutory auditor of the company for understanding their
reasons for such a change in the treatment of borrowings and finance costs in the cash flow statement. She
may ask them the reasons why they believe that it is better to show borrowings and finance costs under cash
flow from investing activities (CFI) instead of cash flow from financing activities (CFF).
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2.2) Calculation of cash flow from operating activities (CFO) by NGL Fine Chem Ltd:
When an investor analyses the cash flow from operating activities (CFO) presented by the company in its
annual reports, then she notices that NGL Fine Chem Ltd has included the cash flow changes due to
financial assets like investments like shares and mutual funds etc. into its CFO.
An investor would appreciate that usually for manufacturing organizations, the cash flow changes due to
investments like shares and mutual funds are shown under cash flow from investing activities (CFI). This
is because investments in the shares and mutual funds is not their operating activity.
If a manufacturing company includes such changes in the CFO, then the company may sell its investments
like mutual funds and then show the cash inflow under CFO. This will inflate the CFO and show an
erroneous picture to the investors.
The reverse may happen when the company shows an outflow due to investments into mutual funds under
CFO. This would reduce the CFO and once again, would present an erroneous picture to the investors.
For example, an investor may look at the cash flow from operating activities (CFO) calculation provided
by the company in its FY2021 annual report, on page 139 in which the company has included an outflow
of ₹19.42 cr on account of “other current financial assets”.
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When an investor reads the balance sheet in the FY2021 annual report to understand the details of “other
current financial assets”, then at page 136, she notices that this change of about ₹19 cr relates to the Current
assets >> Financial assets >> Investments, which have increased from about ₹10 cr in FY2020 to ₹29 cr in
FY2021.
The company has provided details of these Current assets >> Financial assets >> Investments in note 8 in
the detailed schedules to the financial statements on pages 154-155 of the FY2021 annual report. An
investor notices that these assets include 1,168 shares of Tata Consultancy Services Limited (TCS) and
various mutual funds.
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Therefore, from the above discussion, an investor would appreciate that in the cash flow statement for
FY2021, NGL Fine Chem Ltd has included changes in the investments like shares and mutual funds under
CFO, which usually should be included under cash flow from investing activities (CFI).
Including changes in current financial investments like shares and mutual funds under CFO may lead an
investor to make an erroneous decision if she does not see the CFO calculation in detail. If she relies only
on the data of the CFO provided by the financial databases and does not go through the annual report, then
she may make an error in her assessment of the company’s cash flow generation.
This is because, if during any year, a company has sold its financial investments, then this cash inflow will
inflate the CFO. On the contrary, if the company has purchased financial investments, then this cash outflow
would deflate the CFO for the year. Both these cases would lead to an error in the analysis by the investor.
An investor notices that NGL Fine Chem Ltd started showing current investments under CFO from FY2014
onwards. Thereafter, every year, it has shown these in the CFO calculations as “current investments” up to
FY2017 annual reports and as “other current financial assets” from FY2018 annual report onwards.
An investor may contact the company or the statutory auditor of the company for understanding their
reasons for including cash flow changes due to investments in shares and mutual funds under CFO instead
of cash flow from investing activities. She may ask them the reasons why they believe that it is better to
show shares and mutual fund transactions under the CFO instead of cash flow from investing activities
(CFI).
Whenever an investor comes across such instances where certain items in the financial statements are
classified by the company in a different manner than what is the usual practice, then she may make changes
to the reported financials on her own and then arrive at the conclusions about the financial position of the
company.
In the case of NGL Fine Chem Ltd, it is advised that an investor may edit the cash flow from operating
activities, as well as the cash flow from investing activities to arrive at the correct cash flow assessment of
the company.
3) Project execution by NGL Fine Chem Ltd

While reading the available annual reports of the company from FY2010, an investor notices that during
this period, the company has completed a few capacity expansion projects. These projects provide an
investor with the opportunity to assess the ability of the company to complete projects within time and cost
estimates.
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3.1) Capacity expansion project at Tarapur:
In the FY2016 annual report, NGL Fine Chem Ltd intimated to its shareholders that it has started work on
a capacity expansion plant in Tarapur, which it expects to complete by Q1-FY2018 (i.e. April-June 2017)
for ₹25 cr.
The company is undertaking a capital expansion project at its existing plant in Tarapur. The necessary
statutory consents have been received and construction has commenced. The plant is expected to be
operational by first quarter of 2017-18. The total project expenditure is to the tune of Rs. 25 crores.
However, the project started witnessing delays both in the terms of time as well as cost. In the next year’s
annual report (FY2017), the company disclosed that, now, the project would cost ₹30 cr and would be
completed in Q3-FY2018 (i.e. Oct.-Nov. 2017).
FY2017 annual report, page
The plant is expected to be operational by Q3 2017-18. The total project expenditure is to the tune of Rs.
30 crores.
Upon reading future annual reports, an investor notices that the company faced further challenges while
completing this project. In June 2018, the project had a fire incident in which there was a substantial loss
of assets.
Credit rating report by CRISIL, July 2018:
On June 27, 2018, NGL Fine Chem Limited (NGL) announced that there was fire accident at the company’s
plant located at F-11, Tarapur and that the assessment of damage is under process. At the aforesaid plant,
NGL was carrying out expansion of their production capacity and was undertaking trial production when
accident happened.
In the FY2019 annual report, the auditor of the company highlighted that due to the fire, there was a
substantial loss of assets.
Loss by fire: In June 2018, there was fire in the Company’s new Plant at Tarapur, thereby resulting in
substantial loss of machinery and equipment.
The plant was finally completed by the company in February 2019 with a delay of about two years from
the earlier expected completion date of Q1-FY2018.
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The brownfield expansion at Tarapur, which was commissioned in February 2019, is now in operation.
Therefore, an investor would appreciate that the capacity expansion plant in Tarapur was completed by the
company with a substantial delay of about 2 years. The investor would appreciate that whenever there is a
delay in the completion of any project, then in most instances, it also leads to cost overruns.
As disclosed by the company in the FY2017 annual report, the cost of the project had increased from ₹25
cr to ₹30 cr when it projected a delay of 6 months in completion. However, as the project witnessed a delay
of more than 20-months; therefore, the cost overrun would be even higher.
In addition, the investor would note that the company witnessed losses due to the fire incident at the project
site as well. An investor may think that the fire incident may be an unintentional error and the insurance
company may reimburse the losses. However, it turned out that the insurance company refused to pay the
claim of ₹4.55 cr put by the company for the losses due to the fire incident. An investor may appreciate that
it might be a case where the fire would have started due to negligence by the company.
Subsequent to the fire loss in June 2018, the company had lodged a fire claim with insurance company. The
said claim has not been received till date and is being disputed by the insurance company. Consequently,
adopting a conservative view, the amount receivable has been fully provided during FY 2020-2021 by
charging a sum of ₹ 455 Lakhs to the profit and loss account.
An investor may contact the company directly to get more clarity about the reasons for the start of the fire
and the reasons cited by the insurance company while refusing to pay the claim amount.
Moreover, when an investor reads the history of the company, then she notices that it was not a single
incident of fire in the company’s plants. Previously, in 2009 as well, the company had suffered losses due
to fire at the company’s plants.
In June 2009, there was a fire at one of the company’s factories situated at Navi Mumbai. There was
substantial loss suffered in terms of damage to assets and stocks.
From the above discussion, an investor may note that the project execution and operations by the company
may leave scope for improvement in the terms of construction of the plant as well as running the plants
safely.
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3.2) Capacity expansion project at Navi Mumbai:
In FY2010, NGL Fine Chem Ltd started work on a capacity expansion plant in Navi Mumbai, which it had
expected to complete by April 2011.
The company has undertaken major expansion and reconstruction at two of its sites at Navi Mumbai &
Tarapur. One of these plants is expected to commence production in August 2010 and the other is expected
to commence production in April 2011
However, it seems that the company could not complete this project in April 2011 because after two years,
in the FY2012 annual report, the company stated that it plans to complete the Navi Mumbai project in Q1
of the ongoing year (i.e. Q1-FY2013 = April – June 2012).
The company plans to commission its plant at Navi Mumbai at Unit NGL during Q1 of the year.
From the above discussion, an investor would appreciate that NGL Fine Chem Ltd promised to complete
the Navi Mumbai plant in Q1-FY2012; however, it could complete it only with a delay of about one year
in Q1-FY2013.
Therefore, it seems that NGL Fine Chem Ltd can improve its project execution further, which can save the
investors time and cost overruns. Going ahead, an investor should keep a close watch on the progress of the
company’s capacity expansion plans so that she can monitor whether NGL Fine Chem Ltd can complete
its projects within the estimated time and cost.
4) Pollution control issues at the plants of NGL Fine Chem Ltd:

While reading about NGL Fine Chem Ltd, an investor comes across multiple instances where the company
had to stop operations at its plants due to notices from the govt. authorities.
In February 2020, the company had to shut operations at its plant for a few weeks.
Dhvwanil Desai: The question is that I think there is some closure order issued by MPCB few months ago,
so any update on that, has the issue been resolved and are we back with our operations on that side?
Rabul Nachane: That closure was in February and it was lifted within about I think just about two to three
weeks time.
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After one year, in February 2021, the company had to shut operations in its Tarapur plant due to causing
excessive water pollution and air pollution.
The credit rating report by ICRA in February 2021:
On February 12, 2021, NGL Fine-Chem Limited (NGL) announced that one of its unit in Tarapur
(Maharashtra) has received a notice from the Maharashtra Pollution Control Board (MPCB) directing the
closure of operations at the factory premises. The notice mentions regarding the violation of the provisions
of Water (Prevention and Control of Pollution) Act, 1974, Air (Prevention and Control Pollution), Act,
1981
In the very next month, in March 2021, NGL Fine Chem Ltd had to shut down operations of another plant
in Tarapur operated by its subsidiary for excessive water and air pollution.
The credit rating report by ICRA in March 2021:
On March 6, 2021 NGL Fine-Chem Limited (NGL) had announced that Maharashtra Pollution Control
Board (MPCB) has issued a notice directing the closure of operations of its subsidiary: Macrotech
Polychem Private Limited (MPPL) in Tarapur (Maharashtra) for alleged violation of the provisions of the
Water (Prevention and Control of Pollution) Act, 1974 Air (Prevention and Control Pollution), Act, 1981
Moreover, an investor is surprised to see that the company was able to meet the pollution control norms for
the plant of its subsidiary, Macrotech Polychem Private Limited (MPPL), which it had completed only
recently in October 2019.
Conference call, December 2019, page 2:
With regard to Macrotech, which was acquired by us in May this year, we have commissioned this plant in
October 2019.
An investor may appreciate that the closure of the plant that the company had commissioned in October
2019 may indicate that the company did not spend sufficient money to meet the pollution control guidelines.
Now, after getting the closure notice from the govt., the company is putting up an effluent treatment plant
at the MPPL site.
Rahul Nachane: At the other plant in Tarapur where we have our subsidiary in Macrotech, as part of the
investment, which we are doing, we are also putting in a zero liquid discharge effluent treatment plant over
there.
In light of these multiple instances of loss of business of the company due to poor pollution control measures
at its plants, the concerned shareholders asked the management during the conference calls for the steps
undertaken by it and whether these issues are now resolved.
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In August 2021, the company told the shareholders that the issues are not yet resolved and the problems
persist. The company mentioned that even after its efforts by December 2021, still, about 25% of the
production of the company would be from plants, which are not zero-liquid-discharge.
Rahul Nachane: No, it is not all over. As far as we are concerned there will be two of our units, which we
will not be able to convert to zero liquid discharge… Let us say by December 2021 about 75% of our
production will come from sites, which are zero liquid discharge, and with very low amount of threat. 25%
of our production will still come from sites, which are not zero liquid discharge.
Upon further analysis, an investor gets to know that at two of its manufacturing sites, the company does not
have any space for effluent treatment plants, which may indicate a suboptimal design while creating the
manufacturing units. Therefore, to overcome the challenge, NGL Fine Chem Ltd plans to transport the
polluted water, in trucks, from these plants to the proposed effluent treatment plant of its subsidiary.
Rahul Nachane: At the other two plants in Tarapur they are pretty small in nature, and we really do not
have the space for putting in any effluent treatment plant over there. So, once the Macrotech plant is
commissioned we plan to approach the authorities and ask them to allow us to truck effluent from these
plants to Macrotech…
From the above discussion, an investor would notice that the approach of the company in dealing with the
pollution control measures leaves scope for improvement. It did not create a proper effluent management
system even in the plant completed as recently as October 2019. As a result, it had to shut down operations
in a supposedly modern plant as well.
Now, the company has disclosed to the investors that its pollution control measures would cost about ₹10
cr. It might be a case where the company attempted to save on the money by ignoring setting up proper
pollution control infrastructure at its plants. However, it paid the price when it had to shut down its plants
due to pollution issues.
Rahul Nachane: At Macrotech and one of our sites in Tarapur where we are upgrading zero liquid
discharge total capex is close to about 10 Crores.
Moreover, despite the best measures taken by the company, still, it would end up making 25% of production
in the plants that do not meet the pollution control criteria. Because of the improper planning for handling
water pollution, now, it has to think of solutions like transporting polluted water from one plant to another
in trucks, for treatment.
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Going ahead, an investor should keep a close watch on the progress of the pollution control measures being
undertaken by the company in its plants. This is because, nowadays, the regulators are taken a very strict
approach while dealing with polluting plants.
An investor would remember that the copper smelting plant of Vedanta group at Tuticorin (Thoothukudi),
which was the largest copper unit in India, was shut by the govt. in 2018 as it was causing a lot of pollution.
Tuticorin protest: Tamil Nadu government orders permanent closure of Sterlite plant: Economic Times,
May 29, 2018
The Vedanta group has not been able to get permission to run the plant despite its best efforts for more than
the last 3 years and it is incurring losses of multiple crores of rupees every year due to the plant closure.
Closure of copper facility in Tamil Nadu costs Vedanta Group $600 mn: Business Standard, March 4, 2020
Because of the increasing awareness of the environmental pollution caused by industries, it is advised that
an investor should keep a close watch on the pollution control measures implemented by NGL Fine Chem
Ltd.
5) Promoters’ remuneration of NGL Fine Chem Ltd:

While analysing the salary/remuneration taken by the promoters of the company, an investor comes across
certain instances when the promoters took an increase in the salary while the profits of the company had
declined.
For instance, in FY2018, the net profit after tax (PAT) of NGL Fine Chem Ltd declined to ₹12.6 cr from
₹14.9 cr in FY2017, a decrease of 15.5%. However, during FY2018, the promoters, Mr Rahul Nachane and
Rajesh Lawande took home a salary of ₹2.60 cr, which was an increase of about 80% over the salary of
₹1.46 cr taken by them in FY2017.
Therefore, FY2018 represents an instance where the promoters of the company increased their salary
significantly when the profits of the company had declined. However, this was not the first instance when
the promoters of the company increased their salary while the profits of the company had decreased.
Previously, in FY2011, the profit after tax of NGL Fine Chem Ltd had declined to ₹2.4 cr from ₹2.7 cr in
FY2010, representing a decline of about 11.2%. However, in FY2011, the salary taken by the promoters
increased to ₹0.70 cr from ₹0.48 cr in FY2010, representing an increase of about 45%. Therefore, FY2011
is another period when the promoters of the company increased their salary while the profits of the company
were going down.
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In the FY2015 annual report, while taking shareholders’ approval for the remuneration of Mr Rahul
Nachane, Managing Director, the company intimated to its shareholders that the salary of the promoters is
higher than what the legal limits permit according to the profits of the company.
The profits as calculated under the managerial remuneration to directors under the Companies Act 2013
are inadequate for payment of remuneration.
An investor would remember from the discussion on succession planning that in 2021, Mr Ahaan Nachane,
son of Mr Rahul Nachane has joined the company as a vice president. While assessing the salary of Mr
Ahaan Nachane, an investor gets to know that the company proposes to pay a starting salary of ₹1 cr to
him.
to appoint Mr. Ahaan Nachane, son of Mr. Rahul Nachane, Managing Director and CEO and Mrs. Ajita
Nachane, Non-Executive Director as Vice President w.e.f. 01st June, 2021 upon the terms and conditions
set out in the Explanatory Statement annexed to the Notice convening this meeting for remuneration not
exceeding of ` 1,00,00,000/- (Rupees One Crore) p.a. or as may be agreed to between the Board and Mr.
Ahaan Nachane.”
Going ahead, an investor should keep a close watch on the salary taken by the promoters and their family
members from the company.
6) Related party transactions of NGL Fine Chem Ltd with the promoter-group
entities:
While analysing the transactions of the company with the entities owned by the promoters, an investor
notices that NGL Fine Chem Ltd had done many transactions with one entity: Nupur Remedies Private
Limited (NRPL)
While searching about the details of Nupur Remedies Private Limited (NRPL), an investor notices that the
company has only two directors, Mr Rahul Nachane and Mr Rajesh Lawande who are the promoters of
NGL Fine Chem Ltd. (Source: Zaubacorp)
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Therefore, an investor would appreciate that if NGL Fine Chem Ltd were giving any money to NRPL or
does any business dealing with NRPL, then it is as if it is dealing with/giving money to the promoters, Mr
Rahul Nachane and Mr Rajesh Lawande.
As per the disclosures in the related party transactions section of the FY2021 annual report, page 169, NGL
Fine Chem Ltd has paid a total of ₹1.1 cr to NRPL as considerations of rent (₹0.45 cr) and legal &
professional fees (₹0.66 cr). This is apart from the direct payments of ₹0.64 cr done by NGL Fine Chem
Ltd for rent to the promoters, Mr Rahul Nachane and Mr Rajesh Lawande. Therefore, the total amount of
money paid by NGL Fine Chem Ltd to the promoters other than salary, in FY2021, is about ₹1.74 cr (= 1.1
+ 0.64).
The amount of related party transactions other than salary, by NGL Fine Chem Ltd to the promoters of the
company, was ₹0.36 cr in FY2014 (as per FY2015 annual report, page 49).
An investor would appreciate that the related party transactions between the listed entity and the
promoters/their entities provide opportunities for shifting economic benefits from the minority/public
shareholders to the promoters. If the listed entity pays a price to the promoters, which is higher than the
market price of those services/rent, then effectively, these transactions may benefit promoters at the cost of
minority/public shareholders.
Therefore, the investor should always do deeper due diligence of the related party transactions between the
listed company and the promoter owned entities.
Going ahead, investors should keep a close watch on the transactions between NGL Fine Chem Ltd and the
promoters/their entities.
7) Errors in the annual reports of NGL Fine Chem Ltd:

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While going through the annual reports of NGL Fine Chem Ltd, an investor comes across a few instances
where she feels that the information provided by the company in the annual report could have been better.
7.1) Trade receivables for FY2011:
She notices one such instance in the FY2011 annual report when NGL Fine Chem Ltd declared that about
92.5% of its receivables are pending for more than 6-months from the date they became due for payment.
The company disclosed that out of total receivables of ₹10.74 cr on March 31, 2011, a total of ₹9.9 cr are
due for more than 6-months.
The amount of receivables due for more than 6-months at 92.5% of the total receivables in FY2011 seemed
disproportionately high because, in the previous year, FY2010, the amount of receivables due for more than
6-months were only 5% i.e. ₹0.4 cr out of total receivables of ₹8.8 cr.
An investor would appreciate that when a very large proportion of the trade receivables from the customers
are due for more than 6-months, then it may indicate serious issues in the accounting assumption and sales
practices of any company. It may indicate that the company may be following aggressive sales recognition
where the customers have not yet agreed for payment, but the company has already recognized sales in the
profit & loss statement.
It could also indicate that the customers are not happy with the quality of goods supplied by the company
and therefore, are not willing to release the payments. Otherwise, it may also indicate that the company is
not doing a proper credit risk assessment of its customers; therefore, the customers who have accepted the
goods are not able to pay due to their poor financial position.
A very high proportion of overdue trade receivables bring all these questions to the mind of the investors.
However, when the investor reads the annual report of the next year, FY2012, then she notices that in the
column for the previous years’ data (FY2011), the company has presented an entirely different picture for
its trade receivables.
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An investor notices that in the FY2012 annual report, NGL Fine Chem Ltd disclosed that in the previous
year (FY2011), only about 7.5% of the total receivables (i.e. about ₹8 cr out of a total of ₹10.7 cr) were due
for more than 6-months.
Such a drastic change in the data of trade receivables due for more than 6-months for FY2011 in the two
annual reports of FY2011 and FY2012 creates a lot of confusion in the mind of investors. Whether it was
a typographical error or any manipulation of information.
An investor may contact the company directly to understand the reasons for such difference in the data of
trade receivables for FY2011 in the annual reports of FY2011 and FY2012.
Moreover, while reading the annual reports of NGL Fine Chem Ltd, we did not find any entry for loss due
to bad debt in the schedule/note for “other expenses” where companies show the receivables that they are
not able to recover from their customers as an expense/loss. However, it looks like NGL Fine Chem Ltd
has not shown bad debt in any of the years for which its annual reports are available on the company and
Bombay Stock Exchange (BSE) website (FY2010-FY2021).
An investor may contact the company directly to understand whether it never faced any loss in collecting
more than ₹1,000 cr of total revenue from its customers over the last 10-years. This is because, NGL Fine
Chem Ltd is the only company out of hundreds of companies that we have analysed until now, which has
not shown any bad debt in any of its annual reports.
All the other companies have shown at least some amount of bad debt whatever small it may be. It is natural
because, over years of doing business, the companies deal with numerous customers, some small and some
big. Not all the customers they deal with over decades make 100% of payments against 100% of demands.
We advise that an investor should read the annual reports of the company in-depth to understand various
aspects of the financial position of the company.
7.2) Contingent liabilities section in FY2019 annual report:
While reading the FY2019 annual report, in the contingent liabilities section, an investor notices that the
company has shown NIL contingent liabilities for FY2019.
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However, while reading the description of the contingent liabilities, the investor gets to know that the
company has contingent liabilities of ₹948,364 in FY2019 as disputed income tax demands.
It looks like the company by mistake did a typographical error in which it disclosed the amount of disputed
tax demand in the description; however, missed mentioning it in the table column.
Nevertheless, an investor may contact the company directly to get a clarification about the true position of
contingent liabilities in FY2019.
It is advised that the investor should read the annual reports carefully so that she does not miss the
information due to such errors by the companies.
8) Attempts by NGL Fine Chem Ltd to save on taxes:

While reading about the company, an investor gets to know about an order passed by the Income Tax
Appellate Tribunal – Mumbai against NGL Fine Chem Ltd on July 30, 2018 (click here).
The order is related to a case in which the Income Tax officials found out certain transactions where NGL
Fine Chem Ltd had taken allegedly fake invoices from some entities, which were known to issue fake
invoices without the actual supply of goods or services. These entities are known as Hawala Dealers. The
company, which takes these fake invoices, and shows these as expenses, reduces its profits and thereby
reduces the tax payout by the company.
While doing their investigation, the income tax official (Assessing Officer, AO) found that NGL Fine Chem
Ltd has availed such fake invoices from these Hawala Dealers and he/she penalized NGL Fine Chem Ltd.
The company challenged the penal orders first to the Commissioner of Income Tax (Appeals) [CIT (A)]
who agreed with the findings of the assessing officer (AO) that NGL Fine Chem Ltd had inflated its
expenses by using fake bills from Hawala Dealers.
Thereafter, NGL Fine Chem Ltd appealed against the CIT (A) order in the appellate tribunal. In the order
dated July 30, 2018, the Income Tax Appellate Tribunal – Mumbai found that NGL Fine Chem Ltd had
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indeed availed these fake invoices from the Hawala Dealers. The following sections of the order (click here)
would help the investor.
assessee is unable to substantiate his purchases from the claimed suppliers who has already been
established as hawala dealers
Therefore, it is held that the assessee has inflated its expenses by taking bogus bills of purchases from the
hawala dealers.
An investor may contact the company and ask whether the company further appealed against the penal
order in the courts or it paid the said charges.
Going ahead, an investor should keep a close watch on the developments related to NGL Fine Chem Ltd
appearing in the media and online space. It is advised that an investor may set up Google alerts for
whichever companies she intends to track in the online space.
9) Weakness of internal controls and processes at NGL Fine Chem Ltd:

While assessing the company, an investor comes across certain instances, which indicate that the internal
controls and processes at NGL Fine Chem Ltd leave room for improvement. Let us see some examples.
First, the company made mistakes in the reporting of its shareholding pattern for June 2019. The secretarial
auditor highlighted the mistakes done by the company in the FY2020 annual report. As per the auditor, the
company had shown a public shareholder as its promoter; therefore, it showed its promoter shareholding
higher than what it was.
there was an error in submission of shareholding pattern filed for quarter ended 30th June, 2019. The
corrected shareholding pattern were filed from quarter ended 30th September, 2019 in which an entity from
the “public” group was shown in the “promoter” group, consequently, increasing the promoter
shareholding.
In FY2014, NGL Fine Chem Ltd entered into a settlement agreement with SEBI by paying ₹275,625/ for a
delay in disclosing shareholding to the stock exchanges.
The Company has voluntarily filed consent application with SEBI pursuant to delay in filing of
disclosures… An order dated 8th October 2013 was received from SEBI levying a settlement charge of Rs.
2,75,625/- which was paid…
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Additionally, by doing an independent search for the regulatory orders against NGL Fine Chem Ltd, an
investor comes across certain instances where the company was penalized and a fine was levied by BSE.
The following screenshot from the website WatchoutInvestors (click here) shows a few orders passed by
regulatory authorities against NGL Fine Chem Ltd:
The above screenshot mentions the order passed by BSE on December 31, 2019, when the company did
not submit a corporate governance report for the December 2019 quarter. BSE penalized NGL Fine Chem
Ltd for ₹759,920/-. Unfortunately, an investor is not able to find any reference to this order of BSE and the
fine levied against the company in its FY2020 annual report.
Similarly, there is another order of BSE where the company did not submit the shareholding pattern for
March 31, 2008, to the Bombay Stock Exchange.
From the above discussion, an investor would notice that on numerous occasions, NGL Fine Chem Ltd has
missed meeting the regulatory requirements.
In addition, on a few occasions, the company did not make undisputed payments to the govt. authorities
when they became due. In FY2018 and FY2019, it did not make the undisputed GST payments on time.
 FY2018 annual report, page 29: Goods & Service Tax under Reverse Charge Mechanism:
Rs.2,14,836/-
 FY2019 annual report, page 83: Goods and Service Tax Under Reverse Charge Mechanism: ₹
98,984/-
Going ahead, an investor should keep a close watch on such incidences indicating a weakness in the internal
processes and controls of the company. An investor would appreciate that companies that have weaknesses
in controls and processes are at a higher risk of fraud.
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An investor may read the case of National Peroxide Ltd, a Wadia Group company, where the managing
director of the company attempted to take advantage of the weaknesses in the internal processes and controls
and did fraud on the company: Analysis: National Peroxide Ltd
The Margin of Safety in the market price of NGL Fine Chem Ltd:
Currently (November 11, 2021), NGL Fine Chem Ltd is available at a price to earnings (PE) ratio of about
27.7 based on consolidated earnings of the 12-months ended September 30, 2021 (i.e. Oct. 2020-Sept.
2021). An investor would appreciate that a PE ratio of 27.7 does not offer any margin of safety in the
purchase price as described by Benjamin Graham in his book The Intelligent Investor.
Analysis Summary
Overall, NGL Fine Chem Ltd seems a company, which has grown its sales at a growth rate of 24% year on
year for the last 10 years. The sales of the company have grown consistently over this period except in
FY2020 when it saw a marginal decline. The company has improved its profitability significantly over the
last 10-years (FY2012-FY2021) from 11% to 31%. The major role in the improvement is played by the
entry of the company in high-margin products, reduction of crude oil prices, high capacity utilization and a
good recovery by the company after the Coronavirus pandemic.
Nevertheless, an investor should note that the API industry is highly competitive with many suppliers
willing to undercut prices to take away market share from others. As a result, despite being a market leader
in many of its products, NGL Fine Chem Ltd does not have pricing power over its customers. The customers
of the company are pharmaceutical companies, which are knowledgeable buyers and once the quality of
the product is approved, then they prefer suppliers only based on pricing. The customers do not give any
premium pricing to any supplier or brand.
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NGL Fine Chem Ltd does most of its business by short-term spot business contracts. As a result, always,
the company has to revise the prices of its products as per the market price and there is no price certainty.
The company is small-sized; therefore, it does not have many resources to spend on R&D and is not able
to show strong negotiation in buying raw material. There have been periods where the raw material prices
increased by 50%-60%; however, the company could not pass it on to the customers and its profit margins
declined.
The company needs specialized raw materials with only a few suppliers. For many raw materials, China is
the sole and the cheapest supplier. Therefore, at times, the company faces challenges in getting the raw
material. There have been periods when the company could not get raw material for some of its products
for many months and as a result, its business suffered.
The business of NGL Fine Chem Ltd is working capital intensive where it has to give a long credit period
to the customers. Additionally, it has to keep a lot of inventory with itself so that it can be a reliable supplier
to its customers. As a result, a lot of money from NGL Fine Chem Ltd is stuck in the inventory and
receivables.
NGL Fine Chem Ltd has expanded its capacity significantly over the last 10-years; however, at times,
capacity expansion projects have witnessed time and cost overruns. There were two fire incidences in the
company’s plants and during the recent incidence, the insurance company refused to reimburse the loss
incurred by the company. It might be a case of fire due to the company’s negligence.
An investor is surprised to note that many plants of the company were not compliant with the pollution
control guidelines. As a result, on multiple occasions, it had to shut down production in its plants on the
govt. orders. It is now spending about ₹10 cr on effluent treatment plants; however, despite this spending,
about 25% of the company’s production would be from such plants, which are still not compliant with
water-pollution control guidelines.
It seems that the promoters of the company have put in a succession plan because; the son of one of the
promoters has joined the company as a vice president in 2021. There have been instances when the
promoters have increased their salaries in the years when the profits of the company had declined. The son
of the promoters has joined the company at a starting salary of ₹1 cr per annum.
The promoters have entered into many related party transactions with NGL Fine Chem Ltd either directly
or via their companies. These transactions vary from giving properties on rent to the company and other
legal & professional services. The scope of these transactions has increased significantly over the last 10-
years. An investor should analyse these transactions closely.
The data presented by the company in the annual report seems to leave scope for improvement. The cash
flow calculation shows the inclusion of borrowings and finance costs in the cash flow from investing section
instead of the financing section. The cash flow from operating activities shows the inclusion of investment
in stocks and mutual funds, which should be shown under investing activities. On other occasions, the
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company has shown different data of trade receivables for FY2011 in the two annual reports of FY2011
and FY2012.
There have been a few instances where the company was penalized by the regulators for not making the
required disclosures on time. At other times, the company made mistakes in disclosures like shareholding
patterns. At times, it did not deposit the undisputed statutory dues to the govt. authorities on time. It looks
like the internal processes and controls at the company need strengthening.
On one occasion, the income tax department penalized the company for using fake invoices to reduce its
tax payout. The company appealed against the order; however, the appellate tribunal held the company
guilty of using fake invoices from Hawala Dealers and asked the company to pay the penalty.
Going ahead, an investor should closely monitor the profit margins of the company to assess whether the
company is able to pass on the increase the raw material costs to its customers or the competition has caught
up with it resulting in a decline in profitability. The investor should monitor the progress of the capacity
expansion projects to understand whether the company is able to complete them within time and cost
estimates. Also, she should keep a close watch on the pollution-control measures being taken by the
company in its plants.
The investor should keep monitoring the working-capital utilization efficiency of the company and see if
the company continues to generate surplus cash flow from its operations. She should read the annual reports
of the company carefully so that she can avoid making errors in her conclusions due to unusual presentation
of financial transactions by the company in sections like cash flow statements etc.
The investor should keep a close watch on the remuneration of promoter family members and the related
party transactions of the company with the promoters. These transactions have the potential of shifting the
economic benefits from the minority/public shareholders to the promoters. She should monitor the
disclosures by the company to understand whether it has improved its internal controls and processes. She
should also set up Google alerts for the company so that she can get to know about any development about
the company in the online space that the company may not include in its annual report.
These are our views on NGL Fine Chem Ltd. However, investors should do their own analysis before
P.S.

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6) Monte Carlo Fashions Ltd

Monte Carlo Fashions Ltd is an Indian manufacturer of woollen and cotton garments under the brand
“Monte Carlo”. The company is a part of the Nahar group of companies.
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While analysing Monte Carlo Fashions Ltd, an investor would notice that throughout the last 10-years
(FY2012-FY2021), the company did not have any subsidiary and therefore, until now, it has reported only
standalone financials.
In the current financial year (FY2022), Monte Carlo Fashions Ltd has established a wholly-owned
subsidiary, Monte Carlo Home Textiles Limited on December 3, 2021 (Source: BSE). Therefore, going
ahead, it is expected that the company would report both standalone as well as consolidated financials.
subsidiaries, joint ventures etc. Consolidated financials of a company present such a picture. Therefore, if
a company reports both standalone as well as consolidated financials, then in such a case, it is advised that
the investor should prefer the analysis of consolidated financials of the company, whenever they are present.
In the case of Monte Carlo Fashions Ltd, as until now, the company has reported only standalone financials;
therefore, we have used the standalone financials in the analysis.
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Financial and Business Analysis of Monte Carlo Fashions Ltd:

While analyzing the financials of Monte Carlo Fashions Ltd, an investor notices that the sales of the
company have grown at a pace of 6% year on year from ₹364 cr in FY2012 to ₹622 cr in FY2021. Further,
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the sales of the company have increased to ₹793 cr in the 12-months ended September 30, 2021, i.e. during
Oct. 2020-Sept. 2021.
of the company increased every year from FY2012 to FY2016 from ₹364 cr in FY2012 to ₹618 cr in
FY2016. However, thereafter, for the next 2 years, the sales of the company declined to ₹576 cr in FY2018.
Subsequently, the sales of Monte Carlo Fashions Ltd increased to ₹726 cr in FY2020 only to decline once
again to ₹622 cr in FY2021.
Similarly, the profitability of Monte Carlo Fashions Ltd has also witnessed sharp fluctuations with the
operating profit margin (OPM) fluctuating between 13% and 22% during the last 10 years (FY2012-
FY2021). Monte Carlo Fashions Ltd reported an OPM of 22% in FY2012, which declined to 13% in
FY2017. Subsequently, the OPM showed recovery and the company reported an OPM of 20% in the 12-
months ended September 30, 2021, i.e. during Oct. 2020-Sept. 2021.
To understand the reasons for such changes in the performance of Monte Carlo Fashions Ltd, an investor
needs to read the publicly available documents of the company like annual reports, conference calls, credit
rating reports, as well as its corporate announcements.
influence the business of Monte Carlo Fashions Ltd. An investor needs to keep these factors in her mind
while she makes any predictions about the performance of the company.
1) Pricing power of Monte Carlo Fashions Ltd:

While analysing the performance of Monte Carlo Fashions Ltd under different business conditions and the
explanations provided by the management of the company about its profit margins under various
circumstances, an investor gets to know that Monte Carlo Fashions Ltd is in a peculiar position with respect
to the pricing power over its customers.
An investor realizes that on the one hand, Monte Carlo Fashions Ltd has strong pricing power over its
customers in the sense that it is able to safely pass on the increase in raw material costs to its customers
almost every year. On the other hand, the investor witnesses that even the main brand “Monte Carlo” of the
company does not have sufficient pricing power to hold on to the prices when its competitors start offering
discounts on their products.
Therefore, the business of Monte Carlo Fashions Ltd presents a dichotomous situation where it can pass on
the increases in the raw material costs to the customers by increasing the prices of its garments. However,
when its competitors start to offer discounts to customers, then Monte Carlo Fashions Ltd has to match the
discounts; however, early the competitors start the discounts or however, deep discounts they provide.
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Let us see the business situations, which demonstrate the dichotomous pricing power of Monte Carlo
Fashions Ltd.
1.1) Monte Carlo Fashions Ltd has strong pricing power over its customers:
While analysing the business of Monte Carlo Fashions Ltd, an investor comes across multiple instances
that indicate that the company has a very strong pricing power over its customers, which includes almost
the entire value chain i.e. the retailers like exclusive brand outlets (EBOs), multi-brand outlets (MBO) etc.
as well as the final consumer.
An investor comes across multiple instances where Monte Carlo Fashions Ltd was able to increase the
prices of its garments whenever the raw material costs like wool and cotton increased.
In FY2021, the company could pass on the increase in the cost of yarn by increasing the prices of its
products.
Mihir Desai: I understood, Sir. If the yarn prices, which have been increasing will it be a pass on for us or
it will impact our gross margins to some extent?
Sandeep Jain: No, it is already passed on. Whatever yarn prices have increased we have increased our
prices for the winter products for approximately 5% to 6%, so we have passed on that high to the product
prices.
Even in the current year, FY2022, the company witnessed an increase in the cost of cotton, which it could
pass on to the customers.
Sandeep Jain: …As far as your question about the high cotton prices are concerned yes there have been
increase in the cotton prices but fortunately, we have been able to pass all the cost increase to our garments
The company has been able to pass on the increase in the cost of raw materials in the past as well. In
November 2016 conference call, the company intimated to its shareholders that it has been able to pass on
the increase in raw material costs almost every year.
Conference call, November 2016, page 2:
Sandeep Jain: Yes to some extent woollen it has gone up, but I do not think it is going to affect us because
we have been able to pass on the price increase every year
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Once again, in the February 2017 conference call, the company confirmed that it has always been able to
increase prices to cover up the increase in the cost of raw materials. At times, it had taken prices increases
of up to 12%-13% as well.
Sameep Kasbekar: When was the last time we took a price hike?
Sandeep Jain: Every year we are doing a price hike, it is a nominal 3% to 4%, sometimes it is 7% to 8%,
sometimes it was even 12% to 13% also.
In FY2018, when the branded apparel industry witnessed an increase in taxes due to the application of
goods and services tax (GST), then Monte Carlo Fashions Ltd could pass on the impact of higher taxes and
avoid any impact on its profit margins due to a higher GST.
Sandeep Jain: We have increased price of around 4%-5% on various category of garments which were
above the Rs. 1000 range and that has already been accepted by the market also. So as far as we are
concerned, we are not having any effect on our margins because of GST.
In the November 2021 conference call, the company intimated to its shareholders that despite an increase
in product prices, it has witnessed a healthy increase in order bookings.
Sandeep Jain: …we had to increase 19% across our product to absorb this increase in the cotton yarn
prices and thankfully the brand has the power that in spite of increasing 18% our trade show witnessed a
booking increase of 25% to 30%.
While analysing the negotiating power in the relationship of Monte Carlo Fashions Ltd and the retailing
supply chain like exclusive brand outlets (EBO), multi-brand outlets (MBO) as well as commission agents,
an investor notices that the company has an upper hand in the negotiations.
In one of the conference calls, the company highlighted to its investors that when it organizes trade shows
for displaying its products to the retailers, then the retailers have to pay an advance to make the bookings.
The company stressed that normally in the industry, the retailers do not need to pay an advance for making
bookings. Therefore, as per the company, the practice of retailers making advance payment for bookings
shows its strong negotiating power over them.
Sandeep Jain: We have a tradeshow where we invite all the retails across India who comes and book with
us, they pay advance to us along with the booking, this you would not hear in any other trade segment they
pay advance also along with the booking then only we close the book
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On similar lines, in the case of exclusive brand outlets (EBO) and multi-brand outlets (MBO via
commission agents), the company starts production of garments for the season only after receiving the
orders from the retail outlets. Therefore, the production is only against pre-booking. In addition, the
company does not have any sales-return clauses with the MBOs; therefore, even if the garments remain
unsold with the MBOs, Monte Carlo Fashions Ltd is not liable to accept them as a return. Such a practice
shows the strong negotiating position of Monte Carlo Fashions Ltd over the retailing outlets.
Over 90% of our sales are through the outright sale basis. We manufacture on the basis of pre-booking of
orders for apparels. Therefore, the Company does not have any major inventory risk. With the MBOs, there
is no stock correction as well as no discount sharing
An investor also notices that Monte Carlo Fashions Ltd manufactures garments against pre-booking where
it factors in the prevailing prices of the raw material. As a result, the company protects itself from the year-
on-year changes in the raw material prices.
Sandeep Jain: See both the inventories like before we go to the booking we book the raw material and then
only we go for booking. So we are insulated as far as one season is concerned.
Moreover, in the case of exclusive brand outlets (EBO), Monte Carlo Fashions Ltd may shut down the
outlet whenever it wants by only taking back the unsold inventory. As per the company, it does not have to
give any other compensation to the franchise owner when it decides to close the outlet.
Hiren Dasani: Let us say when you close down a particular showroom do you have to take any write offs?
Sandeep Jain: We just call our inventory back so that is a kind of write back because those inventory
definitely goes at a lesser price which we use to sell normally otherwise there is no write back on company
as a whole.
Hiren Dasani: But do you have to compensate if let us say the store kind of closes down or something?
Sandeep Jain: No, we do not have any agreement clause like that. It is only that we need to take back all
the goods whatever we have supplied.
From the above disclosures, an investor would appreciate that Monte Carlo Fashions Ltd can close any
showroom/exclusive brand outlet if it is not satisfied with its performance by only taking back the unsold
inventory of garments.
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An investor would appreciate that setting up a showroom involves a lot of investment by the franchise
owner in the store interiors, lease/rental payments etc. In the case of EBOs of Monte Carlo Fashions Ltd,
the franchise owner has to prepare the showroom as per the standards and the design requirements of Monte
Carlo Fashions Ltd.
As per the disclosures in the red herring prospectus (RHP) of Monte Carlo Fashions Ltd dated November
21, 2014 (click here), the company had hired a design firm to give a consistent experience to the consumer
in all of its EBOs including company-owned as well as franchise-owned.
RHP, November 21, 2014, page 116:
we have entered into an agreement with an architect firm, Design Affairs Private Limited, to provide the
design for each of the ‘Monte Carlo Exclusive Brand Outlets’ including the ones owned and operated by
the franchisees. This ensures that all our ‘Monte Carlo Exclusive Brand Outlets’ have the standard store
design and the in-store experience.
Therefore, an investor would appreciate that owning and operating the showroom/exclusive brand outlet of
“Monte Carlo” would include significant investment by the franchise owner. However, as per the company,
it can close down the showroom without any compensation to the franchise owner. Such a situation
represents the strong negotiating power of Monte Carlo Fashions Ltd over the retailers.
Moreover, an investor finds another sign of strong negotiating power of Monte Carlo Fashions Ltd over its
retailers when she notices that the company charges interest on any delay in the payment by the retailers.
Sandeep Jain: …if the economy does not pick up there may be a delay of 15 to 20 days or maybe a maximum
about a month, because they have to pay interest also on the late payments, so they cannot delay more and
we do not allow whole of our MBOs to delay payment more than 30 to 35 days. And we charge interest on
that also
An investor gets to know that Monte Carlo Fashions Ltd engages commission agents to supply goods to
multi-brand outlets (MBOs). These commission agents are responsible for making payments to the
company for the goods ordered by the MBOs. In addition, if any MBO cancels an order after placing it,
then the commission agent has to bear the expenses and any loss incurred by Monte Carlo Fashions Ltd on
such cancellation.
RHP, November 21, 2014, page 117:
we had 21 commissioned agents who work as an interface between the MBOs and our Company. All our
commissioned agents are exclusive agents to our Company… Our commissioned agents are contractually
liable for timely payment to our Company for the products supplied to the MBOs through the commissioned
agents. In the event the dealers of the MBOs cancel the orders before or after the products have been
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dispatched by us to the MBOs, the commissioned agents are liable to pay all expenses incurred and any
other losses suffered by our Company due to such cancellation.
From the above discussion, an investor would appreciate that Monte Carlo Fashions Ltd has a strong
negotiating and pricing power over the supply network including commission agents, MBOs as well as
EBOs. Monte Carlo Fashions Ltd dictates terms as per its preferences whether it is related to pre-booking
of orders, advance payments for bookings, holding commission agents liable for payments, cancellations
and losses as well as no sales-return and no discount sharing with MBOs. It can shut down any exclusive
showroom (EBO) any time without any compensation to the franchise-owner by only taking back the unsold
goods.
In addition, every year, Monte Carlo Fashions Ltd increases the prices of the garments to pass on any
increase in its cost of raw materials like wool and cotton.
All these aspects of the business of Monte Carlo Fashions Ltd show that it has a very strong negotiating
and pricing power over its customers.
However, at the same time when an investor analyses the competitive landscape of the branded apparel
industry, then she notices that Monte Carlo Fashions Ltd does not have any superior competitive advantage
even if its main brand “Monte Carlo” is a well-established brand in the Indian market.
Let us see business situations, which indicate that Monte Carlo Fashions Ltd does not have any superior
competitive advantage or pricing power in the industry.
1.2) Monte Carlo Fashions Ltd does not have any superior pricing power in the industry:
While analysing the business of Monte Carlo Fashions Ltd, an investor comes across multiple instances
where she realizes that the company is completely at the mercy of competitors in the terms of prices at
which it can sell its garments to the customers. The company has clearly highlighted to the shareholders
that it has to follow the market. If the competitors start discounts early, then it has to start it too. If the
competitors start the discounting season with deep discounts, then it has to offer deep discounts as well.
In FY2018, when Monte Carlo Fashions Ltd witnessed a decline in its sales turnover, then it highlighted
that deep discounts offered by all the brands even before the actual discounting season started led to a fall
in the sales revenue as well as profit margins.
Sandeep Jain: The brands have started going for discount even before the actual discount season starts
and that is the big reason, which is actually hurting the margin as well as it is cutting the revenues also.
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Monte Carlo Fashions Ltd stressed that no brand; however strong, whether Indian or international can
survive without discounts.
Sandeep Jain: Sir I think in today’s scenario, we see all the leading brands not only Indian brands but the
international brands also, no brand can survive without discounts so when it is end of season discount sale
every brand be it a strong brand or a weak brand has to adjust to the market conditions.
In FY2019, Monte Carlo Fashions Ltd reported a sharp decline in the profit margins when its OPM declined
from 20% in FY2018 to 15% in FY2019, then the company mentioned that it had to offer deep discounts
because its competitors started giving large discounts right at the start of the discounting season. As a result,
its profit margins suffered.
Dinesh Gogna: normally the discounts are in January and February and starts at 20% and then it goes to
30%, then 40%, then 50%, but this year most of the brands have started from 20% immediately by January
20, 2019 they went to 40% and 50%, so we have to increase our discounts accordingly to get rid of the
stocks…so we never anticipated that and that has actually hurt our margins that is why ₹18 Crores extra
discount has been given in the fourth quarter.
Monte Carlo Fashions Ltd highlighted in the current scenario, no brand can survive without discounts. The
company highlighted that the intense competition and the resulting discounts are a major threat to its
business.
Heavy Discounts: All the leading brands i.e Indian and International are going for early discounts/
sales…In such a scenario to keep the walk-ins intact every brand has to offer discount and no brand can
survive without discounts. We fear that going forward also the discounting sales will continue in same
fashion or may rise going forward due to intense competition in this space.
Monte Carlo Fashions Ltd told investors that the competitive pressures in the terms of discounts is so much
that the company is finding it difficult to maintain its profit margins.
Sandeep Jain: The discount months are actually expanded. It used to be only one month at one point of
time, now it has gone to around two-and-a-half months in one particular season so the discount is
applicable in all the categories and all brands have started discounts so it is a challenge to maintain the
EBITDA
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An investor may believe that a company may not participate in the discounts and in turn hold on to the
inventory so that it may use it in the next season to protect its profitability. However, she should note that
in the case of apparel changing fashion trends lead to the current designs going out of favour very soon.
Therefore, the demand for the garments produced in the current season may not sustain for the next season.
As a result, companies intend to get rid of the current inventory within the current season even by giving
very high discounts.
The credit rating agency, ICRA highlighted this aspect of the business of apparel manufacturers in its rating
guidelines in November 2015 (click here), page 4:
Given the fast changing fashion trends, apparels can face fast obsolescence and witness a sharp decline in
their realizable value, if not sold within the marketing season they were manufactured for. Accordingly,
inventory management is most critical for the profitability of a branded apparel player.
From the above discussion, an investor would appreciate that the branded apparel business is highly
competitive where all the brands whether Indian or international are cutting each other on pricing, which
makes it very difficult for the brands to maintain profit margins.
In such a situation, an investor notices that even the main brand of the company “Monte Carlo”, which is a
well-known name, does not have any distinct competitive advantage over its competitors. When the
competitors reduce prices, then Monte Carlo Fashions Ltd cannot afford to hold on to its prices. It has to
match the discounts offered by the competitors even if it hurts its profitability.
Such kind of intense competition where industry players undercut prices and Monte Carlo Fashions Ltd has
to follow the path shows that the company does not have any pricing power.
Therefore, from the above discussion, an investor would appreciate that the pricing/negotiating power of
Monte Carlo Fashions Ltd over its consumers is dichotomous. It has a very strong negotiating power over
its supply chain network where it can dictate terms to the commission agents, brand outlets (EBOs and
MBOs) and increase prices of goods to pass on the increase in costs. On the other hand, it does not have
any distinct competitive advantage over its peer and has to follow them whenever other players start
discounts early or go for deep discounts.
Going ahead, an investor needs to keep these contrasting dynamics of the business of Monte Carlo Fashions
Ltd in her mind when she attempts to understand and project the business performance of the company in
the future.
Moreover, while analysing the business of Monte Carlo Fashions Ltd, an investor comes across other
aspects of its business, which are essential for her to understand.
2) Intense competition in the apparel industry:
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An investor would appreciate that the apparel industry has very high competition. This is because the
apparel industry is highly fragmented and is dominated by the unorganized sector. As per the company, in
India, the share of organized players is only about 19% as compared to about 80% market share in the
developed markets.
The Indian apparels market is highly fragmented, with organised players commanding only ~ 19% market
share, in stark contrast to the United States and European markets where organised players have more
than 80% market share.
Even in the case of winter-wear garments, in India, the share of the unorganized sector is much higher at
70% when compared to the share of the organized sector at 30%.
In India, the winter wear market is clearly segmented between branded and unbranded players. The ratio
is 70:30, with 70% players belonging to the unbranded sector.
The main reason for a very high share of the unorganized sector in the apparel industry is that it has very
low barriers to entry. As a result, the market has witnessed the presence of numerous players. Monte Carlo
Fashions Ltd highlighted the low barriers to entry in the apparel industry as one of the major threats to its
business of selling branded apparel.
Low entry barriers: The absence of significant entry barriers leads to an increase in the number of players,
especially the unorganised players. This can escalate the degree of competition, making market penetration
and sustaining of higher margins even tougher.
The company acknowledged to its shareholders that the cotton apparel business is very less capital
intensive.
Sandeep Jain: knitted cotton is basically very less capital intensive industry even if we would like to put up
facility for 10 lakhs T-shirts it has been our cost is more than 1.5 to 2 Crores
Therefore, an investor would appreciate that anyone with a moderate level of financial resources can enter
the apparels business making the industry one with low barriers to entry.
One of the effects of low entry barriers and the presence of many unbranded players is that Monte Carlo
Fashions Ltd and other branded players face very high competition to get a share of the limited market
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available to the branded apparel players. Cutthroat competition among branded players is one of the
challenges faced by Monte Carlo Fashions Ltd.
This has led to great deal of competition among the organised players to grab the largest share of the pie.
With an increase in the number of international brands entering India and many looking to enter soon, the
competition is expected to intensify further
The competition in the industry is so severe that at times, Monte Carlo Fashions Ltd had to shut down some
of its outlets, as they could not survive the competition.
Sandeep Jain: Actually, we are closing some of our smaller MBOs because they are not able to survive
because of competition
Because of intense competition among branded players and the presence of a large number of unbranded
players, Monte Carlo Fashions Ltd has to spend a lot of money on the advertisement of its products, which
at times has led to a decline in the profit margins of the company.
As per the credit rating agency, ICRA, one of the key reasons for the decline in the operating profit margin
(OPM) of the company in FY2019 to 15% from about 20% in FY2018 was the high marketing spending
done by the company to maintain its market share.
Credit rating report by ICRA, Sept. 2019, page 3:
The intense industry competition mandates high marketing spends to maintain market presence,
particularly when there is a demand slowdown. This was also witnessed in FY2019, wherein the operating
margin declined to 15.0% from 19.6% in FY2018 to maintain market share.
Monte Carlo Fashions Ltd has to continuously spend on marketing because it has competition from many
of the well-established large international apparel brands, which have a bigger financial strength and bigger
brand recognition.
Red herring prospectus, Nov. 2014, page 14:
Many of our competitors, specifically the international brands, have significant competitive advantages,
including longer operating histories, larger and broader customer bases, more established relationships
with a broader set of suppliers, greater brand recognition and greater financial, research and development,
marketing, distribution and other resources than we do.
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From the above discussion, an investor would be able to appreciate the very high level of competition in
the apparel industry. As a result, the branded players are willing to cut prices in the terms of higher discounts
to sell garments and as discussed above, Monte Carlo Fashions Ltd has to follow the same path.
In fact, when Monte Carlo Fashions Ltd decided to enter South and West India with the range of its cotton
garments, then it had to compete based on the pricing. A lower price was the main offering made by Monte
Carlo Fashions Ltd to the consumers.
Conference call, August 2016, page 10-11:
Deepan Shankar: Sir in these south and west markets so only the price being competitive advantage for us
in the cotton segment?
Sandeep Jain: I think the competition is definitely on the price front also because when somebody is
established either we have to offer something which is completely different so that the question of price
does not come up or we have to compete with the prices in the brand…So price becomes one of the important
factor
However, even after many years of struggling in the South India market, Monte Carlo Fashions Ltd could
not make a significant break. The company acknowledged that it is finding it tough to establish itself in the
South India market.
Sandeep Jain: …one thing we will admit that south was not that easy which we thought of in the earlier
year’s report, so we are definitely facing challenge as far as south India market is concerned
Sandeep Jain: I think we would admit that there have been difficulties in penetrating in the south and we
did not anticipate that the growth as far as south is concerned… So, I could take back my words particularly
as far as southern region is concerned and it is actually not doing well for us
From the above discussion, an investor would appreciate that the competition faced by Monte Carlo
Fashions Ltd is intense and it is not able to establish itself or take market share away from existing players
on the strength of its brand. It has to follow the discount levels offered by competitors to attract customers
to its stores and to get rid of the inventory in the end of season sales. In addition, in the South India market,
it could not penetrate despite offering its products at a lower price than what its competitors offer.
It indicates that Monte Carlo Fashions Ltd does not have a distinct competitive advantage over its
consumers when compared to its peers.
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3) Online sales/e-commerce is pushing Monte Carlo Fashions Ltd.’s margins

down:
While reading about the development of the business of Monte Carlo Fashions Ltd over the years, an
investor notices that at first, the company attempted to treat online sales channel/e-commerce as just an
additional sales channel with no special consideration. Monte Carlo Fashions Ltd attempted to keep its
prices/MRP and discounts for the online channel at the same level as its offline channel (retail stores, EBO,
MBO etc.).
Sandeep Jain: We started this online business, we maintained one policy that our prices at all the channels
will remain same, whether we sell at EBO or LSS or MBO, we have the same policy if we are selling an
MRP in online we are also selling MRP in offline and other channels also, and the discount is also same,
when we go for EOSS, end of year sales discount the price remains same in all the channels and the same
discount is being offered
However, soon the company realized that its strategy of keeping the prices and the discounts the same for
both online and offline channels is not giving the desired results. Therefore, the company started providing
higher discounts/lower prices on the online channel.
Devendra Pandey: And what would be the ballpark number, the difference between the average realization
through our own shops and through the online channel?
Sandeep Jain: It is almost 4% discount it will more in online channels as compared to offline channels.
In addition, the company realized that the online channel is changing consumers, expectations about
discounts. It realized that, nowadays, consumers expect discounts all the time and online channel/e-
commerce is forcing brands to give discounts during the peak of the summer/winter season instead of the
usual practice of offering discounts at the end of the season.
In 2018, the company intimated to its shareholders that the discount sales in the market started from May
1, 2018, when the summer season had not yet peaked.
Shailesh Kumar: To what extent this is true that the online sellers are forcing established brands to give
this kind of discounting and all these things?
Sandeep Jain: Yes, you rightly said it is one of the factor which is actually influencing the brand to go for
the discount sales because these customers are now getting habitual to discount sales as the discount sales
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starts very early, now even if the summer has not peaked but we have a discount sale which is beginning
from May 1, 2018 itself most of the brands have gone for discount sales.
From the above discussion, an investor would notice that initially Monte Carlo Fashions Ltd attempted to
treat online sales/e-commerce channels as just another channel with no special considerations. However,
soon, it realized that the effects of online sales channels on consumer behaviour have started to impact
offline sales also.
As a result, first, it started offering a higher discount/lower prices for online sales than offline channels.
Further, the company even decided to launch a separate clothing range especially for the online channel
where it could give higher discounts.
Rishabh Oswal: we have launched a new exclusive range for online partner, which is not available offline,
which gives them the freedom to use discounting on leverage terms as they could be with the brand Monte
Carlo.
In the past, the company had acknowledged to the shareholders that the profit margins in the online sales
channel are lower than profit margins on offline sales.
Tanmai Sharma: Sir margins there would be lower in the online because discounts are quite common
there?
Sandeep Jain: Yes, margins are a little lower as compared to other sales in online sales.
Moreover, in the online channel, the company has to bear the full impact of discounts on its own instead of
offline sales like MBO (no discount sharing) and EBO (5%-17.5% discount sharing). In addition, the
company’s sales to offline channels are almost without recourse. In the case of MBOs, the company does
not accept any returns whereas for EBOs it accepts about 5% returns. However, the sales to the online
channel partners are almost with full-recourse (consignment sales i.e. sales or return, SOR) indicating that
the entire unsold inventory can be handed over back to the company.
With the MBOs, there is no stock correction as well as no discount sharing, whereas, with EBOs, there is
5% stock correction and discount sharing ranging from 5% to 17.5%.
Sandeep Jain: there are national chain stores, yes, there we fully participate in the discount whenever they
go for discounts and e-commerce there we fully participate,
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Sandeep Jain: our business has progressed so the other channels like SIS and large format retail and the
online sales channels and more of the EBO, which are doing consignment sales have added.
Therefore, an investor would appreciate that the emergence of online sales has forced Monte Carlo Fashions
Ltd to first offer a higher discount on its garments and thereafter, launch clothes especially for the online
channel that will be sold at a lower price. These steps lead to a decline in the profit margins of the company.
As the contribution of the online sales increases in the revenue of Monte Carlo Fashions Ltd, it is expected
that the profit margins of the company may come down. In addition, as highlighted by the company, online
sales are changing consumers’ expectations and nowadays, discounts start even at the peak of the season
even in the offline channels. Therefore, going ahead, it may be a challenge for the company to earn a higher
profit margin.
An investor needs to keep these aspects in her mind when she attempts to project the financial performance
of the company and its profit margins in the future.
In recent years, the profit margins of Monte Carlo Fashions Ltd have seen a sharp increase with the
operating profit margin (OPM) increasing from 15% in FY2019 to 20% in the 12-months ended September
2021 (i.e. Oct. 2020-Sept. 2021). The key reason for the increase in the margin is the reduction in the
expenses associated with the coronavirus related lockdowns e.g. advertising, business promotion, salary
expenses etc.
Conference call, November 2020, pages 14-15:
Sandeep Jain: See the reason being is cut down in the expenditures, so if you see in the presentation we
have cut down the advertising, we have cut down on the salary part, we have cut down on other expenses
as well, so all these things I think has helped us to improve the gross margins.
Sandeep Jain: we used to hold trade shows for our retail bookings twice in a year where we used to spend
almost 4.5 Crores to 5 Crores expense, but that has been cut down and we are doing the virtual booking
Sandeep Jain: we used to spend around Rs 5 to 6 Crores on theaters in full financial year, but no movies
have been released and there have not been any advertising as far as cinemas are concerned, so that has
also saved the cost.
As per the FY2021 annual report, page 120, the advertisement and business promotions expenses have
declined from about ₹30 cr in FY2020 to about ₹11 cr in FY2021.
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Therefore, an investor may note that the increase in the profit margins in recent years seems due to a
decrease in expenses like advertising, business promotions, salary etc. She should keep this aspect in her
mind when she attempts to project the profit margins of Monte Carlo Fashions Ltd in the future.
4) Over-reliance of Monte Carlo Fashions Ltd on Q3 (October to December) for

its business:
While analysing the business of Monte Carlo Fashions Ltd, an investor notices that the October-December
quarter (Q3) is the only period when it makes the profit for the entire year. In addition, the investor would
also notice that as a routine, Monte Carlo Fashions Ltd makes losses in the Q4 (January-March) and Q1
(April-June) months.
The following table showing the financial performance of the last 12 quarters, from December 2018 to
September 2021 shows that in each of the years, Monte Carlo Fashions Ltd reported losses in the January-
March quarter and April-June quarters.
Monte Carlo as a brand is well known for its winter garments. At one point in time, it used to sell only
woollen garments; however, over time, its share has come down and in FY2021, woollens contributed only
27.7% of its turnover (Investors presentation, November 2021, page 7). An investor may think that the
increasing share of cotton garments in its sales, which is 51.4% in FY2021 (Investors presentation,
November 2021, page 7) would reduce the dependence of the company on winters. However, she notices
that the majority of cotton garments sold by Monte Carlo Fashions Ltd are also winter-wear.
As per the company, in FY2020, 70% of cotton wear sold by the company were winter-wear like
sweatshirts, jackets, tracksuits etc.
Sandeep Jain: When we talk about the cotton segment, it is not only the summer segment, it is basically
around 70% of the winter segment. When we talk about sweatshirts, when we talk about jackets, it comes
under the cotton category. When we talk about the tracksuits in winters, so basically the cotton category
comprises of around 70% of the winter category and 30% of summer categories.
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Therefore, an investor would appreciate that despite hard efforts by the company, Monte Carlo is perceived
as a winter-wear brand and the company is not able to break this perception. Monte Carlo Fashions Ltd
highlighted this challenge in its red herring prospectus.
RHP, November 2014, page 12:
we may face risks in relation to delayed acceptance of our products due to limited brand recognition, as
well as the perception that we are a cold-weather apparel brand.
Therefore, an investor would note that despite the best efforts of the management, Monte Carlo Fashions
Ltd is not able to reduce its dependence on the December quarter for its sales.
Such a dependence of the business on a limited period during the year exposes Monte Carlo Fashions Ltd
to a huge risk. An investor would appreciate that if due to any reason, the business faces disturbance or
headwinds during the December quarter, then the whole year is washed out for the company.
The company has faced such tough times in the past.
An investor would remember that on November 8, 2016, the Indian govt. had announced demonetization
of high denomination currency notes. As a result, the availability of cash became a huge challenge, which
hurt consumption. Unfortunately, this period was Q3 (October-December) quarter, which is the most
important for Monte Carlo Fashions Ltd.
No wonder that during FY2017, Monte Carlo Fashions Ltd witnessed a sharp decline in sales from ₹618 cr
in FY2016 to ₹577 cr in FY2017 and the net profit after tax (PAT) of the company declined by almost 25%
Sandeep Jain: but after 9th because there was definitely a cash crunch in the market and the smaller
retailers who sell these categories do not have the credit card machines installed in their shops. Even a
normal request when they gave it took almost one month for the bank to install the credit card machines on
the shops. So, that was the reason why we were badly affected in November and almost middle of December
before the sales started picking up.
Therefore, an investor would appreciate that due to the concentration of sales in the December quarter, the
impact of any adverse development during these 3 months (October-December) is usually very significant
for Monte Carlo Fashions Ltd.
Even if an investor assumes that events like demonetization are not very frequent, still, an investor has to
understand that over-reliance of Monte Carlo Fashions Ltd on winter season for its sales has affected its
business every-time India had a weak winter season.
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While analysing the business of Monte Carlo Fashions Ltd, an investor notices that whenever winter is
weak during any year, then its adverse impact on the business is not limited to this year. In fact, it affects
the next years’ sales for the company as well. In the current year, the sales are low because the winter is
weak and people do not buy many winter clothes. In the next year, the retailers do not place many orders
for winter wear because they have unsold inventory from the previous year.
Monte Carlo Fashions Ltd highlighted this risk to the investors in its red herring prospectus before its IPO.
weather conditions also have a material impact of our sales as a longer winter ensures higher sales while
a mild and short winter adversely affects our results of operations. A mild and short winter may also have
a material adverse effect on our next season sales as most of the multi brand outlets (“MBOs”) and ‘Monte
Carlo Exclusive Brand Outlets’ may have unsold stocks from the previous season and might place smaller
orders compared to the last season.
In the last 10-years, Monte Carlo Fashions Ltd was affected multiple times by its over-dependence on the
winter season for sales. Every time, the weak winter in one year affected its sales for the next year as well.
For example, in FY2012, India had a short winter and it affected the sales of Monte Carlo Fashions Ltd for
FY2013 as well.
our sales were negatively impacted by the short winter in fiscal 2012, which led to a decrease in
consumption of woollen yarn, woven fabric and knitted cloth and our cost of materials consumed decreased
by ₹ 91.59 million, or 8.23%, from ₹ 1,112.97 million in fiscal 2012 to ₹ 1,021.38 million in fiscal 2013,
which was caused by decline in the demand of our apparel products.
The company faced a similar situation again in FY2016 and FY2017. In FY2016, the winter season was
weak, which resulted in lower sales; however, it affected the sales of FY2017 as well because the retailers
had unsold inventory from FY2016. The company intimated it to the shareholders in the FY2017 annual
report.
This Financial Year, the Company has a negative growth of 6.02%…as you all are aware that December,
2015 was a year of very low winter and resulting thereof the stocks remain unsold with the franchisees and
as well as Multi Brand Outlets (MBO). In the normal trend of our business this effects our sales for the
immediately succeeding year.
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Sandeep Jain: As you all know that the last year winter was very bad for us and the impact of bad winter
is always felt in the next year as the stocks are piled up in the retail channel,
Therefore, an investor would note that over-reliance on a very short period of the year for its overall
business performance puts Monte Carlo Fashions Ltd in a very risky position. Any disturbance to its
business during the December quarter can wipe out the whole year for the company.
If sales of the company are impacted in the December quarter, then it cannot hope to make up for the same
in the next quarter because, in March quarter, the end of season sales start, which reduce the selling prices
significantly. In addition, in Q4 (January-March) every year, the company gets the return of unsold
inventory, which it has to sell in its factory outlets at a loss.
Sandeep Jain: And these returns basically we sell it on our factory outlets. We have around 22 factory
outlets all across India where we sell these returns….Actually it is not sale which have profit. Profit comes
from the 90% of the sale which goes in fresh. So this is a sale, which actually we have to incur some loss
to get rid of the stock.
Therefore, an investor would appreciate that in Q4, every year; Monte Carlo Fashions Ltd suffers a loss due
to deep discounts on the garments in the end of season sale and selling the returned-unsold garments in its
factory outlet for a loss.
Therefore, any investor who wishes to project the financial performance of Monte Carlo Fashions Ltd in
the future should always keep in her mind its over-dependence on the short period of time (October-
December) every year for its full years’ financial performance. She should always be aware of the risk that
the business of Monte Carlo Fashions Ltd carries due to a short window to generate profits.
She should be aware that in addition to natural factors like a short/weak winter, any other disturbance like
demonetization, if it happens in the December quarter, then it could severely affect the business
performance of Monte Carlo Fashions Ltd for the whole year.
5) Monte Carlo Fashions Ltd has a heavy reliance on outsourcing for garment
manufacturing:
While analysing the company, an investor notices that Monte Carlo Fashions Ltd relies heavily on
outsourcing to get its garments. As per the company, it manufactures woollens (about 27% of sales in
FY2021) and about 15% of the cotton garments, (total cotton garments constitute about 51% of sales in
FY2021). As a result, Monte Carlo Fashions Ltd outsources the manufacturing of about 85% of cotton
garments and entire home furnishing goods to third parties.
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Therefore, an investor would appreciate that Monte Carlo Fashions Ltd acts more like a marketing company
instead of a majorly manufacturing company.
Conference call, May 2021, pages 8-9:
Sandeep Jain: …it is only woollen side, which is being manufactured at our place and cotton side it is just
15% of our total production and we are basically more of a marketing company rather than production-
based company, so most of the products are outsourced in our case.
Until now, the home furnishing business of Monte Carlo Fashions Ltd is a complete trading business i.e. it
purchases the blankets, quilts and bedsheets etc. in a readymade condition and sells it under the Monte
Carlo brand name.
Anand Krishnan: Sir, with respect to your home furnishing business is that actually a trading business or
is it also being manufactured by you?
Sandeep Jain: Sir, it is a trading business only.
An investor would appreciate that when a company becomes predominantly a marketing company and
relies on third parties for manufacturing, then there are chances that it may face supply disruptions in
meeting demand from retailers due to excessive reliance on outsiders.
Monte Carlo Fashions Ltd had also realized the same and it gave certainty in the supply dynamics as one
of the reasons when it established its manufacturing plant in the past.
Sandeep Jain: There is the reason for that, one is that because when you’re 100% dependent on the outside
suppliers in some of the vendor sales it makes difficult to supply on time…the reason for putting up in-
house production is to match the timelines given by our retailers.
In addition, Monte Carlo Fashions Ltd intimated to investors in its RHP that the third parties manufacturing
garments for it are not bound exclusively to supply to it. In addition, there are no long-term supply contracts
with these third parties. As a result, there is a risk that these third parties may start supplying the same or
similar goods to its competitors.
Red herring prospectus (RHP), November 2014, page 210:
We generally do not enter into agreements with our third party manufacturers from whom we buy finished
products for sale under our ‘Monte Carlo’ brand and typically transact business on an order-by-order
basis

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Since such third party manufacturers are not contractually bound to deal with us exclusively, we may face
the risk of our competitors offering better terms to such third party manufacturers, which may cause them
to cater to our competitors alongside, or even instead of us.
Therefore, an investor would appreciate that reliance on outsourcing for a major portion of its goods exposes
the company to risks of supply chain disruptions and its designs leaking to competitors.
In FY2021, the company intimated to the shareholders that its sales of jackets declined during the year as
it could not get the required cotton fabric from overseas suppliers. On the other hand, the production of
woollens did not face challenges, as its production is in-house.
Sandeep Jain: …the major drop is in jackets the reason being is that we are not able to get some fabrics
from China, Korea and Italy as there have been some restrictions… As woollen sweaters are in-house so
we did not face many difficulties in producing the woollen sweaters
In the recently announced capital expenditure, Monte Carlo Fashions Ltd has plans to manufacture rugs
and the mink-blankets’ fabric in the proposed plant, which will offer a good control on the supply of home
furnishing business, especially the mink-blankets.
Conference call, November 2021, pages 3-5:
Sandeep Jain: The proposed subsidiary company will manufacture rugs 13 million square meter per annum
and mink blanket fabric 20 tons per day
Dinesh Gogna: business of Monte Carlo of this blanket will not be affected at all rather it will help because
raw material will be procured in-house only and we will be controlling even the fabric
Sandeep Jain: we import all our blankets from China, so we pay lot of freights and also the duties, which
is increasing the cost, so one is that it will reduce the cost
An investor would appreciate that the proposed manufacturing will reduce outsourcing requirements for
the mink-blankets for Monte Carlo Fashions Ltd and the existing outsourcing requirements for the majority
of cotton garments and other products like quilts, bed sheets etc. will continue in future.
In addition, as per the management, the proposed manufacturing plant would lead to incremental revenue
of about ₹600 cr in the next 5 years.
Conference call, November 2021, pages 4, 9:
Sandeep Jain: … total (investment) will be around Rs.355 Crores overall and that would have the turnover
of around Rs.600 Crores in next five years
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Majorly it will come from rugs and you can assume around 60% will come from the rugs and balance will
come from the mink blanket fabric
As per the company, the revenue from the new plant will commence from FY2025.
Anil Jain: Congratulations on the good set of numbers. I missed the part when the revenue from the
subsidiary will start generating?
Sandeep Jain: 2024 – 2025
Therefore, an investor would appreciate that if she factors in incremental revenue of about ₹600 cr from
FY2025, which would be from in-house manufacturing activities in the newly formed wholly-owned
subsidiary, then on an overall basis, the company would have about 75% of the total revenue from in-house
manufacturing. This includes assumptions of complete in-house manufacturing of woollen-wear (27% of
FY2021 revenue), home furnishing (14% of FY2021 revenue), 15% of cotton wear (51% of FY2021
revenue) and ₹600 cr of revenue from in-house manufacturing of the proposed plant.
As per the above assumptions, the new plant would reduce the share of outsourcing significantly in the
overall revenue of the company and therefore, may reduce the risks associated with outsourcing discussed
above. Nevertheless, an investor should keep a close watch on the developments related to the progress of
the proposed manufacturing plant.
While analysing the tax payout ratio of Monte Carlo Fashions Ltd., an investor notices that for most of the
years, the tax payout ratio of the company has been in line with the standard corporate tax rate prevalent in
India.
In recent years, the tax payout ratio has declined to 25% from the previous years’ level of above 30%, which
seems to be in line with the recent changes in the corporate tax rates implemented by India.
Operating Efficiency Analysis of Monte Carlo Fashions Ltd:
a) Net fixed asset turnover (NFAT) of Monte Carlo Fashions Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Monte Carlo Fashions Ltd in the past
years (FY2013-21), then she notices that the NFAT of the company has stayed in the range of 3.6-5.0. (An
investor may note that while calculating the NFAT, we have removed the impact of the right of use assets
created by the company under lease accounting.)
The NFAT of the company had declined during FY2013-FY2015 when the NFAT decreased from 5.1 in
FY2013 to 3.3 in FY2015.
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An investor would note that during FY2014-15, the company had completed a manufacturing plant to
produce cotton t-shirts and thermals.
Sandeep Jain: In April last year we put in a facility for manufacturing cotton T-shirts and thermals.
An investor would appreciate that whenever a company makes a manufacturing plant, then it takes some
time for the company to increase its utilization levels to the optimal level. As a result, during the initial
phase, the investment done by the company in the plant does not produce commensurate revenues, which
leads to a decline in the net fixed asset turnover (NFAT) of the company. Thereafter, as the capacity
utilization of the plant increases, then the NFAT of the company increases.
In the case of Monte Carlo Fashions Ltd as well, the NFAT of the company increased from 3.3 in FY2015
to 5.1 in FY2020.
Moreover, from the above discussion on the business of Monte Carlo Fashions Ltd, an investor would
remember that the company relies a lot on outsourcing for getting cotton garments, and home furnishing
goods. Therefore, as the share of cotton garments and home furnishing goods has increased in the overall
revenue of Monte Carlo Fashions Ltd, the NFAT of the company has increased.
As per the recent announcements by Monte Carlo Fashions Ltd, it is going to invest about ₹355 cr in a new
manufacturing plant to make rugs and mink-blanket fabric. This is a large investment when compared to
the existing fixed asset base of the company.
Sandeep Jain: The proposed subsidiary company will manufacture rugs (carpets) 13 million square meter
per annum and mink blanket fabric 20 tons per day. The total investment is Rs.355 Crores over a period of
five years
As per the company, the new plant is going to generate a sale of about ₹600 cr from FY2025 onwards,
which amounts to an NFAT of about 1.7 (= 600/355). Therefore, going ahead, when the new plant becomes
functional, then Monte Carlo Fashions Ltd may witness a decline in the NFAT.
Going ahead, an investor should keep a close watch on the progress of the newly announced project and
the capacity utilization levels of Monte Carlo Fashions Ltd so that she can assess whether the company is
utilizing its assets efficiently or not.
b) Inventory turnover ratio of Monte Carlo Fashions Ltd:
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While analysing the efficiency of inventory utilization by Monte Carlo Fashions Ltd, an investor notices
that over the last 10 years (FY2013-FY2021), the inventory turnover ratio (ITR) of the company has stayed
in the range of 3.0 to 3.5.
An investor would appreciate that an inventory turnover of 3.0 indicates that about 4-months’ worth of sales
of Monte Carlo Fashions Ltd is tied up in the inventory for the company. This is a large amount of inventory
that Monte Carlo Fashions Ltd carries on its books.
The credit rating agency, ICRA, explained the reasons for the large inventory requirement by apparel
manufacturers, in its rating guidelines for the sector. The key reasons are multiple designs, colours etc.; the
need to keep stocks in warehouses and sales returns.
The apparel industry is working capital intensive, primarily on account of the high inventory levels…For
a branded apparel player, the inventory is due to the requirement to stock apparels for multiple designs,
colours and sizes in the stores which typically averages ~3~4 months of store sales, stock apparels in
warehouses to ensure good fill rates in the stores and inventory on account of season leftovers.
Nevertheless, over the years, Monte Carlo Fashions Ltd has kept its inventory turnover ratio within a tight
range indicating that it has maintained its inventory utilization efficiency. The company has highlighted to
its investors that it has kept inventory risks under control by ensuring that most of the garments are produced
only after getting bookings from the retailers and selling them on an outright basis to the retailers without
any large amount of returns of the unsold inventory.
A majority of our revenues are contributed by these MBOs and Franchisee EBOs, where the merchandise
is primarily sold on a pre-ordered and outright basis. This has insulated us from major inventory risks and
keeps us adequately protected from the routine hazards faced by the branded apparel business.
Large-format stores (LFS) or national chain stores (NCS), follow the model of consignment sales i.e. sale
or return where the stores send back all the unsold garments to the manufacturer. This creates a large
inventory risk for the apparel manufacturers like Monte Carlo Fashions Ltd, which may be stuck with a
large amount of returned inventory. To reduce this risk, Monte Carlo Fashions Ltd seems to have decided
to go slow on LFS and NCS stores even though these seem to be growing at a very fast pace.
Sandeep Jain: I think as compared to last year, last year in this LFS business, Large Formal Stores will
be growing by 20% to 25%, but we do not have aggressive plan of 50% to 60% growth, the point you
mentioned very rightly is the inventory risk. So we are cautiously moving ahead… So we do not want to put
ourselves in a problem by supplying to each and every outlet wherever we do not have expertise and then
having the return, which are beyond our limits.
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As per the company, it has processes to deal with the unsold inventory received from the outlets. Seasonal
designs are sold at a deep discount in the factory outlets whereas classic designs, which are sold every year,
it dry-cleans and repackages them for sale in the next season.
After end of season sales, unsold items in the ‘Monte Carlo Exclusive Brand Outlets’ are cleared through
liquidation channels such as discount stores or factory outlets. However, some of the unsold products,
specifically the basic design products, are returned to our manufacturing facility for dry cleaning and re-
packaging for the next season.
The company sells the unsold inventory in the factory outlets at a discount of 40% to 50%.
Sandeep Jain: there are some returns from our exclusive stores and some LSS, but those pieces are getting
sold in our factory outlets where we give around 40%, 50% discount
Those items, which are not sold in the discount stores/factory outlets are sold by the company to buyers in
the areas, which do not affect its regular markets.
Giriraj Daga: No, but the things, which has not been sold also in the factory outlet, then what?
Sandeep Jain: So they are a very small portion of like, I would say that 0.5%-0.6% that we sell it to some
of the buyers, which are based at in certain parts of India, which is not affecting our market.
Therefore, an investor would notice that Monte Carlo Fashions Ltd does not write off any inventory. It
either repackages the basic designs for sale in the next season or sells seasonal designs in the discount
stores/factory outlets or to the buyers in areas outside its normal markets.
An investor would appreciate that due to these processes, Monte Carlo Fashions Ltd has been able to
maintain its efficiency of inventory utilization.
In FY2020, the company witnessed an increase in the inventory because the retailers did not take shipments
due to coronavirus related lockdown in March 2020.
Conference call, June 2020, pages 4-5:
Sandeep Jain: After March 15, 2020, retailers did not take any deliveries and that happened for south
also… After the lockdown, we are stuck with more than Rs 32 Crores of inventory, which is lying in our
godown, which was to be dispatched to various parts of India.
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Going ahead, an investor should monitor the inventory turnover ratio of Monte Carlo Fashions Ltd so that
she can assess whether the company is utilizing its inventory efficiently or not.
c) Analysis of receivables days of Monte Carlo Fashions Ltd:

While analysing the receivables days of Monte Carlo Fashions Ltd, an investor would notice that the
receivables days of the company have continuously increased from 61 days in FY2014 to 141 days in
FY2021. An investor would appreciate that this is a very significant increase in the receivables days for the
company.
While analysing the business of the company, an investor gets to know that the main reason for such a
significant increase in the receivables is the changing nature of the sale channel composition of Monte Carlo
Fashions Ltd. As per the company, in the past, the business was primarily driven by MBOs who used to
make immediate payment for the garments supplied to them. However, nowadays, the business is primarily
focused on EBOs, and an additional contribution from shop-in-shop (SIS), large format stores (LFS),
national chain stores (NCS) and online channels that make payments only when the goods supplied to them
are sold to the final consumer.
Sandeep Jain: See the reason for increasing the receivable was that the model is completely changing from
the last five year to this year. Mostly we were doing with MBOs at that point of time, so MBOs receive the
goods and make the payment immediately, but as our business has progressed so the other channels like
SIS and large format retail and the online sales channels and more of the EBO, which are doing
consignment sales have added. so when all these have been added, they only give the payments when they
actually sell the products, so that is why the receivable it is showing more as compared to last five years
In addition, one of the reasons for a sharp increase in receivables in FY2020 was the coronavirus related
lockdown, when the retailers faced poor sales and financial difficulties due to the shutdown of the business.
As per the company, it gave an additional credit of 2-3 months to the retailers due to Covid related issues.
Sandeep Jain: Fortunately in our business at this present moment we do not have any default arising out
of this COVID cases, but, yes there are some delayed payments for which we have given some extension
for two to three months
Thereafter, in FY2021, the company focused on the recovery of receivables and as a result, its receivables
declined from ₹252 cr in FY2020 to ₹230 cr in FY2021.
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Sandeep Jain: See, the payment positions have actually improved as compared to last year, so we have put
a lot of focus on the recovery of payment rather than promoting the sales
After a few months, in May 2021, when the analysts asked the promoters about the recoverability of money
as the receivables days were continuously on the rise, then the promoters said that they are fully confident
about the recovery of the receivables.
Nitin Khandkar: So, you are saying that you are confident that the receivables are fully collectable, right?
Sandeep Jain: 100% confident, no doubt about that
However, when the annual report for FY2021 came out later, then investors got to know that the company
has written off an amount of ₹2.71 cr. (FY2021 annual report, page 120).
In the past, the company intimated to its shareholders that its business model is free from credit risk and it
never had any default on its receivables.
Sandeep Jain: I would like to highlight that till date we have experienced almost zero bad debt in our
business, which stands testimony to our strong business model based on a zero-credit risk policy for the
company.
However, when an investor analyses the ageing of receivables provided by the company in its annual
reports, then she notices that routinely Monte Carlo Fashions Ltd has more than 10% of its receivables due
for more than when they became due for payment. For example, in each of FY2017, FY2018 and FY2019,
Monte Carlo Fashions Ltd had more than 10% of its receivables outstanding for more than 6-months from
the due date.
At times, the company even had receivables, which were due for more than one year from the payment due
date. In FY2018, Monte Carlo Fashions Ltd had about 7% of receivables due for more than one year from
the payment due date.
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Therefore, it looks like the company had a practice of not writing off its receivables and keeping them on
its books and providing for them. It is evident from the information that in the last few years the company
continuously had receivables days over 100 days whereas according to the company, it offers a credit period
of about 60-75 days to different retailers.
Sandeep Jain: There is no difference in credit period for cotton or woollen it is 75 days for MBOs and for
EBOs it is 60 days and for national channel store it is consignment so when they sell the good, they give
the payment in 15 days.
Therefore, it seems that the company has continuously witnessed a delay in payments from its retail outlets.
However, it has been only from FY2020 onwards that Monte Carlo Fashions Ltd has started providing for
long overdue receivables.
Excluding provision for expected credit loss amounting to ₹72.63 lakhs (as at 31 March 2020: ₹51.85
lakhs).
In the RHP of the company, in November 2014, Monte Carlo Fashions Ltd had disclosed that it had shut
down some of the retail outlets when they did not pay the money due to the company.
In the past, for example, certain franchisees did not pay sales proceeds due to us, resulting in the
termination of our arrangements with such franchisees and to the closure of the exclusive brand outlets
that they operated.
Going ahead, an investor should carefully monitor the receivables position of the company and analyse the
ageing of the receivables provided by it in the annual report so that she can ascertain whether the company
is able to collect its receivables on time. This is because, as per the company, whenever its customers delay
payments to it, then it has a practice of delaying payments to its suppliers.
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Sandeep Jain: …increased in debtors, because of slow recovery from our MBOs. So, that is why the
working capital has increased, but at the same time it is little bit compensated by the increasing creditors
also. So, what we did is that we used to make payments in 60 to 65 days, which we have increased to 100
days to our creditors, if you see that the creditors which were 72.27 has gone to 91.55 so 70% to 75% of
increase has been compensated by the increase of creditors also and we will keep the same process in
coming quarters also
An investor would appreciate that delaying payment to the supplier has the potential of creating financial
difficulties for them, which in turn can push them to competitors. An investor would remember from the
earlier discussion that the third parties from whom Monte Carlo Fashions Ltd sources its garments etc. are
not contractually bound to supply exclusively to the company and at such times, competitors can benefit by
offering better terms to the third-party suppliers.
We generally do not enter into agreements with our third party manufacturers from whom we buy finished
products for sale under our ‘Monte Carlo’ brand and typically transact business on an order-by-order
basis
Since such third party manufacturers are not contractually bound to deal with us exclusively, we may face
the risk of our competitors offering better terms to such third party manufacturers, which may cause them
to cater to our competitors alongside, or even instead of us.
From the above discussion, an investor would remember that the receivables position of the company has
started deteriorating in recent years, as the contribution from EBOs, LFS, online sales increased. However,
during her analysis, an investor gets to know that the company intends to focus more on EBOs in the future.
Sandeep Jain: We are focusing definitely on the EBOs because there has been some issue with the MBO
channels…so I think to grow in some of the regions, we need to open more EBOs so that we can have the
potential, which is available in that particular area
Therefore, an investor must keep a close watch on the receivables position of the company.
From the above discussion, an investor would appreciate that the business of Monte Carlo Fashions Ltd is
a working-capital intensive business where it has to keep a lot of inventory of different designs, sizes,
colours, and stock its warehouses to supply to retailers and take returns of unsold inventory. In addition,
the changing composition of the sales channel has led to continuously increasing receivables days for the
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company. Therefore, an investor would appreciate that the company needs to continuously monitor its
working capital position so that it stays under control.
operations (cCFO) of Monte Carlo Fashions Ltd for FY2012-21, then she notices that over the last 10-years
(FY2012-FY2021), the company has almost converted its profit into cash flow from operations.
Over FY2012-21, Monte Carlo Fashions Ltd reported a total net profit after tax (cPAT) of ₹572 cr. During
the same period, it reported cumulative cash flow from operations (cCFO) of ₹566 cr.
The Margin of Safety in the Business of Monte Carlo Fashions Ltd:

target growth.
Where,

While analysing the SSGR of Monte Carlo Fashions Ltd, an investor would notice that over the years, the
company had an SSGR of 12%-18%. Over the same period, the company has grown its sales at a CAGR
of about 6%.
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As the company has grown its sales within its SSGR; therefore, despite growing its sales from ₹364 cr in
FY2012 to ₹622 cr in FY2021, the company has been able to keep its debt levels under check and without
raising money from equity.
The initial public offer (IPO) done by the company in FY2015 was an offer for sale where the existing
shareholders had sold their shares to the public. There was no fresh issuance of shares in the IPO, which
might have given some money to the company.
As this Offer is an offer for sale of Equity Shares by the Selling Shareholders, the proceeds from this Offer
will be remitted to the Selling Shareholders and our Company will not benefit from such proceeds.
In FY2021, the company is net-debt free as it has reported a debt of ₹32 cr (excluding the lease liabilities
as per IndAS) whereas it has cash & investments of ₹218 cr.
An investor arrives at a similar conclusion when she analyses the free cash flow (FCF) position of Monte
Carlo Fashions Ltd.
b) Free Cash Flow (FCF) Analysis of Monte Carlo Fashions Ltd:

While looking at the cash flow performance of Monte Carlo Fashions Ltd, an investor notices that during
Therefore, during this period (FY2012-2021), Monte Carlo Fashions Ltd had a free cash flow (FCF) of
₹282 cr (=566 – 284).
of ₹112 cr. As a result, the company had a total free cash flow of ₹324 cr (= 282 + 154 – 112). Please note
While looking at the overall cash-flow position of Monte Carlo Fashions Ltd over the last 10 years
(FY2012-2021), an investor notices that the company has used the FCF in the following manner:
 Dividends: ₹133 cr: the company has paid dividends of about ₹133 cr (excluding dividend
distribution tax, DDT) to its shareholders from its free cash flow. Over and above ₹133 cr, the
company would have paid a DDT of about 20% i.e. about ₹25 cr.
 Buyback: ₹55 cr: in FY2019, the company has bought back 1,000,000 equity shares at ₹550/- per
share. (FY2019 annual report, page 26).
 The rest of the money is available with the company in the form of an increase in cash &
investments.
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Going ahead, an investor should keep a close watch on the free cash flow generation by Monte Carlo
Fashions Ltd to understand whether the company continues to generate surplus cash from its operations.
Additional aspects of Monte Carlo Fashions Ltd:

On analysing Monte Carlo Fashions Ltd and after reading annual reports, DRHP, its credit rating reports
and other public documents, an investor comes across certain other aspects of the company, which are
important for any investor to know while making an investment decision.
1) Management Succession of Monte Carlo Fashions Ltd:

Monte Carlo Fashions Ltd, a part of the Nahar group, is promoted by the Oswal family. Currently, the
following members of the Oswal family are present on the board of directors:
 Mr Jawahar Lal Oswal (aged 78 years) is the Chairman & Managing Director of the company.
 Ms Ruchika Oswal and Ms Monica Oswal (both aged 49 years), daughters of Mr Jawahar Lal
Oswal as Executive Directors.
 Mr Sandeep Jain (aged 50 years), spouse of Ms Ruchika Oswal and son in law of Ms Jawahar Lal
Oswal as Executive Director.
 Mr Rishabh Oswal (aged 29 years), grandson of Mr Jawahar Lal Oswal and nephew of Ms Ruchika
Oswal and Ms Monica Oswal as Executive Director.
Monte Carlo Fashions Ltd has explained the relationship of the directors of the Oswal family on multiple
occasions in its annual reports.
Sh. Sandeep Jain is spouse of Smt. Ruchika Oswal and Smt. Ruchika Oswal and Smt. Monica Oswal are
daughters of Sh. Jawahar Lal Oswal, Chairman and Managing Director.
Sh. Rishabh Oswal is the Grandson of Sh. Jawahar Lal Oswal and nephew of Smt. Ruchika Oswal and Smt.
Monica Oswal.
Therefore, an investor would note that currently, three generations of the Oswal family are present on the
board of directors in executive positions.
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to understand whether any ownership issues arise between them. An investor may contact the company
directly for any clarifications in this regard.
2) Remuneration paid by Monte Carlo Fashions Ltd to Ms Monica Oswal and Ms

Ruchika Oswal:
While analysing the management structure of Monte Carlo Fashions Ltd, an investor notices that two
daughters of Mr Jawahar Lal Oswal, Ms Monica Oswal and Ms Ruchika Oswal are present on the board of
directors and the company is paying a very good remuneration to them.
The following table shows the remuneration paid by the company to Ms Monica Oswal and Ms Ruchika
Oswal over the last 10-years.
From the above table, an investor would notice that the company is currently paying a remuneration of
about ₹1 cr each to both Ms Monica Oswal and Ms Ruchika Oswal. Over the last 10-years (FY2012-
FY2021), Monte Carlo Fashions Ltd has paid a total remuneration of over ₹15 cr to Ms Monica Oswal and
Ms Ruchika Oswal.
From the remuneration data as well as from the designation of Executive Directors, an investor would
estimate that Ms Monica Oswal and Ms Ruchika Oswal would play a very important role in the management
of the company. However, when an investor looks at the disclosures made by Monte Carlo Fashions Ltd
about its senior management, then she notices that the company has not highlighted their names as a part
of the senior management.
Investors’ presentation, Q1-FY2022, page 20:
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In the above slide taken from the Q1-FY2022 investors’ presentation, an investor notices that Mr Rishabh
Oswal, aged 29 years who has a total experience of 8 years (FY2021 annual report, page 19) and was
appointed on the board only in June 2018 as a director, is highlighted as a senior manager. Whereas Ms
Monica Oswal and Ms Ruchika Oswal, both aged 49 years and having experience exceeding 21 years each
(FY2021 annual report, page 19) are not highlighted as senior managers.
In addition, when an investor analyses the remuneration of senior management for FY2021, then she notices
that the company has paid a remuneration of ₹1.22 cr to Mr Rishabh Oswal, which is more than the
remuneration of about ₹0.95 cr each paid to Ms Monica Oswal and Ms Ruchika Oswal.
From the above discussion, an investor would notice that despite paying a hefty remuneration to Ms Monica
Oswal and Ms Ruchika Oswal, Monte Carlo Fashions Ltd is not highlighting their names as senior managers
to the investors. In addition, it is now paying a comparative higher remuneration to Mr Rishabh Oswal, who
is nephew of Ms Monica Oswal and Ms Ruchika Oswal and has a much lower working experience than
they have and is highlighting him as a senior manager to the investors.
From the above disclosures, an investor gets confused about the value being added by Ms Monica Oswal
and Ms Ruchika Oswal to the company.
Therefore, an investor may contact the company directly to understand the role played by Ms Monica Oswal
and Ms Ruchika Oswal in the active day-to-day management of the company. She may ask the company
the reasons why despite seeming to be one of the most senior resources available with the company, their
names are excluded from the list of senior managers presented to investors whereas the name of a younger
manager with much lower experience is included in the list of senior managers.
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3) Related party transactions of Monte Carlo Fashions Ltd:

When analysing the business of the company, an investor notices that Monte Carlo Fashions Ltd is involved
in numerous purchase and sale transactions with its promoter-group entities belonging to the Nahar group.
As per the various disclosures by the company in different reports, an investor notices that Monte Carlo
Fashions Ltd buys almost 90%-95% of its woollen yarn from Oswal Woollen Mills Ltd and about 10% of
cotton fabric & garments from other promoter-group entities.
Sandeep Jain: See, as far as woollen yarn is concerned, we buy almost 90%-95% of our requirement from
our sister concern Oswal Woollen Mills at arm’s-length pricing and which is the only mill actually who
manufactures these kind of pure wool yarns in these categories. And as far as cotton yarn, cotton fabric,
cotton woven garments is concerned, around 10% comes from our sister concern company, 90% comes
from the various manufacturers of these kind of fabrics all over India and world.
As per the disclosures in the related party transactions section of its annual reports, Monte Carlo Fashions
Ltd makes purchases of about ₹100 cr every year from promoter entities like Oswal Woollen Mills Limited,
Nahar Spinning Mills Limited, Nahar Industrial Enterprises Limited, and Cotton County Retail Limited.
An investor would appreciate that the related party transactions between the listed entity and the
promoters/their entities provide opportunities for shifting economic benefits from the minority/public
shareholders to the promoters. If the listed entity pays a price to the promoters, which is higher than the
market price of those services/rent, then effectively, these transactions may benefit promoters at the cost of
Apart from the purchase transactions, over the years, Monte Carlo Fashions Ltd has had other business
arrangements with Nahar group companies like:
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Initially, a promoter-group company, Vanaik Spinning Mills Limited, used to run all the company-owned-
company-operated EBOs and its e-commerce website (www.montecarloshop.in)
“About Us” section of Monte Carlo Fashions Ltd website
readymade garment business was demerged from Oswal Woollen Mills to Monte Carlo Fashions Limited
in the year 2011-12 and Vanaik Spinning Mills Limited was selected as its franchisee and to look after of
its Ecommerce business
one of our Group Companies, Vanaik Spinning Mills Limited operates an online shopping website
www.montecarloshop.in through which they sell our products online.
Some of the exclusive Company owned showrooms were operated and managed by the Company, which
are taken by the Company on lease. With effect from 01 April 2012, these showrooms were transferred to
Vanaik Spinning Mills Limited.
Therefore, from the above arrangements, an investor would notice that from the overall profit pool of the
Monte Carlo brand value (i.e. from manufacturing branded garments and selling them to the final
consumers) a portion of profit i.e. the part earned in the final retailing step in the offline showroom and the
online channel was shifted from Monte Carlo Fashions Ltd to Vanaik Spinning Mills Limited.
As of date, the original e-commerce website of Monte Carlo Fashions Ltd (www.montecarloshop.in) is
defunct. Currently, the products of the company are sold through the website www.montecarlo.in.
However, when an investor checks the ownership details of www.montecarlo.in, then she notices that this
website is owned by its group company, Oswal Woollen Mills Ltd (Source: whois). Therefore, even today,
Monte Carlo Fashions Ltd does not own the domain name of the website where it is putting a lot of resources
to build its online presence. Instead, the domain name is owned by one of the promoter group companies.
In its red herring prospectus (RHP) shared with the investors in November 2014, Monte Carlo Fashions Ltd
had highlighted the risk of related party transactions between the company and the promoter group entities.
Conflicts of interest may arise out of common business objects shared by our Company and our Group
Companies.: In cases of conflict, our Promoters may favour other companies in which our Promoters have
interests. There can be no assurance that our Promoters or our Group Companies or members of the
Promoter Group will not compete with our existing business or any future business
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On its part, Monte Carlo Fashions Ltd has appointed an auditor, Grant Thornton, to check the transfer
pricing terms i.e. related party transactions between the company and the promoter group entities in order
to give an assurance to the investors that the related party transactions are at market prices.
Dinesh Gogna: we have engaged Grant Thornton specifically to check that all our purchases from the
sister concern are at a transfer pricing formula we are adopting…As an auditor also the check and as an
independent their team like to see that all purchases from the sister concern are at the market price.
Therefore, the presence of an auditor to check the transactions between Monte Carlo Fashions Ltd and the
promoter-group entities may provide some comfort to the investors. However, an investor should keep in
her mind that in almost all the cases of big corporate incidences where the investors were over-smarted by
the promoters, one or the other reputed firms was present as an auditor. For example, Enron was audited by
Arthur Anderson, and Satyam was audited by PwC.
Therefore, the presence of a reputed auditor should not lead an investor to stop her own due diligence in
the related party transactions.
4) Aggressive accounting followed by Monte Carlo Fashions Ltd:

While reading the public disclosures of the company, an investor gets to know about instances where Monte
Carlo Fashions Ltd used aggressive accounting assumptions to show a higher sales revenue.
An investor would appreciate that usually, as per proper accounting assumptions, companies recognize
revenue only when the risk and reward associated with the sales are duly transferred from the seller to the
buyer. However, during FY2012 and FY2013, Monte Carlo Fashions Ltd recognised sales even in the cases
where risk and reward were not transferred to the company’s customers.
As a result, later on, the company had to reverse the said transactions and show the revised statements in
the RHP to the investors before its IPO.
During the years ended 31 March 2013 and 2012 the Company had recognised sales of ₹ 6.28 million and
₹ 8.35 million respectively for which risk and reward had not been transferred before the year end.
Accordingly, such sales have been reversed in those years and adjusted in the respective years.
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Going ahead, an investor should keep a close watch on the accounting assumptions followed by the
company so that she may notice any deviation by the company from the normal accounting standards.
5) Weakness in the internal processes and controls at Monte Carlo Fashions Ltd:
While going through the annual reports of the company, an investor comes across many instances that
indicate that the internal processes of the company leave scope for improvement. Let us see a few examples
of such instances.
5.1) Delays in depositing undisputed statutory dues to govt. authorities:
While analysing the financial position of Monte Carlo Fashions Ltd, an investor notices that the company
has always been a cash-rich company, which has maintained a cash & investment balance of more than
₹100 cr ever since FY2013. However, an investor notices that every year since FY2012, the company has
delayed depositing undisputed statutory dues to the govt. authorities. An investor may check about the
delays highlighted by the auditors of the company in its various reports.
 FY2012: RHP, November 2014, page 180:
There have been delays in depositing undisputed statutory dues including provident fund,
employees state insurance, income tax, sales tax, cess, service tax and any other material statutory
dues as applicable to it with the appropriate authorities. Undisputed amounts payable in respect
of abovementioned dues amounting to ₹ 1.96 million were in arrears as at 31 March 2012 for a
period more than six months from the date they become payable.
Similar disclosures for other years can be found in the following sections:
 FY2013 and FY2014: RHP, November 2014, pages 180-181

 FY2015 annual report, page 50
Looking at this scenario where a cash-rich company is delaying in depositing undisputed statutory dues, an
investor can only assume that the company does not have strong processes to check whether its statutory
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liabilities are paid on time. As a result, every year, it delays depositing its dues to the govt., which are
undisputed and the company also accepts that it has to pay these dues.
An investor may contact the company directly to understand why it continuously delays the deposit of
undisputed statutory dues to govt. authorities.
5.2) Delays in paying interest, which is due for payment to lenders:
Similarly, in its various annual reports, Monte Carlo Fashions Ltd disclosed that in many years, the
company had the interest to the lenders, which was due for payment but was not paid by the company.
For example, the following section from the FY2016 annual report shows that Monte Carlo Fashions Ltd
had not paid the interest of ₹1.34 cr at the end of FY2016, which was due to the lenders but it had not paid
it despite disclosing a large cash & investment balance. In the same table, an investor can also see that at
the start of FY2016 i.e. at the end of FY2015, the company had an interest due but not paid of ₹0.18 cr.
Similar disclosure about interest due to the lenders but not paid by Monte Carlo Fashions Ltd for other
years can be found in the following sections:
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Once again, looking at the scenario where a cash-rich company is delaying payment of interest, which is
due for payment to the lenders, an investor can only assume that the company does not have strong
processes to check whether its debt payments are paid on time.
An investor may contact the company directly to understand why it did not repay the interest due to the
lenders on time despite seeming to have sufficient cash balance for the payments.
5.3) Delay in appointment of chief financial officer (CFO):
In the FY2019 annual report, the secretarial auditor of the company pointed out that Monte Carlo Fashions
Ltd did not have a CFO for more than one year. This was because the company appointed the new CFO on
November 30, 2018, more than one year after the resignation of the previous CFO on November 13, 2017.
The Board of Directors has appointed Mr. Raj Kapoor Sharma as Chief Financial Officer (KMP) on 30th
November 2018 in their meeting, to fill the vacancy caused by the resignation of Mr. Raman Kumar on
13.11.2017.
The lack of strong processes in the company was also visible when in August 2015; it could not upload its
financial results on the stock exchange websites before it initiated its conference call with investors. As a
result, for the initial part of the conference call, the analysts did not have access to the results of the company
and as per one analyst; they were shooting in the dark.
Mehul Sawla: We have a high interest in this company but unfortunately the results are not available either
on BSE or on NSE. So in the absence of having the results in our hand it becomes very difficult to utilize
your valuable time and get feedback. My request will be to you and Edelweiss is maybe next time when you
are doing the conference please keep it a day later so that at least we have the results with us and we can
make use of this opportunity more meaningfully because otherwise it’s like just shooting in the dark right
now.
In another instance, in May 2016, the company could not upload the investors’ presentation on the stock
exchanges’ websites before the conference call.
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Sunil Jain: None of the investor I think have gone to investor presentation, it is not available on the BSE
or NSE website also.
An investor would appreciate that companies that have weaknesses in controls and processes are at a higher
risk of fraud. In the case of Monte Carlo Fashions Ltd, it has faced instances where its showrooms attempted
to sell unbranded garments as Monte Carlo garments.
we have faced instances in the past of our franchisees passing off unbranded apparel under our “Monte
Carlo” brand.
In addition, in the RHP, the company also cautioned its investors about the risk of unauthorized removal of
inventory from its locations i.e. theft.
We may also be adversely affected by unauthorized removal of inventory and products from ‘Monte Carlo
Exclusive Brand Outlets’, MBOs, our manufacturing facilities and our distribution centers.
To understand more about the risks that any company may face due to weakness in internal processes and
controls, an investor may read the case of National Peroxide Ltd, a Wadia Group company. The managing
director of National Peroxide Ltd attempted to take advantage of the weaknesses in the internal processes
and controls and did fraud on the company: Analysis: National Peroxide Ltd
Therefore, going ahead, an investor should keep a close watch on such incidences indicating a weakness in
the internal processes and controls of the company
6) Previous business initiatives of Monte Carlo Fashions Ltd that did not work
out:
While analysing the business of the company, an investor comes across two business initiatives taken by
Monte Carlo Fashions Ltd, which did not work out as planned by the company.
The first initiative was an entry into the leather accessories business starting with shoes. In August 2016,
the company intimated to its shareholders that it has planned to enter into the shoe business by lending its
brand name to a contract manufacturer who would make and sell shoes under the Monte Carlo brand.
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Sandeep Jain: Shoes business we have entered into an agreement with a company, which will manufacture,
distribute and market our shoes as Monte Carlo brand and will be getting the 9% royalty from the sales
However, soon thereafter, the deal did not work out and after a delay of a few months; Monte Carlo Fashions
Ltd intimated that the plan to enter into the shoe business has been dropped.
Sameep Kasbekar: Okay, similar levels to last year. Any update on the footwear segment that we were
planning to enter in December, has that been delayed?
Sandeep Jain: No. This we have dropped actually.
The second initiative was an entry into the manufacturing of masks and personal protective equipment
(PPE) kits. In June 2020, Monte Carlo Fashions Ltd intimated to its shareholders that it has imported
machinery to manufacture masks and PPE kits for about ₹3.5 cr and it plans to generate a revenue of about
₹12-15 cr from masks.
Conference call, June 2020, pages 12 and 17:
Sandeep Jain: No, it is not a CSR; it could be a profitable venture for Monte Carlo…We have already
imported the machines, the productions have already started, so we assume that this financial year we
should do a turnover of around Rs 12 to Rs15 Crores out of this mask line.
Sandeep Jain: Approximately Rs 3.5 Crores has been invested in the mask making machines.
However, after a few months, in February 2021, the company intimated that the masks business is closed
and it has about 3-4 lakh masks, which are lying unsold with it.
Sandeep Jain: we produced I think around 40, 50 lakh masks I think only 3 to 4 lakh masks are pending,
which we already sold out and now the demand for masks and PPE kit is almost zero there is no demand
right now so that segment we already closed.
Going ahead, an investor should continuously monitor the progress of the new business initiatives by Monte
Carlo Fashions Ltd and let the new business initiatives establish themselves before she starts factoring in
the potential sales and profits from new initiatives in her financial projections.
The Margin of Safety in the market price of Monte Carlo Fashions Ltd:
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Currently (December 28, 2021), Monte Carlo Fashions Ltd is available at a price to earnings (PE) ratio of
about 12 based on consolidated earnings of the last 12-months (Oct. 2020-Sept. 2021). An investor would
appreciate that a PE ratio of 12 offers some margin of safety in the purchase price as described by Benjamin
Analysis Summary
Overall, Monte Carlo Fashions Ltd seems a company, which has grown its sales at a moderate growth rate
of 6% year on year for the last 10 years. The sales of the company were growing continuously year-on-year
from FY2012 to FY2016; however, thereafter, intermittently, its business was hit by demonetization, weak
winters and lockdowns due to coronavirus pandemic. The heavy reliance of Monte Carlo Fashions Ltd on
the December quarter for its business worked against it in FY2017 when demonetization announced in
November 2016 affected consumer demand and the company reported its lowest ever operating profit
margin in FY2017.
Monte Carlo Fashions Ltd enjoys a very strong negotiating position over its retailers. It sells its garments
to retailers on an outright sale basis with a limited option of returning the unsold inventory. Similarly, it
does not share any discounts given by MBOs in the end of season sales. The company is able to increase
the prices of garments whenever its costs increase be it prices of wool, cotton or higher taxes on GST
implementation.
However, the company does not have any distinct competitive advantage over its competitors as it is not
able to withstand the market pressure when the competitors start the discounting season early or when they
offer deep discounts very early in the season. As per the company, all brands, whether Indian or
international, have to follow the market trend for discounts to bring walk-ins in the stores and to get rid of
the inventory.
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The intense competition in the industry due to low entry barriers has led to the branded apparel players
competing with each other on price. In addition, the emergence of the online sales channel and the
expectation of consumers for continuous discounts is forcing companies to start discounting season early
and give deep discounts, which is making it difficult for Monte Carlo Fashions Ltd to maintain profit
margins.
The business of the company is working capital intensive, as it has to maintain a large amount of inventory
of different designs, sizes and colours, a large stock in warehouses to supply to its showrooms and returned-
unsold inventory. In addition, the increase in the share of EBOs, LFS, NCS and the online sales channel in
its sales has led to an increase in receivables days of the company. However, Monte Carlo Fashions Ltd has
been able to maintain its working capital efficiency without any deterioration.
The company is cash-rich. It has generated significant free cash flow during the last 10-years, which it has
used to pay dividends, do a buyback and has the balance as cash & investments. The company is net debt-
free on March 31, 2021.
Currently, three generations of the promoter Oswal family are present on the board of directors of the
company in executive positions. Monte Carlo Fashions Ltd is paying significant salaries to the daughters
of CMD; however, it is not highlighting their names as senior managers to investors in its presentations.
The company does a lot of related party transactions like the purchase of material from its promoter-group
entities, which increases the risk of promoters benefiting at the cost of public shareholders. The company
has engaged Grant Thornton as an auditor for checking transfer-pricing norms in its related party
transactions; however, an investor should do her own due diligence in this matter.
While reading the annual reports of the company, an investor comes across instances of aggressive
accounting to show higher sales, delays in payment of undisputed statutory dues to govt. authorities, non-
payment of interest to lenders even when it was due, and delay in appointment of CFO even after one year
of the resignation of existing CFO. Most of these instances indicate that the internal controls and processes
of the company leave scope for improvement.
Currently, Monte Carlo Fashions Ltd has announced a large capital expenditure to manufacture rugs and
mink-blanket fabric. The past experience of new business initiatives taken by the company in the form of
entering the shoe market and making masks and PPE kits show that the plans did not work out as planned.
Therefore, an investor should wait for the new manufacturing plant to be established before she should start
factoring it in her financial projections and therefore, in her stock price assumptions.
Going ahead, an investor should closely monitor the profit margins of the company to assess whether the
company is able to maintain its profit margins in the face of severe competition and challenges of online
sales and deep discounts. She should watch out for signs where excessive reliance on outsourcing might
affect its supply chain. She should keep a close watch on the receivables days of the company and see if it
is able to bring it under control or it has to do many write-offs.
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The investor should closely monitor the progress of the newly announced manufacturing plant and also
watch out for the signs of weakness in the internal controls & processes as well as any signs of fraud that
might appear under the weak processes.
An investor should deeply analyse the related party transactions of Monte Carlo Fashions Ltd with its
promoter-group entities to safeguard herself from landing in a situation where promoters are able to take
away economic benefits from public shareholders.
These are our views on Monte Carlo Fashions Ltd. However, investors should do their own analysis before
P.S.

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7) Lincoln Pharmaceuticals Ltd

Lincoln Pharmaceuticals Ltd is an Indian company manufacturing pharmaceutical formulations. The
company sells its products primarily in India and African nations.
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While analysing Lincoln Pharmaceuticals Ltd, an investor would notice that during the last 10-years, the
company had three subsidiaries, Lincoln Parenteral Limited (98.58%), Zullinc Healthcare LLP (100%) and
Savebux Enterprises Private Limited (100%). As a result, the company reported both standalone as well as
consolidated financials.
such a picture.
Therefore, in this analysis of Lincoln Pharmaceuticals Ltd, we have studied the consolidated financial
performance of the company.
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Financial and Business Analysis of Lincoln Pharmaceuticals Ltd:

While analyzing the financials of Lincoln Pharmaceuticals Ltd, an investor notices that the sales of the
company have grown at a pace of about 9% year on year from ₹188 cr in FY2012 to ₹424 cr in FY2021.
Further, the sales of the company have increased to ₹443 cr in the 12-months ended June 30, 2021, i.e.
during July 2020-une 2021.
While analysing the revenue growth of the company over the last 10-years, an investor notices that until
FY2016, sales of Lincoln Pharmaceuticals Ltd grew at a fast pace of 20% from ₹188 cr in FY2012 to ₹400
cr in FY2016. However, in FY2017, the company witnessed a sharp decline in its sales as the sales declined
by 10% to ₹360 cr in FY2017. Thereafter, the sales of the company have grown at a slow pace of about 4%
While looking at the profitability of the company, an investor notices that the operating profit margin
(OPM) of the company improved from 7% in FY2012 to 20% in the 12-months ended June 2021. The OPM
of the company had witnessed a near consistent increase over the last 10-years.
To understand the reasons for the decline in the revenue of the company in FY2017 as well as to understand
the reasons for the improvement in its OPM, an investor needs to read the publicly available documents
like annual reports, credit rating reports as well as its corporate announcements.
influence the business of Lincoln Pharmaceuticals Ltd. An investor needs to keep these factors in her mind
1) Domestic (India) pharmaceuticals market has very high competition. Many

players offer similar products. Low pricing power:
While analysing the business performance of Lincoln Pharmaceuticals Ltd, an investor notices that the
pharmaceutical market in India has the presence of many players, which include domestic as well as
multinational companies. The domestic formulations segment is very crowded and as a result, the
companies do not have pricing power.
The credit rating agency, ICRA highlighted this aspect of the business of Lincoln Pharmaceuticals Ltd in
its report for the company in February 2018.
The domestic generic formulation industry faces stiff competition with the presence of numerous contract
manufacturers, MNCs as well as established domestic brands with some of these players also having a pan-
India presence leading to intense competition, which restricts the company’s pricing flexibility.
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An investor would appreciate that when any sector has high competition, and the customers have a choice
of buying goods from many suppliers, then the bargaining/pricing power shifts from the suppliers to the
customers. In such a situation, the suppliers become price takers.
Such a situation of low pricing power of suppliers becomes more prominent when the goods produced by
the suppliers are commodity in nature and indistinguishable from each other. This is because, if the goods
produced by all the suppliers are similar, then the customers can easily switch from one supplier to another
without worrying about any impact on their final products.
In such a situation, none of the suppliers can afford to increase prices. As a result, whenever the raw material
costs go up, the suppliers have to take a hit on their profit margins.
Lincoln Pharmaceuticals Ltd intimated to its investors about the situation of its business segment involving
many suppliers competing for the same customers with similar kinds of undifferentiated products in its
FY2010 annual report on page 8.
The Company is functioning in the competitive markets where there are number of small scale and medium
scale manufacturers are in the presence. There are number of similar kind of products present in the
markets and therefore there is a pressure on the margin on the Company.
Therefore, an investor would appreciate that due to the intense competition and low pricing power in the
domestic market, Lincoln Pharmaceuticals Ltd started to shift its focus from the Indian market to exports.
Let us see how the business of Lincoln Pharmaceuticals Ltd evolved once it started prioritizing the exports
market over the domestic market.
2) Increased focus on exports by Lincoln Pharmaceuticals Ltd:

When an investor analyses the breakup of sales of Lincoln Pharmaceuticals Ltd between domestic and
export sales over the last 10-years, then she notices that the share of exports has increased from 21% in
FY2012 to 53% in FY2021.
The following table shows the breakup of the consolidated revenue of Lincoln Pharmaceuticals Ltd into
exports and domestic sales.
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From the above table, an investor would notice that as the share of exports increased over the last 10-years,
the operating profit margin (OPM) of the company also increased from 7% in FY2012 to 21% in FY2021.
An investor would also notice that from FY2017 onwards, when the share of exports started increasing at
a fast pace i.e. from 33% of sales in FY2017 to 53% in FY2021, the operating profit margins (OPM) of the
company also increased significantly. The OPM of the company increased from 13% in FY2017 to 21% in
FY2021.
In FY2014, the company has disclosed to the shareholders that it plans to increase its focus on the African
countries and it is expecting that most of its growth would come from these nations.
In Export, we are steadily growing and also in coming year, we are planning to enter in most of the West
African Countries, where we are targeting potential growth in the company.
The credit rating agency, ICRA has also highlighted the change in the strategy of Lincoln Pharmaceuticals
Ltd from a focus on the domestic market to prioritizing export markets in its report for the company in
February 2021.
The Group was predominately a domestic market player; however, it has been increasing its focus on
exports to semi-regulated markets in the past few fiscals owing to intense competition in the domestic
generic formulations industry.
From the above table, an investor would notice that the domestic sales of Lincoln Pharmaceuticals Ltd are
on a decline in recent years.
Lincoln Pharmaceuticals Ltd had reported a revenue of ₹283 cr from the domestic market in FY2016, which
declined to ₹168 cr in FY2020. In FY2021, the sales from the domestic market have increased to ₹198 cr;
however, it is still significantly lower than the peak domestic sales achieved by the company in FY2016.
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3) Stopping of trading and domestic generics business by Lincoln Pharmaceuticals

Ltd:
While listening to the audio recording of the annual general meeting (AGM) of the company for FY2020
(transcript) the managing director (MD) of the company, Mr Mahendra G. Patel, mentioned that the
company has stopped the trading business and the generics business in the domestic market.
The stopping of trading business seems to be one of the biggest reasons for a decline in the sales of the
company in FY2017 when the sales had declined by 10% from ₹400 cr in FY2016 to ₹360 cr in FY 2017.
4) Focus on the value-adding products by Lincoln Pharmaceuticals Ltd:

While analysing the development of the business of Lincoln Pharmaceuticals Ltd over the years, an investor
notices that the company has launched a few innovative products including NDDS (novel drug delivery
systems.
The below chart from the Q3-FY2021 result presentation of Lincoln Pharmaceuticals Ltd in February 2021,
page 11 highlights some of the important launches done by the company in recent years.
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An investor would notice that the company developed and launched two NDDS products in FY2015. It
launched further three new products (apparently the first time launch of these products in India) in FY2017.
It launched next-generation progesterone therapy, Prolin spray, in FY2018.
All these launches are value-added products, which have helped the company improve its profit margins.
Therefore, from the above discussion, an investor would notice that over the last 10-years, Lincoln
Pharmaceuticals Ltd has taken some strategic steps like shifting its focus away from the highly competitive
domestic market to the exports markets. The company stopped the low margin trading business and the
generics business. In addition, the company focused on value-added products.
All these steps have helped the company in improving its profit margins over the years. An investor may
notice that the operating profit margin (OPM) of the company has improved significantly from 7% in FY
2012 to 20% in the 12-months ended June 30, 2021, i.e. during July 2020-June 2021.
The credit rating agency, ICRA, highlighted the role of these decisions in the improvement of profit margins
of Lincoln Pharmaceuticals Ltd in its report for the company in February 2021.
The improvement was aided by successful product launches, increased contribution of higher value-added
exports as well as manufacturing sales vs. trading sales to its revenue profile.
Lincoln Pharmaceuticals Ltd is continuing to focus on the exports market. In May 2020, the company
received the EU GMP approval, which allows it to sell its products in all of the European Union (EU)
member countries as well as European Economic Area (EEA) markets.
Corporate announcement to BSE on May 19, 2020:
The certification will allow the company to market its products in all the 27 member countries of EU and
also give access to European Economic Area (EEA) countries. Company looks to enter the EU markets
very soon with its dermatology, gastro and pain management products and gradually expand product
portfolio.
As per the company, it plans to start exports to EU nations by the end of FY2022.
Q1-FY2022 result, page 8:
Exports to EU markets are likely to commence from Q4FY22.
However, an investor should keep in her mind that in the pharmaceuticals sector, any company or its
investors should not get relaxed only by getting the initial approvals and start of sales in any geography.
This is because meeting regulatory guidelines and staying compliant with the required regulations and
quality standards is an ongoing process. Any lapses on this front may prove very costly for any company.
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This is called regulatory risk and the pharmaceutical companies are very concerned about it. Let us see an
incidence where Lincoln Pharmaceuticals Ltd faced regulatory risk.
5) Regulatory risk:
In FY2016, Lincoln Pharmaceuticals Ltd faced a situation where the regulatory risk created significant
issues for it.
In January 2016, the drug authority of Tanzania (TFDA) banned the import of Chloramphenicol Sodium
Succinate, which is one of the best-selling products of the company. TFDA cancelled the license of Lincoln
Pharmaceuticals Ltd and ordered to destroy the Chloramphenicol already supplied by the company to
customers in Tanzania.
Credit rating report by CRISIL in February 2016:
scale of operations and profitability of Lincoln group are likely to impacted over the near to medium term
on account of one of the highest selling product (chloramphenicol sodium succinate) ban in Tanzania as of
January 2016. The group had got many orders from government institutes based out of Tanzania; however
Tanzania Drug authority (TFDA) has announced to ban the product’s import while cancelling the group’s
license. In such circumstances, the inventory dispatched is kept on hold and the authority has issued notice
to destroy the product. The group’s estimates significant impact on its profitability due to the product ban
and rejection of the current batch by TFDA.
The company highlighted that this ban would have a significant impact on its profitability.
An investor would appreciate that in the pharmaceutical industry, non-compliance with the required
regulations may shut the business completely if the company is not able to provide a satisfactory resolution
to the concerns raised by the drug regulators.
Therefore, an investor should always keep a track of the developments related to the approvals of the
company with various drug regulators of its target countries.
Going ahead, an investor should monitor the trend of domestic and export sales in the overall revenue of
the company. In addition, she should focus on the profit margins of the company and in case, she notices a
decline in the profit margins, then she should explore the reasons for the same. This is because; loss of
pricing power due to increasing competition in its target markets might be one of the reasons for declining
profit margins.
While analysing the tax payout ratio of Lincoln Pharmaceuticals Ltd., an investor notices that for most of
the years, the tax payout ratio of the company has been lower than the standard corporate tax rate prevalent
in India.
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While going through the annual reports of the company, an investor notices that the key reasons for a lower
tax payout ratio for Lincoln Pharmaceuticals Ltd are (i) tax benefits on scientific research and (ii) credits
available to the company under minimum alternate tax (MAT) regime.
The above table from the FY2019 annual report shows the income tax reconciliation between the standard
corporate tax rate applicable in India and the tax payout in the profit & loss (P&L) statement of Lincoln
Pharmaceuticals Ltd. An investor may notice that the tax benefits on scientific research and MAT credits
are the biggest factors leading to a lower tax payout ratio for Lincoln Pharmaceuticals Ltd in both FY2019
as well as FY2018.
Operating Efficiency Analysis of Lincoln Pharmaceuticals Ltd:
a) Net fixed asset turnover (NFAT) of Lincoln Pharmaceuticals Ltd:
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When an investor analyses the net fixed asset turnover (NFAT) of Lincoln Pharmaceuticals Ltd in the past
years (FY2013-21), then she notices that the NFAT of the company has been consistent in the range of 3.0
to 4.0 over the years.
The NFAT had increased to 4.9 in FY2016; however, it declined in subsequent years. This decline seems
to be a result of two factors.
First, Lincoln Pharmaceuticals Ltd did a capital expenditure of ₹38 cr in FY2016 where it increased the
manufacturing capacity.
Q3-FY2016 results presentation, March 2016, page 7:
Completed the expansion of Unit 1 (Tablet, Capsule & Ointment), which resulted in trebling of the current
capacity
An investor would appreciate that whenever a company increases its manufacturing capacity, then it may
take a couple of years for the company to gain new orders to reach the optimal utilization levels of the new
plant. Therefore, after a company completes capacity expansion, the NFAT of the company stays low for a
few years.
Second, after FY2016, the sales of the company witnessed a decline due to the stoppage of trading and
domestic generic business by Lincoln Pharmaceuticals Ltd. Because of the lower sales, the NFAT of the
company stayed low in the subsequent years.
An investor would notice that now the company has received EU GMP approval and it plans to start sales
to the EU region by Q4-FY2022. Therefore, going ahead, the NFAT of the company might witness an
increase.
An investor should monitor the NFAT of the company to ascertain whether it is able to utilize its assets
efficiently or not.
b) Inventory turnover ratio of Lincoln Pharmaceuticals Ltd:

While analysing the efficiency of inventory utilization by Lincoln Pharmaceuticals Ltd, an investor notices
that over the last 10 years, the consolidated inventory turnover ratio (ITR) of the company has stayed in the
range of 9.0-10.0.
The ITR of the company had increased to 16.2 in FY2016; however, since then it has moderated sharply to
9.0 in FY2021.
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An investor would notice that from FY2016 onwards the company has significantly increased its export
sales. In FY2016, the share of exports in the sales of Lincoln Pharmaceuticals Ltd used to be 29%, which
has increased to 53% in FY2021.
While analysing the business of Lincoln Pharmaceuticals Ltd, an investor notices that the export sales
typically make the suppliers keep a higher inventory of goods in addition to providing a higher credit period
to the overseas customers. As a result, the export sales are usually working capital intensive.
The credit rating agency, ICRA, highlighted the working capital intensive nature of export sales in its report
of Lincoln Pharmaceuticals Ltd in February 2021.
High working capital intensity of operations – The working capital intensity of the Group is high and has
witnessed an increase with surge in sales to the export market, which has higher credit period (up to ~120
days compared to ~60-90 days in the domestic market), coupled with moderate inventory requirement.
Therefore, an investor would appreciate that due to a sharp increase in the exports from FY2016 onwards,
the inventory turnover ratio (ITR) of Lincoln Pharmaceuticals Ltd declined from 16.2 in FY2016 to 9.0 in
FY2021.
company is able to maintain its inventory utilization efficiency or not.
c) Analysis of receivables days of Lincoln Pharmaceuticals Ltd:

Over the last 10 years, the receivables days of Lincoln Pharmaceuticals Ltd have improved from 131 days
in FY2013 to 91 days in FY2021. A reduction in the receivables days over the years indicates that Lincoln
Pharmaceuticals Ltd has been able to improve the collection of its dues from its customers.
Nevertheless, an investor would notice that the receivables days of Lincoln Pharmaceuticals Ltd have
consistently been more than 90 days. It indicates that the company has to give a comparatively longer period
to its customers than the usual credit period of 45-60 days that we notice in general across various industries.
The credit rating agency, ICRA, highlighted the requirement of Lincoln Pharmaceuticals Ltd to provide a
longer credit period to its overseas customers in its report for the company in December 2019.
The ratings also consider the high working capital intensity of the Group owing to the long credit period
extended to its customers especially in the export markets.
An investor would appreciate that whenever a company has to give a longer credit period to its suppliers,
then it faces a higher default risk. It means that if a company provides a higher credit period to its customers,
then there is a higher probability that the customers may not be able to pay or refuse to pay when the
payment is due.
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Moreover, when an investor notices that the export market of Lincoln Pharmaceuticals Ltd is concentrated
in Africa and other developing nations, then she would appreciate that the company faces higher credit risk.
While reading the February 2021 credit rating report of the company prepared by ICRA, an investor notices
that almost 45-55% of export sales of Lincoln Pharmaceuticals Ltd are to the Africa region.
The export sales are concentrated, with African regions contributing ~45-55% to the total export sales,
While analysing the annual reports of Lincoln Pharmaceuticals Ltd, an investor notices that at times, the
company has faced a significant delay in collecting its money and due to delays. The following data from
the FY2019 annual report indicates that Lincoln Pharmaceuticals Ltd had ₹38.5 cr and ₹33.5 cr of
receivables classified as credit-impaired in FY2018 and FY2019 respectively, which is about 30-40% of
the overall trade receivables for these years.
In light of the same, when an investor analyses the losses recognized by Lincoln Pharmaceuticals Ltd in its
P&L over the years, then she notices that during FY2012-2020, the company has lost almost ₹10 cr in bad
debt i.e. cases where customers refused to pay the company for the goods supplied by it.
Even if the company has been able to improve its receivables days over recent years (FY2019-2021);
however, going ahead, an investor should closely monitor the trend of receivables days. This is because an
increase in the receivables days may be a sign if the company faces any challenges in recovering its dues
from its customers.
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Nevertheless, when an investor notices that Lincoln Pharmaceuticals Ltd has improved its receivables days
over the last 10-years and has maintained its inventory turnover ratio, then she can understand that the
company kept its working capital position under control.
operations (cCFO) of Lincoln Pharmaceuticals Ltd for FY2012-21 then she notices that the company has
converted all of its profits into cash flow from operating activities.
Over FY2012-21, Lincoln Pharmaceuticals Ltd reported a total cumulative net profit after tax (cPAT) of
₹289 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹319 cr.
Learning from the article on CFO will indicate to an investor that the cCFO of Lincoln Pharmaceuticals
Ltd is higher than the cPAT due to the following factors:

The Margin of Safety in the Business of Lincoln Pharmaceuticals Ltd:

target growth.
Where,
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While analysing the SSGR of Lincoln Pharmaceuticals Ltd, an investor would notice that over the years,
the company had an SSGR in the range of 25%-35%. At the same time, she would notice that Lincoln
Pharmaceuticals Ltd has grown at a CAGR of about 9% in the last 10-years from ₹188 cr in FY2012 to
₹424 cr in FY2021.
Lincoln Pharmaceuticals Ltd has grown at a pace, which is lower than what its internal resources can afford;
therefore, over the years, the company has been able to generate surplus cash and repay its debt.
An investor would notice that over the last 10-years, Lincoln Pharmaceuticals Ltd has repaid its entire debt
of ₹65 cr outstanding in FY2012 and has become a debt-free company in FY2021. Moreover, in FY2021,
the company has a cash & investments balance of ₹95 cr.
An investor arrives at the same conclusion when she analyses the free cash flow (FCF) position of Lincoln
Pharmaceuticals Ltd.
b) Free Cash Flow (FCF) Analysis of Lincoln Pharmaceuticals Ltd:

While looking at the cash flow performance of Lincoln Pharmaceuticals Ltd, an investor notices that during
Therefore, during this period (FY2012-2021), Lincoln Pharmaceuticals Ltd had a free cash flow (FCF) of
₹200 cr (=319 – 119).
of ₹60 cr. As a result, the company had a total free cash flow of ₹195 cr (= 200 + 55 – 60). Please note that
the capitalized interest is already factored in as a part of the capex deducted earlier.
While looking at the overall cash-flow position of Lincoln Pharmaceuticals Ltd over the last 10 years
manner:
 Reduction of debt: ₹65 cr as a reduction in total debt as it has entirely paid off the debt of ₹65 cr
outstanding in FY2012 and has become debt-free in FY2021.
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 Cash & investments: ₹78 cr as the cash & investments of the company have increased from ₹17 cr
in FY2012 to ₹95 cr in FY2021 (95 – 17 = 78)
Going ahead, an investor should keep a close watch on the free cash flow generation by Lincoln
Pharmaceuticals Ltd to understand whether the company continues to generate surplus cash from its
operations.
Additional aspects of Lincoln Pharmaceuticals Ltd:

On analysing Lincoln Pharmaceuticals Ltd and after reading annual reports, DRHP, its credit rating reports
1) Management Succession of Lincoln Pharmaceuticals Ltd:

Lincoln Pharmaceuticals Ltd is promoted by the Patel family. Currently, four members of the Patel family
are executive directors on the board of the company.
 Mr Mahendra G Patel, age 67 years, is currently, the managing director of the company
 Mr Hashmukh I. Patel, age 62 years, is currently, the whole-time director of the company
 Mr Munjal M. Patel, age 39 years, son of Mr Mahendra G Patel, is the whole-time director of the
company
 Mr Ashish R. Patel, age 40 years, son of Mr Rajnikant G. Patel, is the whole-time director of the
company.
Shri Munjal M. Patel is son of Shri Mahendra G. Patel, MD and Shri Aashish R. Patel is son of Shri
Rajnikant G. Patel, Jt. MD of the Company.
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2) Loans and advances given by Lincoln Pharmaceuticals Ltd to outside parties:

While analysing the annual reports of the company, an investor notices that the company has regularly
given out money to others as loans and advances.
As per the FY2020 annual report of the company, it has given out about ₹30.7 cr as loans to others. The
money has been given in the form of current loans, non-current loans and inter-corporate deposits.
 Current loans: Loans and Advances to Others: ₹15.9 cr (page 143)

 Non-Current Other Financial Assets: Loans to others: ₹12.3 cr (page 141)
 Non-Current Other Financial Assets: Inter-Corporate Loans: ₹2.5 cr (page 141)
As per the Q4-FY2021 results, page 12, on March 31, 2021, the loans given by Lincoln Pharmaceuticals
Ltd to others had increased to about ₹44 cr.
 Non-Current Assets: Financial Assets: Loans: ₹25.09 cr

 Current Assets: Financial Assets: Loans: ₹18.78 cr
While analysing previous annual reports, the investor notices that such loans are present in almost every
annual report of the company. It indicates that Lincoln Pharmaceuticals Ltd has given out money to others
regularly.
An investor may contact the company directly to understand more about the entities that have received this
money from Lincoln Pharmaceuticals Ltd. She may attempt to understand whether these entities are
individuals or companies who might be related to/friends/acquaintances of the promoters but are not
classified under related parties as per the legal definition.
She may attempt to understand what is the benefit that shareholders of the company are getting from these
loans.
Analysing these loans and understanding the reasons for them is important because such loans may
represent a shift of money out of the company indicating that someone else is enjoying the economic
benefits of the business of Lincoln Pharmaceuticals Ltd.
3) Multiple instances of equity dilution by Lincoln Pharmaceuticals Ltd:

When an investor analyses the history of changes in the equity capital of the company, then she notices that
Lincoln Pharmaceuticals Ltd has diluted its equity multiple times in the past. Lincoln Pharmaceuticals Ltd
has raised money by way of both preferential issuances of shares as well as warrants to the promoters.
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3.1) Share issuances by Lincoln Pharmaceuticals Ltd:
i) In FY2005, the company issued 104,980 shares at ₹2 per share and raised about ₹85 lac rupees.
In the above section from the FY2005 annual report, an investor would notice that the share capital has
increased from ₹58,958,200 in FY2004 to ₹60,008,000 in FY2005 indicating that a total of the new share
capital of ₹1,049,800 (=60,008,000 – 58,958,200) is issued in FY2005. The share capital consists of shares
of face value (FV) of ₹10/-. Therefore, the company seems to have issued 104,980 shares (=1,049,800/10)
of FV ₹10/- in FY2005.
An investor would also notice in the above section that in FY2005, a share premium of ₹7,474,200 has been
added, which seems to pertain to the issuance of new shares.
By combining the increase in share capital and the increase in share premium, an investor gets to know the
total money raised by the company in FY2005, which is ₹8,524,000.
From the above data, an investor can now calculate the per-share price at which Lincoln Pharmaceuticals
Ltd had issued the new shares. It comes to ₹81.2 per share (=8,524,000/104,980).
ii) In FY2006, Lincoln Pharmaceuticals Ltd again raised capital of ₹5.5 cr by issuing shares. The company
issued 1,610,000 shares at a price of ₹34.5 per share consisting of a face value (FV) of ₹10 + premium of
₹24.5) (1,610,000 * 34.5 = 55,545,000)
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ALLOTMENT OF SHARES: During the year, your Company has allotted 16,10,000 Equity Shares of Rs.
10/- each for cash at a premium of Rs.24.50 /- per share on preferential basis to various parties.
iii) In FY2010, Lincoln Pharmaceuticals Ltd raised about ₹6.48 cr by issuing 2,400,000 shares at a price
of ₹27/- per share (2,400,000 * 27 = 64,800,000).
Company has allotted 24,00,000 equity share of face value of Rs.10/- each for cash at a premium of Rs.17/-
each by way of preferential allotment during the year
iv) In FY2011, Lincoln Pharmaceuticals Ltd raised about ₹5 cr by issuing 5,000,000 shares at a price of
₹41/- per share (5,000,000 * 41 = 205,000,000)
During the year under review, the company has allotted 5,000,000 Equity shares of Rs. 10/- for cash at
premium of Rs. 31/- per share by way of preferential allotment.
Therefore, an investor would notice that Lincoln Pharmaceuticals Ltd raised a total of about ₹33.38 cr
(=0.85 + 5.55 + 6.48 + 20.5) by way of preferential issue of shares during FY2005-FY2011.
Apart from preferential issuance of shares, Lincoln Pharmaceuticals Ltd also raised money by way of
preferential issue of warrants to the promoters.
3.2) Warrants allotment by Lincoln Pharmaceuticals Ltd:
The company issued warrants for the first time to the promoters on a preferential basis in FY2009, a part
of which were exercised by the warrant-holders in FY2010.
In FY2009, the company issued 10,000,000 warrants with rights to subscribe equity shares of FV ₹2/- at
₹10/- per share. The company received the subscription amount of ₹1/- per warrant i.e. 10% of the exercise
amount in FY2009.
Company has issued 10,000,000 preferential warrants on 21 -07-2008 with a right to subscribe equity
shares @ Rs. 10/- per share of equity shares of face value of Rs. 2/- each and company has received Re. 1
per each warrant. Subsequently Company has consolidated 5 equity shares of Rs. 2/- each fully paid up in
to one equity share of Rs. 10/- each. In view of the same, the right to subscribe the equity shares would get
consolidated at the time of exercise of right to convert warrant in to equity share.
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An investor would notice that in FY2009, the company consolidated five shares of FV ₹2/- into one share
of FV ₹10/- i.e. reverse share-split. As a result, in the terms of FV ₹10/-, the total number of shares that the
warrant holders would receive got reduced to 2,000,000 (=10,000,000 / 5) and the exercise price increased
to ₹50 (=10 * 5).
In FY2010, out of a total of 10,000,000 warrants, the promoters exercised 6,500,000 warrants by paying
the balance amount and received 1,300,000 shares. The promoters did not exercise the balance of 3,500,000
warrants.
Out of the same, warrant holders holding 65,00,000 warrants exercised the rights by paying balance
amount @ Rs. 9/- per share ( Face value of Rs. 2/- per share ) and against the same, the Company allotted
13,00,000 Equity shares or Rs. 10/- each at a premium of Rs. 40/- per shares to them. The Company forfeited
the amount paid on balance 35,00,000 warrants which remained unexercised.
In the above instance, an investor would notice that the promoters did not exercise 3,500,000 warrants and
decided to let go of ₹0.35 cr paid by them as subscription money (₹1/- per warrant) to the company.
Therefore, if an investor wishes to calculate the total amount of money received by the company from this
episode, then it comes to ₹6.85 cr (=6,500,000*10 + 3,500,000*1).
In FY2016, Lincoln Pharmaceuticals Ltd issued another set of warrants to the promoters. The company
issued 3,689,200 warrants to be exercised at a price of ₹82/- per share.
The Company has Issued and Allotted 36,89,200 Convertible Warrants, Convertible into Equity Shares, at
an exercise price of ₹ 82/- per equity share of the face value of ₹ 10/- each, which includes premium of ₹
72/- per equity share.
In the next year, in FY2017, the promoters exercised all the warrants and paid the amount due in full to
receive the shares.
The Company has Issued and Allotted 36,89,200 Equity Shares (Pursuant to conversion of warrants), at an
aggregate price of Rs. 82/-per equity share of the face value of Rs. 10/- each, which includes premium of
Rs. 72/- per equity share.
Therefore, in FY2016-FY2017, the company received a total of ₹30.25 cr by issuing 3,689,200 shares at
₹82/- per share (3,689,200 * 82 = 302,514,400).
As a result, Lincoln Pharmaceuticals Ltd raised a total of ₹37.1 cr (=6.85+30.25) by two warrant issues of
FY2009 and FY2016.
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When an investor combines the money raised by Lincoln Pharmaceuticals Ltd by way of preferential issue
of shares as well as warrants from FY2005 onwards, then she notices that the company raised a total of
₹70.5 cr (=33.38 + 37.1) by equity dilution over FY2005-FY2017.
 ₹33.38 cr by way of preferential issue of shares during FY2005-FY2011

 ₹37.1 cr by way of preferential issue of warrants and their exercise in FY2009 and FY2016-
FY2017.
From the above discussion on self-sustainable growth rate (SSGR) and free cash flow (FCF), an investor
would remember that the business model of Lincoln Pharmaceuticals Ltd generates sufficient cash flows to
sustain its growth rate of 9% over FY2012-FY2021. It is also evident from the fact that the company has
repaid its entire debt and has become debt-free in FY2021.
In such a situation, it comes as a surprise to the investor that the company had to resort to equity dilution to
raise money at frequent intervals during FY2005-FY2017.
4) Giving out money raised from equity issuances as inter-corporate deposits:

When an investor analyses the usage of funds by Lincoln Pharmaceuticals Ltd over the years, then she
notices that the company has frequently used its cash flows for purposes other than investments in the
business of the company.
From the earlier discussion, an investor would recollect that Lincoln Pharmaceuticals Ltd has regularly
given out money to third parties in the form of loans. She would remember that on March 31, 2021, Lincoln
Pharmaceuticals Ltd has given out loans of about ₹44 cr to others.
In the past also, the company has been regularly giving out large amounts of money to others in the form
of loans.
i) In FY2006: An investor would remember that in FY2006, Lincoln Pharmaceuticals Ltd raised ₹5.5 cr by
way of preferential issuance of shares. When an investor attempt to read the annual report to find out the
usage of these funds by the company, then she realizes that it had given out almost entire money (₹5.15 cr)
as an inter-corporate deposit (ICD) to others (=56,000,000 in FY2006 – 2,500,000 in FY2005).
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Therefore, whatever money Lincoln Pharmaceuticals Ltd raised by way of issuance of shares in FY2006,
it gave out to others by way of ICDs. In a sense, it is similar to using Lincoln Pharmaceuticals Ltd as a
channel to move money from the accounts of subscribers of preferential issuance of shares to the accounts
of entities taking ICDs from the company. Nevertheless, an investor should do her own due diligence in
this regard.
ii) In FY2010: An investor would remember that in FY2010, Lincoln Pharmaceuticals Ltd raised ₹6.48 cr
by way of preferential issuance of shares. When an investor attempt to read the annual report to find out the
usage of these funds by the company, then she realizes in FY2010, Lincoln Pharmaceuticals Ltd had given
out ICDs of about ₹7.8 cr as the ICDs increased from ₹1.2 cr in FY2009 to ₹9 cr in FY2010.
An investor would also remember that during FY2010, Lincoln Pharmaceuticals Ltd had also received
money when the promoters exercised a part of warrants allotted to them by the company. In FY2010, the
promoters had exercised 6,500,000 warrants out of 10,000,000 warrants allotted to them in FY2009.
Therefore, an investor would notice that in FY2010, Lincoln Pharmaceuticals Ltd gave out all the money
raised by way of issuance of shares and a part of the money received from the exercise of warrants to others
by way of ICDs.
iii) In FY2011: From the above discussion, an investor would also remember that in FY2011, Lincoln
Pharmaceuticals Ltd raised ₹20.5 cr by way of preferential issuance of shares. When an investor attempt to
read the annual report to find out the usage of these funds by the company, then she realizes that it had
given out the majority of the money (₹16.7 cr) as an inter-corporate deposit (ICD) to others (=25.78 cr in
FY2011 – 9.07 cr in FY2010).

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Therefore, in FY2011 as well, whatever money Lincoln Pharmaceuticals Ltd raised by way of issuance of
shares, it gave out to others by way of ICDs. An investor would appreciate that this case is also similar to
using Lincoln Pharmaceuticals Ltd as a channel to move ₹16.7 cr from the accounts of subscribers of
preferential issuance of shares to the accounts of entities taking ICDs from the company. However, an
investor should do her own due diligence in this regard.
In FY2011, an investor also notices that there was a significant increase in the audit fees. The audit fees in
FY2011 became 3.7 times to ₹615,000 in FY2011 from ₹165,000 in FY2010, an increase of 272%.
While looking at the increase in the size of the business of Lincoln Pharmaceuticals Ltd over FY2011, an
investor notices that the consolidated sales of the company had increased from ₹131.6 cr in FY2010 to
₹187.1 cr in FY2011, an increase of 42%. When an investor looks at the profits, then she notices that the
profit after tax (PAT) of the company declined to ₹5.8 cr in FY2011 from ₹6.1 cr in FY2010.
An investor may contact the company directly to understand the reasons why the company decided to give
away the money it had raised by way of diluting its equity, both in FY2006 as well as FY2011. She may
ask for details of these counterparties. She may also ask about the reasons for a significant increase in the
auditors’ fees when the size of the business, which might be a proxy for the scope of the audit work, has
not changed so significantly.
An investor may do her own due diligence and arrive at her own conclusion about these transactions.
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5) Related party transactions of Lincoln Pharmaceuticals Ltd:

While analysing the annual reports of the company, an investor notices that Lincoln Pharmaceuticals Ltd
year after year, the company is involved in numerous transactions with many persons and entities related
to promoters.
An investor would appreciate that each of the transactions between the listed company and the
promoters/their relatives/entities carries the potential of shifting the economic benefit from the
public/minority shareholders to the promoters.
Let us see examples of some of such transactions.
5.1) Salaries and commissions paid to family members/HUFs of promoters by Lincoln

Pharmaceuticals Ltd:
While analysing the annual reports of Lincoln Pharmaceuticals Ltd, an investor notices that many family
members/relatives of the promoter family including a few Hindu undivided families (HUF) are being paid
commissions and remunerations by the company.
As per the FY2020 annual report, page 166-168, during the year, Lincoln Pharmaceuticals Ltd paid out a
total of ₹1.5 cr to the HUFs, wives, daughters and sons of the directors of the company in the form of
commissions and salary expenses.
Entities and relatives of the MD of the company, Mr Mahendra G Patel:
 Mahendra G Patel HUF: HUF of Mr Mahendra G Patel (MD): Commission: 23.60 lac
 Kailashben M Patel: Wife of Mr Mahendra G Patel (MD): Salary Expenses: 11.50 lac
 Nidhi H Patel: Daughter of Mr Mahendra G Patel (MD): Salary Expenses: 11.49 lac
Entities and relatives of the WTD of the company, Mr Munjal M Patel who is son of MD, Mr Mahendra G
Patel:
 Munjal M Patel HUF: HUF of Mr Munjal M Patel (WTD): Commission: 23.60 lac
 Mansi M Patel: Wife of Mr Munjal M Patel (WTD): Remuneration: 20.79 lac
Entities and relatives of other directors of the company:
 Ashish R Patel HUF: HUF of Mr. Ashish R Patel (WTD): Commission: 27.49 lac
 Kalpanaben R Patel: Wife of Mr Rajnikant G Patel (Director): Salary Expenses: 5.45 lac
 Dharmisthaben H Patel: Wife of Mr Hasmukh I Patel (WTD): Salary Expenses: 10.79 lac
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 Mansi A Patel: a relative of key managerial personnel: Salary Expenses: 16.39 lac
An investor may contact the company directly to understand more about these employees and the
commission transactions. She may seek information that might help her to understand the value being added
by these relatives/employees. She may ask for information like designations/attendance etc. to understand
the value addition.
She should do her own due diligence to make up her mind about these transactions.
5.2) Sale/purchase transactions of Lincoln Pharmaceuticals Ltd with promoter entities:
Apart from the above-mentioned salary/commission transactions; there are instances of sales/purchases
from promoter group entities.
For example, as per the FY2011 annual report, page 49, during the year, Lincoln Pharmaceuticals Ltd sold
goods of about ₹15 cr, to Allantis Exim Pvt. Ltd, which is an entity controlled by key managerial persons.
This seems like a transaction where the promoters bought goods from Lincoln Pharmaceuticals Ltd and
subsequently exported/traded these goods using their personal entity (Allantis Exim Pvt. Ltd).
An investor may note that such transactions where the listed entity enters into sale/purchase transactions
with promoter entities carry the risk of shifting the economic benefits from minority shareholders to the
promoters. This is because, if the listed entity sells the goods to promoter entities at a lower price than what
it can get in the market or it buys the goods at a higher price than what it can buy from the market, then the
promoters benefit at the cost of minority/public shareholders.
5.3) Financing transactions of Lincoln Pharmaceuticals Ltd with promoter entities:
Similarly, an investor comes across many transactions where Lincoln Pharmaceuticals Ltd has taken and
given loans to the promoter entities. For example, the company has been involved in many financing
transactions with one of the entities, Downtown Finance Pvt Ltd, which is mentioned as an entity controlled
by key managerial personnel/or their relatives. E.g. FY2019 annual report, page 154.
An investor may note that such transactions where the listed entity enters into financing transactions with
promoter entities, also carry the risk of shifting the economic benefits from minority shareholders to the
promoters. This is because, if the listed entity borrows money from the promoter entity at a higher interest
rate than what it can borrow from the market or it lends money to the promoter entity at a lower rate than
what it can get from the market, then the promoters benefit at the cost of minority/public shareholders.
To understand more about the related party transactions between the companies and their promoters and to
appreciate the risks involved in such transactions, an investor may read the following article in detail.
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6) Purchase of Lincoln Parenteral Ltd (LPRL) from promoters:

While reading the annual reports of Lincoln Pharmaceuticals Ltd, an investor notices that the company
started purchasing a stake in an entity, Lincoln Parenteral Ltd (LPRL). LPRL was a promoter group
company, which had been disclosed as an entity controlled by key management persons in the FY2011
annual report, page 49.
From the credit rating rationale of Lincoln Pharmaceuticals Ltd prepared by CRISIL in April 2021, an
investor notices that LPRL was established in 1991.
Lincoln Parenteral was incorporated in 1991 and manufactures dry powder, liquid injectibles, and syrup
variants at its facilities in Ahmedabad (Gujarat).
Therefore, it might be a case that the company had been running its operations for the previous 21 years
when Lincoln Pharmaceuticals Ltd decided to purchase it from the promoters.
i) First time, Lincoln Pharmaceuticals Ltd purchased a 62% stake in LPRL in FY2012 for ₹11.16 cr.
When Lincoln Pharmaceuticals Ltd purchased a 62% stake of LPRL from promoters at ₹11.16 cr, it
indicated that the company valued the entire equity (100%) of LPRL at ₹18 cr (=11.16/0.62).
To assess whether the valuation of ₹18 cr for LPRL is low or high, an investor needs to assess the financial
The below table contains the financial performance of LPRL from FY2011 to FY2020, taken from the
annual reports of Lincoln Pharmaceuticals Ltd from the section on performance of subsidiaries.
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From the above table, an investor notices that in the previous year, FY2011, LPRL had a revenue of about
₹15 cr and net profit after tax (PAT) of ₹0.37 cr. Therefore, when Lincoln Pharmaceuticals Ltd put a
valuation of ₹18 cr on LPRL, then it amounted to buying LPRL from the promoters at a price to earnings
(PE) ratio of more than 48 times (18/0.37 = 48.65).
Soon after acquisition by Lincoln Pharmaceuticals Ltd, the financial performance of LPRL started
declining. The revenue of LPRL declined about 50% in the next two years, from ₹15 cr in FY2011 to ₹7.6
cr in FY2013. At the same time, the profits also declined sharply. LPRL started reporting losses. From a
profit of ₹0.37 cr in FY2011, LPRL fell into losses, which increased to (₹1.2) cr in FY2014.
ii) Second time, Lincoln Pharmaceuticals Ltd increased its stake in LPRL in FY2015 from 62% to 70.08%.
To increase its stake by 8.08% (=70.08 – 62), Lincoln Pharmaceuticals Ltd paid a value of ₹1.42 cr because
the investment by the company in LPRL increased from ₹111,600,000 in FY2014 to ₹125,849,430 in
FY2015.
From the above disclosure, an investor would appreciate that when; in FY2015, Lincoln Pharmaceuticals
Ltd purchased a stake of 8.08% in LPRL at ₹1.42 cr, then it valued the entire company at ₹17.57 cr
(=1.42/0.0808).
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When an investor notices the profits of LPRL for the previous year, FY2014, then she notices that LPRL
reported a loss of (₹1.2) cr in the year. Therefore, we consider the profits of LPRL for the year FY2015 for
doing the valuation. In FY2015, LPRL reported a PAT of ₹0.17 cr. If an investor calculates the valuation
paid by Lincoln Pharmaceuticals Ltd for purchasing a stake in LPRL considering the profits of FY2015,
then it comes at a price to earnings (PE) ratio of more than 103 times (17.57/0.17 = 103.35).
iii) Third time, Lincoln Pharmaceuticals Ltd increased its stake in LPRL in FY2016 from 70.08% to
98.58%. To increase its stake by 28.5% (=98.58 – 70.08), Lincoln Pharmaceuticals Ltd paid a value of
₹7.34 cr because the investment by the company in LPRL increased from ₹125,849,430 in FY2015 to
₹199,252,187 in FY2016.
From the above disclosure, an investor would appreciate that when; in FY2016, Lincoln Pharmaceuticals
Ltd purchased a stake of 28.5% in LPRL at ₹7.34 cr, then it valued the entire company at ₹25.75 cr
(=7.34/0.285).
When an investor notices the profits of LPRL for the previous year, FY2015, then she notices that in
FY2015, LPRL reported a PAT of ₹0.17 cr. If an investor calculates the valuation paid by Lincoln
Pharmaceuticals Ltd for purchasing a stake in LPRL considering the profits of FY2015, then it comes at a
price to earnings (PE) ratio of more than 151 times (25.75/0.17 = 151.47).
Therefore, an investor notices that in the past, when Lincoln Pharmaceuticals Ltd purchased a stake in
LPRL from its promoters, then it paid PE ratios of 48, 103 and 151 times, which look high from a valuation
perspective.
Moreover, when an investor notices the financial performance of LPRL over the years, then she notices that
the sales of LPRL are on a continuous decline for the last 5 years. The sales of LPRL have declined from a
high of ₹111.5 cr in FY2016 to ₹44.5 cr in FY2020 (the last available financial data of LPRL).
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An investor may contact the company directly to understand the reasons for purchasing LPRL from its
promoters and the rationale for paying a PE ratio of 48, 103, and 151 while purchasing shares of LPRL
from the promoters. She may ask the reasons for the continuous decline in the business of LPRL from the
last 4-5 years.
She may ask the reasons why the LPRL despite being in existence from 1991 (i.e. 30-years) and being in
direct control of Lincoln Pharmaceuticals Ltd from FY2012 has only reached a scale where it is able to earn
profits of only about ₹2 cr. The investor may seek clarifications about the future plans of Lincoln
Pharmaceuticals Ltd related to the manufacturing operations of the plant of LPRL.
An investor may note that currently, Lincoln Pharmaceuticals Ltd is in the process of merging LPRL with
itself, which effectively means that is planning to increase its shareholding in LPRL from the current
98.58% to 100%. Therefore, going ahead, LPRL will cease to exist as a separate legal entity and only its
manufacturing unit would continue to exist as a fixed asset on the balance sheet of Lincoln Pharmaceuticals
Ltd.
Credit rating report of Lincoln Pharmaceuticals Ltd by ICRA in February 2021:
The scheme of amalgamation between Lincoln Parenteral Limited (“Transferor company) and Lincoln
Pharmaceuticals Limited (Transferee Company) is currently under process.
An investor should be cautious while analysing transactions between the listed companies and their
promoters and their group entities. This is because; such transactions have the potential of shifting the
economic benefits from the public/minority shareholders to the promoters.
7) Playing with accounting assumptions to report a higher profit:

While reading the annual reports of Lincoln Pharmaceuticals Ltd, an investor comes across instances where
the company did not comply with the required accounting guidelines and, in turn, reported a higher profit.
However, the statutory auditor of the company highlighted such non-compliance to the accounting
guidelines to the shareholders in its report.
In FY2012, Lincoln Pharmaceuticals Ltd had faced very long delays in receiving money from some of its
customers. It seems that there was a possibility that the company would not be able to collect money from
them. As a result, the accounting guidelines require that the company should recognize this as a loss and
make provisions for the same.
However, as per the auditor, Lincoln Pharmaceuticals Ltd did not recognize a loss on the entire involved
amount. Instead, it only recognized a loss on only a part of the amount and did not recognize the loss of
₹2.15 cr. As a result, the company reported a higher profit than what it should ideally have reported.
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However, the auditor of the company disagreed with this decision of Lincoln Pharmaceuticals Ltd and
pointed out its disagreement in the annual report.
Attention is invited to Note No. 15 to the financial statement relating to trade receivables regarding short
provision to the extent of ₹ 215.21 Lakh toward unsecured trade receivable considered as doubtful. Had
full provision been made, the profit, reserves and trade receivables would have been lower to that extent.
In the next year, FY2013, Lincoln Pharmaceuticals Ltd repeated the same decision when it did not recognize
an amount of ₹2.37 cr of receivables as a loss. Therefore, it reported a higher profit than what it should
ideally have.
However, once again, the auditor of the company did not agree with this decision of the company and
highlighted its disagreement as a qualified opinion in the annual report.
Basis for qualified opinion: Trade Receivable of the company is ₹ 7294.91 Lakh which includes trade
receivable of ₹ 238.07 Lakh identified as doubtful debt by the management of the company. The company
has provided ₹ 0.50 Lakh for Doubtful Debt as on the date of balance sheet. An additional provision for
doubtful debt of ₹ 237.57 Lakh is required and accordingly, Trade Receivable, Net profit for the year and
shareholder fund would have been lower by that amount.
An investor may contact the company directly to understand the reasons for such an accounting treatment
by the company and why it did not rectify the accounting treatment despite the disagreement by the statutory
auditor.
It is advised that in such instances where certain decisions of companies lead to a higher reported profit
where the auditors of the companies do not agree with the same, an investor should adjust the profits
accordingly while doing her analysis.
8) Non-compliance with guidelines of appointing the Chief Financial Officer

(CFO):
In the FY2016 annual report, the secretarial auditor of the company highlighted that Lincoln
Pharmaceuticals Ltd has not complied with the requirements of the Companies Act, 2013 because it has not
appointed a CFO.
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During the period under review the Company has complied with the provisions of the Act, Rules,
Regulations, Guidelines, Standards, etc. mentioned above, Save and Except appointment of Chief Financial
Officer under the provision of Section 203 of the Companies Act, 2013. However, the Company is in process
of appointing the Chief Finance Officer.
As per the above disclosure, an investor would note that the company responded to the auditor that it is in
the process of appointing the CFO.
However, despite its claims, the company did not appoint a CFO for the next two years. In the FY2017 as
well as FY2018 annual reports, the secretarial auditor again highlighted the non-compliance with the
requirements of the Companies Act 2013.
During the Audit period under review and as per the explanation and clarification given to us and
presentation made by the Management, the Company has complied with the provisions of the Act, Rules,
Regulations, Guidelines, Standards, etc. mentioned above, save and except appointment of Chief Financial
Officer under provision of Section 203 of the Companies Act, 2013.
During the Audit period under review and as per the explanation and clarification given to us and
presentation made by the Management, the Company has complied with the provisions of the Act, Rules,
Regulations, Guidelines, Standards, etc. mentioned above, save and except appointment of Chief Financial
Officer under provision of Section 203 of the Companies Act, 2013.
Finally, after about 4 years of continuously pointing out by the auditors, the company appointed the CFO
in FY2019, three days before the end of the financial year on March 28, 2019.
During the period under review the Company has complied with the provisions of the Act, Rules,
Regulations, Guidelines, Standards, etc. mentioned above except appointment of Chief Financial Officer
(CFO) as per section 203 of the Companies Act, 2013 during the year, however the Company has appointed
CFO on March 28, 2019.
Therefore, an investor would notice that the company delayed its compliance with the requirements of the
Companies Act for appointing a CFO of the company for almost 4 years despite continuously pointing out
by the secretarial auditor of the company.
An investor may note that such a non-compliance by the company was not limited to the appointment of
the CFO. In FY2017, Lincoln Pharmaceuticals Ltd did not have the composition of its board of directors as
per the Companies Act, 2013. The secretarial auditor highlighted that the number of independent directors
on the board of the company was less than what is required as per the Companies Act, 2013.
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The Board of Directors of the Company is duly constituted with proper balance of Executive Directors and
Non-Executive Directors and in case of Independent Directors, number of Independent Directors appointed
on the Board of Directors of the Company is falling short by requirement of appointing one Independent
Director, as required under provision of section of Section 149(4) of the Companies Act, 2013
The above instances indicate that on multiple occasions, Lincoln Pharmaceuticals Ltd has not complied
with the legal requirements. Moreover, in the case of the CFO, the company continued to avoid complying
with the requirement for many years despite regular reminders by the secretarial auditor.
9) Weakness in the internal processes and controls of Lincoln Pharmaceuticals

Ltd:
While analysing the annual reports of the company, an investor comes across numerous instances that
indicate a history of weakness in the processes and controls at Lincoln Pharmaceuticals Ltd, which leave
scope for improvement.
9.1) Weakness in control systems and maintaining proper records:
While reading the FY2014 annual report, an investor comes across an observation by the statutory auditor
of the company highlighting that the company has not maintained proper records of its fixed assets.
The Company has not maintained updated records showing full particulars including quantitative details
and situation of fixed assets.
Once again, in the FY2015 annual report, the auditor highlighted the requirement to strengthen the controls
at the company.
In our opinion and according to the information and explanations given to us, the control system needs to
be strengthened to make it commensurate with the size of the company and the nature of its business, for
the purchase of inventory and fixed assets and for the sale of goods.
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9.2) Delays in depositing undisputed statutory dues to the Govt. authorities by Lincoln
Pharmaceuticals Ltd:
While reading the annual reports of the company, an investor notices that at times, the company failed to
deposit its dues to the govt. even in the cases where there was no dispute about its liabilities.
For example, in the FY2015 annual report, the statutory auditor highlighted that the company, as well as its
subsidiary, had delayed the deposit of undisputed dues like provident fund etc.
The holding company is regular in depositing undisputed statutory dues including sales-tax, duty of
customs, duty of excise, value added tax. The holding company is also regular except in some cases, in
depositing provident fund, employees’ state insurance and any other statutory dues, TDS, wealth tax and
service tax with the appropriate authorities.
As reported by auditors of subsidiary companies, those companies, are regular in depositing undisputed
statutory dues…except one subsidiary company which is regular depositing undisputed statutory dues
except, in some cases, in depositing provident fund, employees’ state insurance and any other statutory
dues, TDS, wealth tax and service tax with the appropriate authorities.
An investor would note that the above instances present an environment where there are weaknesses in the
internal process and controls and in addition, non-compliance to the legal requirements continue despite
reminders by the auditors. In such a situation, there are possibilities that unscrupulous elements may attempt
to take benefit of the weaknesses and attempt to do fraud on the company.
In the case of Lincoln Pharmaceuticals Ltd, the company detected an incident where one of the employees
did fraud on the company and took away ₹20 lac. The auditor highlighted it in its report in the annual report
and mentioned that the company could recover the money from the employee.
Fraud: …we noticed that a fraud involving an embezzlement of ₹ 20 Lakh was committed by an employee
of the company. The company has recovered the loss from the employee.
Therefore, an investor would notice that when the internal processes and controls of any company are weak
and there are instances of non-compliance with legal requirements, in such an environment, there is a high
probability of frauds going undetected.
An investor may read another example in the case of National Peroxide Ltd, a Wadia Group company,
where the managing director of the company attempted to take advantage of the weaknesses in the internal
processes and controls and did fraud on the company: Analysis: National Peroxide Ltd
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10) Certain corporate decisions by Lincoln Pharmaceuticals Ltd:

While reading about the business history of the company, an investor comes across certain decisions taken
by the company that do not look like an optimal utilization of time and resources of the company and its
management.
Let us analyse some of these decisions.
10.1) First, a share split from FV ₹10/- to FV ₹2/- and then a consolidation (reverse share
split) from FV ₹2/- to FV ₹10/-:
While analysing the FY2006 annual report, an investor notices that Lincoln Pharmaceuticals Ltd had split
its one share of face value (FV) ₹10/- into five shares of FV ₹2/-.
FY2006 annual report, pages 1-2:
SUB-DIVISION OF SHARE: During the year under review, the Company has Subdivided the existing share
capital of Rs. 9,00,00,000 (Rupees Nine Crores Only) divided into 90,00,000 (Ninety Lacs) equity shares
of Rs. 10/- each in to Rs. 9,00,00,000 (Rupees Nine Crores Only) divided in to 4,50,00,000 (Four Crores
Fifty Lacs) Equity Shares of Rs. 2/- each.
However, an investor notices that within a few years, the company did a U-turn on its decision. In FY2009,
the company did a reverse share split i.e. consolidation of its shares where it consolidated five shares of FV
₹2/- into one share of FV ₹10/-.
Company has consolidated 5 equity shares of Rs. 2/- each fully paid up in to one equity share of Rs. 10/-
each.
An investor would notice that the process of a share split involves many steps like approval by the board of
directors, approval by the shareholders, communications with stock exchanges and registrar and other
operational formalities. All these steps consume precious time and resources, both person-hours and money.
In the case of Lincoln Pharmaceuticals Ltd, it had to spend the resources twice; first, when it did the share
split and second, when it did the consolidation. Therefore, it seems like a non-optimal utilization of time
and resources by the company.
Many times, companies split their shares when the share price increases to very high levels, which starts to
affect the liquidity in its stock market transactions. At such time, doing a share split brings down the price
of each share and increases the number of shares in the market. As a result, the trading activity/liquidity in
the share increases.
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However, in the case of Lincoln Pharmaceuticals Ltd, the share price in FY2006 was in the range of ₹24 to
₹58, which is not high. Therefore, in such a situation doing a share split followed by a consolidation does
not look like the best utilization of time and resources of the management, directors and the shareholders.
An investor may contact the company directly to understand the reasons and the perspective of the company
for doing the share split followed by the consolidation of shares.
10.2) An NBFC subsidiary: formation, name change and then dissolution in quick
succession:
While reading the FY2018 annual report, an investor gets to know that Lincoln Pharmaceuticals Ltd had
formed a wholly-owned subsidiary named “Savebux Finance & Investment Private Limited” and has
applied to Reserve Bank of India (RBI) for its registration as a non-banking finance company (NBFC).
During the year under review, the Company has incorporated a Wholly-Owned Subsidiary Company
“Savebux Finance & Investment Private Limited in India with an initial investment of 2 Crore. The
Company is in process of receiving the Certificate of Registration (COR) from Reserve Bank of India for
Non-Banking Finance Company (NBFC).
An investor would appreciate that formation of a dedicated NBFC subsidiary by a manufacturing company
seems like unrelated diversification that may not be the best utilization of the company’s resources.
However, the very next year, in FY2019, an investor gets to know that Lincoln Pharmaceuticals Ltd has
changed the name of the subsidiary from “Savebux Finance & Investment Private Limited” to “Savebux
Enterprise Private Limited”.
Savebux Enterprise Private Limited [Formerly known as Savebux Finance & Investments Private Limited
(Wholly-Owned Subsidiary Company)
From the decision of Lincoln Pharmaceuticals Ltd to change the name of the subsidiary from finance &
investments to enterprises, an investor may think that the plans of the company have changed. It may seem
that Lincoln Pharmaceuticals Ltd no longer wants to get involved in financing activities; however, it wishes
to use the new subsidiary for manufacturing/trading activities.
However, the very next year, FY2020, an investor reads that this subsidiary has applied for a voluntary
liquidation/winding-up process.
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During the year under consideration, subsidiary of the company namely “Savebux Enterprises Private
Limited (Under Liquidation)” has applied for voluntary winding up process and pursuant to the same
Insolvency Professional has retuned capital contribution of ₹ 195.00/- Lakhs to the company
From the above disclosure, an investor would appreciate that under Indian laws, the process of closing
down a company is also time-consuming that involves appointing an insolvency professional and applying
to National Company Law Tribunal (NCLT). Only after the approval of NCLT, a company ceases to exist.
It took about a year for Lincoln Pharmaceuticals Ltd to receive all the approvals for closing down the
subsidiary. In March 2021, the subsidiary was finally dissolved when the approval of NCLT was received.
Corporate announcement to BSE, March 31, 2021:
Company has received an order passed by Hon’ble NCLT for dissolution of M/s. Savebux Enterprises
Private Limited (a Wholly Owned Subsidiary) of the Company on March 26, 2021 under Section ·59 of the
Insolvency and bankruptcy Code. 2016. Accordingly the said Company stands dissolved w.e.f. March 03,
2021 i.e. the date of passing of the order.
In this entire exercise of forming a wholly-owned subsidiary and then liquidating it, an investor would
appreciate that many aspects of the decisions of Lincoln Pharmaceuticals Ltd do not appear optimal
utilization of time and resources.
Lincoln Pharmaceuticals Ltd first formed a finance-focused subsidiary, which is not the core area of
operations of the company. Forming a new subsidiary and the application to RBI for the NBFC license
involves the work of multiple people like chartered accountants (CA), company management and
board/authorized signatory. Later on, it changed the name of the company, which again is a time and
resource consuming-exercise involving the work of CAs, company management and board of directors.
Thereafter, Lincoln Pharmaceuticals Ltd decided to liquidate the subsidiary, which is a more cumbersome
process with applying to the court, appointing of insolvency professional etc.
Looking at all these steps taken by Lincoln Pharmaceuticals Ltd within a short time, it seems that the entire
time of the life of existence of the subsidiary was spent in one application or the other related to either
registration, name change or dissolution. It looks that Lincoln Pharmaceuticals Ltd could have utilized the
time and resources of the company, the board of directors, company management and the shareholders more
efficiently.
An investor may contact the company directly to understand the reasons for forming a finance-focused
subsidiary, the reasons for changing the name of the company and then dissolving it within a very short
period.
11) Information presented by Lincoln Pharmaceuticals Ltd in the annual reports:

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While reading the annual reports of the company, an investor comes across a few instances where she
notices that the information provided by Lincoln Pharmaceuticals Ltd in the annual reports can be
improved.
Let us see some of such instances.
11.1) Disclosure of related party transactions by Lincoln Pharmaceuticals Ltd:
While reading the FY2018 annual report, in the related party transactions section, an investor notices that
Lincoln Pharmaceuticals Ltd had transactions with many relatives (wife, daughter etc.) and HUFs of the
directors by way of commission and remuneration/salary. We have discussed a few such transactions in the
article above.
While analysing these transactions in the FY2018 annual report, an investor notices that as per the column
for the previous year data (FY2017), Lincoln Pharmaceuticals Ltd had such transactions with the HUFs and
relatives of the directors in FY2017 as well.
In the data of the related party transactions from the FY2018 annual report shown below, an investor may
focus on the transactions with:
 Manasi M. Patel: Wife of Mr. Munjal M Patel (WTD): Remuneration: 810,000 (FY2018) | 520,000
(FY2017)
 Kailashben M Patel: Wife of Mr. Mahendra G Patel (MD): Remuneration: 820,000 (FY2018) |
650,000 (FY2017)
 Kalpanaben R Patel: Wife of Mr. Rajnikant G Patel (Director): Remuneration: 624,167 (FY2018)
| 910,000 (FY2017)
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From the above data, an investor would notice that Lincoln Pharmaceuticals Ltd paid remunerations to Ms
Manasi M. Patel, Ms Kailashben M Patel and Ms Kalpanaben R Patel in FY2017 as well. Moreover, the
investor would appreciate that Mr. Munjal M Patel (WTD), Mr. Mahendra G Patel (MD) and Mr. Rajnikant
G Patel (Director) were a part of the board of directors in FY2017 as well.
Therefore, an investor would appreciate that because that Mr. Munjal M Patel (WTD), Mr. Mahendra G
Patel (MD) and Mr. Rajnikant G Patel (Director) were a part of the board of directors in FY2017. As a
result, Ms Manasi M. Patel, Ms Kailashben M Patel and Ms Kalpanaben R Patel who are related to them
as a spouse, tend to be a related party. Therefore, an investor would assume that the remuneration paid by
Lincoln Pharmaceuticals Ltd to them in FY2017 would be disclosed in the section on related party
transactions.
However, when an investor analyses the section of FY2017 containing related party transactions, then she
notices that their names and the remuneration transactions are not mentioned under related party
transactions in FY2017.
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From the above discussion, an investor would note that in the related party transactions of the FY2017
annual report, Lincoln Pharmaceuticals Ltd has not disclosed the names of Ms Manasi M. Patel, Ms
Kailashben M Patel and Ms Kalpanaben R Patel and the remuneration paid to them in FY2017.
An investor may contact the company directly to understand the reasons for not disclosing the names of
relatives (wives) of directors and the remuneration paid to them in the annual report.
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11.2) Errors in the data provided by Lincoln Pharmaceuticals Ltd in the annual reports:
While analysing the annual reports, an investor comes across a few instances where the data presented by
Lincoln Pharmaceuticals Ltd in the annual reports are erroneous.
Let us see a few such instances.
In the FY2018 annual report, while analysing the indebtedness table on page 30, an investor notices that
there is a totalling error while calculating the total debt at the end of the year.
In the above section, an investor would notice that the debt at the start of the year was ₹5,123.84 lacs.
During the year, the debt increased by ₹602.46 lacs. Therefore, at the end of the year, the total debt should
be ₹5,726.30 lacs (= 5,123.84 + 602.46). However, an investor notices that in the indebtedness table, the
company has shown the total debt at the end of the year as ₹5,467.96 lacs, which seems incorrect.
An investor may contact the company directly to understand whether this is a typographical error or there
is some other data, which is missing in the indebtedness table.
An investor comes across another such instance of an error in the annual report when she analyses the
shareholding pattern of the company in the FY2018 annual report on page 25.
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The investor notices that in the shareholding details table, the Indian promoters’ holding at the start of the
year should be 33.18% (=27.72 + 5.46) instead of the 40.68% shown in the annual report. Similarly, the
change in the Indian promoters’ shareholding during the year should be either 1.03% or 1.04% (due to
rounding off), which is the difference between 33.18% and 32.14% (the shareholding at the end of the year).
However, here also, Lincoln Pharmaceuticals Ltd showed the change in the Indian promoters’ holding
during the year at 8.54%, which seems to be incorrect.
An investor may contact the company directly to understand whether this is also a typographical error or
there is some other data, which is missing in the shareholding pattern table.
The Margin of Safety in the market price of Lincoln Pharmaceuticals Ltd:

Currently (September 3, 2021), Lincoln Pharmaceuticals Ltd is available at a price to earnings (PE) ratio
of about 10.2 based on consolidated earnings of the last 12-months (July 2020-June 2021). An investor
would appreciate that a PE ratio of 10.2 offers some margin of safety in the purchase price as described by
Benjamin Graham in his book The Intelligent Investor.
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Analysis Summary
Overall, Lincoln Pharmaceuticals Ltd seems a company, which has grown its sales at a growth rate of 9%
year on year along with an improvement in profitability over the last 10-years. Until FY2016, the company’s
sales were growing at a fast pace of 20%; however, it had low operating profit margins (OPM). After
FY2017, the company stopped low margin trading and domestic generics business and focused on high
margin exports business. As a result, the sales growth moderated to about 4% per year; however, the OPM
increased to 21% in FY2021.
The company has been able to grow its sales using its business profits and has repaid its entire debt. It
became debt-free in FY2021. However, in the past, on multiple occasions, it had diluted its equity to raise
money by way of preferential allotment of shares and warrants. It seems that almost whenever the company
raised money from equity dilution, it gave it out as inter-corporate deposits to others. Even otherwise,
Lincoln Pharmaceuticals Ltd had regularly given out loans and advances to others. On March 31, 2021, it
had given out loans of about ₹44 cr to others.
The next generation of the founder-promoters has joined the business and the company seems to have a
succession plan in place. The company seems to have many transactions with relatives and entities
controlled by promoters like lending, sales/purchase, commission, and remuneration etc. Lincoln
Pharmaceuticals Ltd has purchased one of the companies owned by promoters where it seems that the
company paid a rich valuation for acquisition. An investor needs to analyse such transactions in detail.
At times, Lincoln Pharmaceuticals Ltd has not disclosed spouses of promoters/directors as related parties
in the annual report. As a result, the company did not disclose the transactions it did with them. Therefore,
an investor should be cautious while analysing the disclosures done by the company.
There have been many occasions where Lincoln Pharmaceuticals Ltd has either used accounting
assumptions to show a higher profit, not complied with the requirements of the Companies Act, did not
maintain proper records of purchase of inventory, fixed assets, and sales of goods etc. The weakness of
internal processes and controls seems to have led to a fraud on the company by one of its employees.
At times, Lincoln Pharmaceuticals Ltd had taken decisions, which show a sub-optimal utilization of
resources and time of the management. It first split the shares from FV ₹10/- to ₹2/-; however, within a few
years, it again consolidated its shares from FV ₹2/- to ₹10/-. Recently, it first established a subsidiary and
applied for an NBFC license from RBI; however, soon thereafter, it first, changed the name of the subsidiary
and then dissolved it. These activities have consumed time and resources, which could have been optimally
utilized in other activities.
Going ahead, an investor should focus on the growth of the company in domestic as well as in export
markets along with the profit margins. Declining profit margins may indicate commoditization of its
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products and a loss of pricing power. She should closely monitor events related to the continued status of
its approvals from drug authorities of its target countries.
The investor should closely monitor the collection of receivables by the company as it has to give a long
credit period to overseas customers and at times, a significant amount of receivables have become credit-
impaired.
The investor should keep a close watch on the loans/ICDs being given out by the company and also keep a
track of all the transactions of the company with its promoters/relatives and their entities. She should see if
the company raises more capital by equity dilution in future and if so, then how the company uses it. She
should closely analyse the annual reports of the company for any signs of non-compliance with legal
regulations and weaknesses in processes and controls.
These are our views on Lincoln Pharmaceuticals Ltd. However, investors should do their own analysis
before making any investment-related decisions about the company.
P.S.

Videos
Analysis Excel
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8) SOM Distilleries & Breweries Ltd

SOM Distilleries & Breweries Ltd is a beer and Indian made foreign liquor (IMFL) manufacturer. The
company produces beer brands like Hunter, Black Fort, Power Cool and Woodpecker, and IMFL brands
like Milestone 100 whisky, White Fox vodka, Legend, Genius, Sunny, Gypsy and Blue Chip. The company
is primarily active in the states of Madhya Pradesh, Karnataka and Odisha.
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While analysing the past financial performance of the company, an investor notices that until FY2016, the
company used to report only standalone financials. However, in FY2017, the company formed its first
subsidiary Woodpecker Distilleries & Breweries Private Limited to build a brewery in Karnataka. As a
result, the company started to report standalone as well as consolidated financials from FY2017.
such a picture.
Therefore, in the analysis of SOM Distilleries & Breweries Ltd we have used standalone financials up to
FY2016 and consolidated financials from FY2017 onwards.
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Financial and Business Analysis of SOM Distilleries & Breweries Ltd:

While analyzing the financials of SOM Distilleries & Breweries Ltd, an investor notices that the sales of
the company have grown at a pace of about 11% year on year from ₹175 cr in FY2011 to ₹460 cr in FY2020.
Further, during the 12-months ending December 2020 (i.e. January 2020-December 2020), the sales of the
company have declined to ₹275 cr.
While doing a detailed analysis of SOM Distilleries & Breweries Ltd, an investor notices that the company
has had nearly consistent sales growth except in FY2014 when its sales declined by about 7% from ₹204
cr in FY2013 to ₹190 cr in FY2014.
When an investor analyses the profit margins of the company, then she notices that SOM Distilleries &
Breweries Ltd had a nearly consistent operating profit margin (OPM) in the range of 14%-15% during
FY2011-FY2017. In FY2018, the OPM of the company increased to 17%. However, thereafter, the OPM
of SOM Distilleries & Breweries Ltd has declined consistently to 10% in FY2020. During the 12-months
ending December 2020 (i.e. January 2020-December 2020), the company reported an operating loss.
In order to understand the reasons behind the decline in sales in FY2014 and the fluctuations in the profit
margins of the company over the years, an investor needs to analyse the business model of SOM Distilleries
& Breweries Ltd in detail. Only after understanding the reasons behind the fluctuating performance of the
past, an investor would be able to make an educated guess about the future performance of the company.
While reading the annual reports of SOM Distilleries & Breweries Ltd, its credit rating reports, red-herring
prospectus for IPO in FY2006 as well as various corporate announcements, an investor notices the
following key characteristics of its business model, which influence its performance significantly:
A) SOM Distilleries & Breweries Ltd does not have the pricing power:
An investor notices that in the liquor industry, the manufacturers do not have any pricing power. In most
cases, the state governments determine the final prices of the beverages and liquor manufacturers cannot
change the prices at their will.
In many states, where the government is also the biggest distributor, it fixes the prices at which it buys
products from the alcoholic beverage companies and the prices at which they will sell to the end consumers.
The state governments decide the end consumer price, leaving manufactures with no say in determining
their selling price.
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B) The input costs for SOM Distilleries & Breweries Ltd are volatile, which affect
its profit margins:
The key raw materials for SOM Distilleries & Breweries Ltd are agricultural inputs like barley, sugar and
rice flakes.
Wherever possible and cost effective, we choose to source our raw materials – barley, rice flakes, sugar
from local supplier
An investor would appreciate that in the case of agricultural inputs, both the prices as well as availability
are highly dependent on natural factors like weather including monsoon etc. as well as local political factors.
As a result, it becomes a challenge for the company to maintain its profit margins when its input costs like
prices of agricultural inputs as well as labour increase.
In addition, due to the highly regulated nature of the industry, SOM Distilleries & Breweries Ltd does not
have any power to increase the prices of their products. The govt. controls the pricing and revises it only
once a year. As a result, if the prices of its raw materials increase during the year, then the companies have
to take a hit on their margins.
Government controls the pricing of Beer in many states, which is allowed to be revised on a yearly basis.
This makes the pricing inflexible for increase in the raw material cost or inflation.
Therefore, the companies have to lobby the govt. authorities for any increase in prices. An investor would
appreciate that getting a price increase in such situations is difficult.
Furthermore, the regulatory barriers also pose challenges for offsetting cost inflation. Companies in the
sector has to represent their case to state governments to get price increase, which is a time-consuming
process.
In such a situation, an investor would appreciate that whenever there is an increase in cost prices, then the
most preferred way for the company to maintain its profit margins is to control its costs.
During FY2011-FY2017, when SOM Distilleries & Breweries Ltd had a stable OPM of 14%-15%, it relied
on controlling its cost efficiencies to maintain its profitability.
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The inflationary pressures had quite an impact on the company not only on input costs, but also the labour
costs in the company. Your company implemented many cost efficient programmes in order to bring down
be production costs
However, still, SOM Distilleries & Breweries Ltd highlighted to its investors that in the liquor industry it
is not possible to fully pass on the increase in raw material prices to its customers. As a result, maintaining
profit margins is challenging.
Volatility in the Prices of Key Raw Material: The beer and IMFL industry can be adversely impacted due
to the volatility in key input raw material prices such as barley, ENA and glass bottles. Since the pricing
power is limited, companies would not be able to fully pass on the higher costs to consumers thereby
margins gets impacted.
Due to the absence of pricing power, when SOM Distilleries & Breweries Ltd faced increasing costs in
FY2019 and FY2020 due to its expansion and entry into newer markets, then its operating profit margin
(OPM) declined. The OPM of the company declined from 17% in FY2018 to 13% in FY2019 and 10% in
FY2020.
Our margins for the year were predominantly impacted due to higher costs pertaining to new glass bottles,
employee and freight costs to target new markets. These cost pressures can be attributed to the expansion
that we have undertaken in the last fiscal year and are transitionary in nature.
EBITDA margins for the year was 10.3% compared to 13.3% in FY2019. As the Company is in a growth
phase, higher costs pertaining to new glass bottles, employee and freight costs to target new markets
impacted the margins during the period
Therefore, an investor would appreciate that due to the low pricing power of SOM Distilleries & Breweries
Ltd, whenever there is an increase in raw material costs, then the company finds it very difficult to increase
the prices of its products. As a result, the company remains susceptible to a decline in its profit margins.
The credit rating agency, ICRA also highlighted the susceptibility of the company’s profit margins to the
volatility in the raw material prices in its report in February 2020.
the Group’s margins remain exposed to volatility in raw material prices.
C) Beer is a perishable product with low shelf life:

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While reading about the business performance of SOM Distilleries & Breweries Ltd, an investor notices
that its key product, beer, is a perishable product. It has a very low shelf life. As a result, if beer is not sold
within a short period of its production, then the entire stock becomes useless and is a straight loss for the
company.
SOM Distilleries & Breweries Ltd faced big losses due to the expiry of unsold beer in 2020 when the
company could not sell beer due to coronavirus related lockdown during March-June 2020.
In March 2020 quarter, the company had a loss of ₹8 cr due to the write-off of unsold beer.
The impact on profitability was primarily attributable loss on sales on account of pandemic outbreak
coupled with inventory write-off to the tune of Rs. 80 million. As you are aware that beer has limited shelf
life and given no sales during the lock down, we had to take the hit.
In April-June 2020, the company to take another hit of about ₹10 cr due to coronavirus lockdown and the
lower shelf life of beer.
Q1-FY2021 result presentation, page 8:
Beer has a short shelf life due to which some inventory had to be written-off. There were write offs also on
account of debtors, demurrage charges and others. The losses on account of these write-offs was ~Rs. 80
million and ~100 million, which is reflected in Q4 FY2020 and Q1 FY2021 financials, respectively.
An investor would appreciate that the limited shelf life of beer hit SOM Distilleries & Breweries Ltd hard
in 2020. As a result, in the 12-months ending December 2020 (i.e. January 2020 – December 2020), the
company had operating losses.
From the above discussions, an investor would appreciate that SOM Distilleries & Breweries Ltd has no
pricing power over its customers. It operates in an industry with very high regulations. It faces challenges
due to volatile prices and the availability of raw materials. In addition, its final product (beer) has a low
shelf life. All these factors make it difficult for SOM Distilleries & Breweries Ltd to maintain its profit
margins.
The operating losses reported by SOM Distilleries & Breweries Ltd during the 12-months ending December
2020 (i.e. January 2020 – December 2020), is not the first time when the company suffered losses in its
business. In the past, the company had repeatedly faced losses in its business.
In the FY2005 annual report, the company told its shareholders that its business has suffered losses from
the last 3 years. The company highlighted that the shape of its business was so poor that it could not even
repay its lenders and as a result, it defaulted in its repayments.
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Default in repayment of dues to Bankers and Financial Institutions are due to losses incurred by the
company during last three years. Various efforts are being made to regularize the accounts with Banks and
Financial Institutions.
Surprisingly, the company blamed the banker for its poor state of business affairs.
The Company has clear dependency on its bankers. This confidence was on the basis of long term
relationship with the Bankers without realizing that the Bankers provide umbrella for non-raining days
only. This dependency on and prolonged persuasion with the Bankers has put the Company into difficult
situation where the Company has suffered huge losses due to non-availability of small requirement of
working capital since last three years.
The poor business performance continued and the company continued to report losses in FY2007. (Source:
FY2008 annual report, page 27).
Due to the continued poor business performance, SOM Distilleries & Breweries Ltd reached the bankruptcy
stage and had to restructure its debt. As a result, in FY2007, the company took the help of Kotak Mahindra
Bank and repaid its debt to the previous lenders: Bank of Baroda and Bank of India (Source: FY2008 annual
report, page 36).
The company has completed the process of restructuring and with the induction of funds from Kotak
Mahindra Bank as Working Capital, Company has turned around completely. The Company has also made
settlement with the bankers for their dues with the help of Kotak Mahindra Bank.
An investor may think that these periods of poor business performance and debt restructuring of SOM
Distilleries & Breweries Ltd have been events of the distant past and the company has moved further over
the years with continued history of profits over the last 10 years.
However, while reading different public documents about SOM Distilleries & Breweries Ltd, an investor
notices that the decline in the business performance of the company in recent years has put a lot of strain
on the financial position of the company.
An investor gets the signs of liquidity stress in the company from the credit rating reports prepared by the
credit rating agency, ICRA. For the first time, in the credit rating report by ICRA for its wholly-owned
subsidiary, Woodpecker Distilleries & Breweries Private Limited, the investor notices that SOM Distilleries
& Breweries Ltd has fully utilized its working capital limits.
Credit rating report of Woodpecker Distilleries & Breweries Private Limited by ICRA, Sept. 2019, page 2:
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Full utilisation of working capital limit – The Group has been fully utilising its working capital limits. Any
major deviation in working capital parameters may lead to a tight liquidity position.
An investor may think of working capital limits as the credit card limit available to individuals. If you notice
that someone has fully utilized their credit card limits, then it usually shows the signs of expenses exceeding
the income substantially or any emergency where the person has to use all the sources from where she can
lay hand on money. In either case, the situation is urgent and demands attention.
In the case of SOM Distilleries & Breweries Ltd, this important sign of liquidity stress are still continuing.
As per the credit rating report prepared by ICRA in February 2021 for SOM Distilleries & Breweries Ltd,
the working capital limits of the company are fully utilized and in addition, it faces significant loan
repayments, which can put further stress on the liquidity position of the company.
Credit rating report by ICRA, Feb. 2021, page 2:
Full utilisation of working capital limit and sizeable repayment of term loan – The Group has been fully
utilising its working capital limits. Any major deviation in working capital parameters may lead to a tight
liquidity position. The Group also has sizeable term loan repayment in the near to medium term.
The liquidity profile of the Group is stretched due to limited cushion available in working capital limits and
substantial repayment liability in the near to medium term.
Therefore, an investor would appreciate that lack of pricing power, high regulations, volatile prices and
availability of raw materials as well as the low shelf life of the final product has put the company in a
difficult financial situation. The company has faced stress and reached near-bankruptcy in the past and it
seems to be facing a tight liquidity situation now.
Going ahead, an investor needs to monitor the liquidity position of the company closely so that she may
notice the early warning signs if the liquidity position of the company deteriorates further.
To understand more about the alcohol/liquor industry and the factors that influence it, and the potential
competition for the company, an investor may read the in-depth analysis of the following companies:
 Analysis: Associated Alcohols and Breweries Ltd

 Analysis: Globus Spirits Ltd
 Analysis: GM Breweries Limited
 Analysis: India Glycols Ltd
While looking at the tax payout ratio of SOM Distilleries & Breweries Ltd., an investor notices that in most
of the last 10 years (FY2011-2020), the tax payout ratio of the company has been in line with the standard
corporate tax rate prevalent in India.
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In FY2018, the company reported a tax payout ratio of 47%. When an investor reads the FY2018 annual
report of the company in detail, then she notices that out of the total tax expense of about ₹22 cr,
approximately ₹5 cr was due to tax pertaining to previous years.
Operating Efficiency Analysis of SOM Distilleries & Breweries Ltd:
a) Net fixed asset turnover (NFAT) of SOM Distilleries & Breweries Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of SOM Distilleries & Breweries Ltd in the
past years (FY2011-20), then she notices that for most of the period (FY2012-FY2016), the NFAT of the
company has stayed in the range of 2.8 to 3.5.
The NFAT of the company started increasing in FY2017 (3.8) and FY2018 (4.8). The reasons for an
increase in NFAT in FY2017 was due to better pricing received by the company and better capacity
utilization due to the sale of higher volumes of liquor.
During FY2017, the total income of the Company increased by 11.9% to Rs. 2,478 million. The increase
was due to improved price realizations and increased sales volumes in the Beer segment and increase in
realizations in the IMFL segment.
In FY2018, the NFAT of the company increased to 4.8 due to better capacity utilization as it could sell
higher volumes of liquor.
During FY2018, beer volumes recorded a growth of 38.9% to reach 7.49 million cases compared last year.
IMFL volumes stood at 0.75 million cases, indicating a growth of 10.3% in FY2017. This robust growth in
volumes during the year was achieved due to combination of increased acceptance of our products in
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existing markets coupled with expansion in the states of Karnataka, Kerala, Chhattisgarh, Delhi and
Maharashtra.
An investor would appreciate that the improving utilization of manufacturing capacity would improve the
NFAT for any company.
However, in FY2019, NFAT of SOM Distilleries & Breweries Ltd declined sharply from 4.8 to 2.8. This
was primarily due to the capital investments of about ₹190 cr done by the company on its Karnataka plant,
for expansion of its Bhopal plant and purchase as well as upgradation of a brewery in Odisha. The Karnataka
and Odisha plants started their operations in FY2019.
Orissa Acquisition: In July 2018, the Company announced acquisition of a brewery in Odisha through its
proposed subsidiary, SOM Distilleries & Breweries Odisha Private Ltd. for a total consideration of Rs.
460 million. The capacity of this newly acquired unit is 42 Lakh cases per annum. This plant started
commercial production in March 2019. During the year, the Company also invested on modernization and
upgradation of the plant.
Karnataka Facility: The Company started commercial production of IMFL from Karnataka plant in
November 2018 and White Fox RTD in January 2019.
An investor would appreciate that any new manufacturing plant for any company usually takes some time
for reaching an optimal level of production. During this time, the company witnesses a decline in its NFAT.
In FY2020, the NFAT of SOM Distilleries & Breweries Ltd declined further to 1.8. This was due to further
capital investment done by the company for the expansion of its Bhopal plant.
Credit rating report by ICRA, February 2020
The Group has also invested more than Rs. 150 crore in SDBL’s existing manufacturing unit in Bhopal to
double the production capacity.
In addition to the capital investments, the loss of sales in March 2020 due to coronavirus related lockdown
also contributed to the decline in the NFAT of SOM Distilleries & Breweries Ltd in FY2020.
Going ahead, an investor should keep a close watch on the NFAT of the company so that she may estimate
whether the capital investments done by the company have started contributing at the optimal level or not.
b) Inventory turnover ratio of SOM Distilleries & Breweries Ltd:
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While analysing the efficiency of inventory utilization by SOM Distilleries & Breweries Ltd, an investor
notices that for most of the period in the last 10 years, the inventory turnover ratio (ITR) of the company
improved. The ITR of the company increased from 6.4 in FY2012 to 13.4 in FY2018. However, thereafter,
the ITR of the company declined sharply.
In FY2019, the ITR of SOM Distilleries & Breweries Ltd declined to 6.3 and further to 4.6 in FY2020.
The ITR of the company declined in FY2019 due to heavy investments in the inventory as two new
breweries of the company started operations in Karnataka and Odisha. Due to the enhanced size of
operations, the company had to invest substantial money in its stores, consumables, packing material (e.g.
glass bottles) as well as hold more stock of finished goods to be supplied in newer markets. In FY2019, the
inventory holding of SOM Distilleries & Breweries Ltd increased to ₹95 cr from ₹28 cr in FY2018.
In FY2020, the inventory requirements of the company increased further as the new plants of the company
increased their capacity utilization. The inventory of SOM Distilleries & Breweries Ltd increased to ₹104
cr in FY2020 from ₹95 cr in FY2019.
Going ahead, an investor should monitor the inventory turnover ratio of the company in order to ascertain
whether the company is able to bring the new breweries at the same level of operating efficiency as the
Bhopal brewery or not. This is because, on an overall basis, in the last 10 years, the ITR of SOM Distilleries
& Breweries Ltd has deteriorated from 6.4 in FY2012 to 4.6 in FY2020.
c) Analysis of receivables days of SOM Distilleries & Breweries Ltd:

Over the last 10 years, receivables days of SOM Distilleries & Breweries Ltd have deteriorated from 66
days in FY2012 to 99 days in FY2020. An increase in receivables days is more prominent in recent years
where it increased from 62 days in FY2018 to 99 days in FY2020.
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The increase in receivables days indicates that the customers of SOM Distilleries & Breweries Ltd are
taking more days to clear their dues. One of the reasons for delayed payments by the customers can be a
higher credit period given by SOM Distilleries & Breweries Ltd to its customers in the new markets.
From the above discussion, an investor would notice that in recent years, SOM Distilleries & Breweries
Ltd has entered two new markets of Karnataka and Odisha by establishing breweries there. In order to gain
customers in these new markets, the company might have to offer a longer credit period. It might be one of
the reasons for deteriorating receivables days for the company.
An investor would appreciate that when SOM Distilleries & Breweries Ltd expanded its operations in new
markets of Karnataka and Odisha, then its liquidity position became stretched. This is a sign of a working-
capital-intensive business model. As a result, the growth in the business of the company requires heavy
investments in the working capital (inventory, and trade receivables) of the company.
The credit rating agency, ICRA, highlighted the working-capital-intensive nature of the business of SOM
Distilleries & Breweries Ltd in its report for the company in February 2020.
The ratings are also subdued on account of the working capital-intensive nature of operations, resulting in
high utilisation of working capital limits.
Going ahead, an investor should keep a close watch on the receivables position as well as the inventory
position of SOM Distilleries & Breweries Ltd. This is because, if the company is not able to bring
efficiencies in its working capital management, then it can face a liquidity crunch.
From the above discussion, an investor would remember that in recent years, the company’s liquidity
position is stretched and it has fully utilized its working capital limits from banks. As a result, it has very
little cushion available to manage any liquidity shock.
Credit rating report by ICRA, Feb. 2021, page 2:
Full utilisation of working capital limit and sizeable repayment of term loan – The Group has been fully
utilising its working capital limits. Any major deviation in working capital parameters may lead to a tight
liquidity position. The Group also has sizeable term loan repayment in the near to medium term.
The liquidity profile of the Group is stretched due to limited cushion available in working capital limits and
substantial repayment liability in the near to medium term.
Therefore, it is essential that an investor keeps a close watch on the liquidity position and working capital
efficiency of the company. This is because, in the past (FY2002-2007), the company faced bankruptcy
when it could not manage its working capital position properly in the light of poor business performance.
operations (cCFO) of SOM Distilleries & Breweries Ltd for FY2011-20 then she notices that the company
has converted its profits into cash flow from operating activities.
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Over FY2011-20, SOM Distilleries & Breweries Ltd reported a total cumulative net profit after tax (cPAT)
of ₹172 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹241 cr.
Learning from the article on CFO will indicate to an investor that the cCFO of SOM Distilleries &
Breweries Ltd is higher than the cPAT due to the following factors:

The Margin of Safety in the Business of SOM Distilleries & Breweries Ltd:

target growth.
Where,

While analysing the SSGR of SOM Distilleries & Breweries Ltd, an investor would notice that the SSGR
of the company used to be about 15% in FY2014; however, it has since declined sharply to 9% in FY2020.
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On the contrary, the pace of sales growth of the company has picked up in the last 5 years (FY2015-2020)
to 17% per year and 23% per year in the last 3 years (FY2017-2020).
An investor would appreciate that the declining SSGR and increasing sales growth would put pressure on
the resources of any company.
When SOM Distilleries & Breweries Ltd was growing at a pace less than its SSGR during FY2011-2014,
then it could manage to reduce its debt from ₹19 cr in FY2011 to ₹6 cr in FY2014. However, since FY2015,
when the company increased its sales growth higher than its SSGR, then it realized that its business profits
are not sufficient to meet its fund requirements. As a result, in the last 5 years (FY2015-2020), SOM
Distilleries & Breweries Ltd had to use additional resources like debt and equity dilution to meet its growth
requirements.
During FY2015-FY2020, the company used the following additional sources of money to fund its business
growth:
 ₹216 cr of additional debt: Total debt of the company increased from ₹6 cr in FY2014 to ₹222 cr
in FY2020.
 ₹100 cr of equity raised in 2018 via private placement by issuing shares to Karst Peak Asia Master
Fund and Vermilion Peak Master Fund.
Preferential Allotment: In July 2018, the Company successfully raised ₹ 1,000 million through preferential
allotment of shares. The key shareholders who participated in the fund raise were Karst Peak Asia Master
Fund (Shares: 2.5 million, Value: ₹ 667 million) and Vermilion Peak Master Fund (Shares: 1.2 million,
Value: ₹ 333 million). The shares of the company were allotted at a price of ₹271.55.
 ₹35 cr of equity raised by issuing 12,88,906 warrants to promoters at ₹55 per share (12,88,906 *
271.55 = ₹35 cr).
The promoters of the company also have subscribed to 12,88,906 warrants amounting to 12,88,906 shares
at a price of ₹271.55.
Therefore, an investor would notice that from FY2015 onwards, when SOM Distilleries & Breweries Ltd
started growing its business by establishing a new brewery in Karnataka and thereafter acquiring a brewery
in Odisha, then its business profits turned out to be insufficient for meeting its growth requirements. As a
result, the company has to rely on debt as well as equity dilution to meet its funds’ requirements.
An investor arrives at the same conclusion when she analyses the free cash flow (FCF) position of SOM
Distilleries & Breweries Ltd.
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b) Free Cash Flow (FCF) Analysis of SOM Distilleries & Breweries Ltd:
While looking at the cash flow performance of SOM Distilleries & Breweries Ltd, an investor notices that
during FY2011-2020, it generated cash flow from operations of ₹241 cr. During the same period, it did a
capital expenditure of about ₹414 cr.
Therefore, during this period (FY2011-2020), SOM Distilleries & Breweries Ltd had a negative free cash
flow (FCF) of ₹(173) cr (=271 – 414).
of ₹62 cr. As a result, the company had a net negative free cash flow of ₹(214) cr (= -173 + 21 – 62). Please
note that the capitalized interest is already factored in as a part of capex deducted earlier.
From the above discussion, an investor notices that the company raised equity by way of preferential
allotment of shares (₹100 cr) and warrants (₹35 cr) to meet its cash flow shortfall. In addition, SOM
Distilleries & Breweries Ltd raised a debt of ₹203 cr during FY2011-2020 as its total debt increased from
₹19 cr in FY2011 to ₹222 cr in FY2020.
An investor observes that over the last 10 years (FY2011-2020), SOM Distilleries & Breweries Ltd has
reported significant negative free cash flow, which it has to bridge by raising additional debt and equity
dilution. Therefore, she would appreciate that the dividends paid out by the company over the last 10-years
(FY2011-2020) i.e. ₹34 cr without considering dividend distribution tax, are effectively funded by debt.
We believe that when an investor notices that the dividend payouts of any company are funded by debt,
then she should not take any comfort from its dividend payouts in her investing decision. This is because,
at the time of stress, the dividends are the first outflows that are stopped by the companies.
From the above assessment, an investor would notice that the business model of SOM Distilleries &
Breweries Ltd does not seem to support its business growth and the company is dependent upon additional
capital by way of debt or equity dilution to meet its funds’ requirements and dividend payments. The market
also seems to have realized this. As a result, over the last 10 years, the market capitalization of SOM
Distilleries & Breweries Ltd has declined from ₹546 cr in FY2011 to ₹193 cr now, a decline of about ₹353
cr. Over the last 10 years, the company retained earnings of about ₹138 cr. However, looking at the
significant decline of the market capitalization of the company over the last 10-years, an investor would
appreciate that the company has not created any value for the shareholders for the earnings retained by it in
the last 10-years.
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Additional aspects of SOM Distilleries & Breweries Ltd:

On analysing SOM Distilleries & Breweries Ltd and after reading its past annual reports since FY2005, its
credit rating reports and other public documents, an investor comes across certain other aspects of the
company, which are important for any investor to know while making an investment decision.
1) Management Succession of SOM Distilleries & Breweries Ltd:

The company is a part of SOM group of companies, which apart from SOM Distilleries & Breweries Ltd
and its subsidiaries, includes other companies like SOM Distilleries Pvt. Ltd. (SDPL) operating in the liquor
industry as well as companies like Aryavrat Tollways Pvt Ltd and Aryavrat Projects & Developers Pvt Ltd.
operating in real estate and infrastructure segments.
Credit rating report, Brickwork, June 2019:
Som Group is into distillery business, real estate and infrastructure. The group Companies are Som
Distilleries Private Limited (rated BWR BBB- (outlook: stable)/A3 dated 24 May 2018), Woodpecker
Distilleries and Breweries Pvt Ltd (rated BWR BB+ (outlook: stable) dated 07 Jun 2018), Aryavrat
Tollways Pvt Ltd (rated BWR BB- (Outlook Stable) dated 19 Jan 2018) and Aryavrat Projects & Developers
Pvt Ltd (rated BWR BB- (Outlook Stable)/A4 dated 22 June 2018).
As per the website of the company, four members of the promoter family are in executive positions in the
SOM group of companies: Mr J.K. Arora (MD), Mr S.K. Arora (Deputy MD, brother of Mr J.K. Arora),
Mr Deepak Arora (CEO, son of Mr J.K. Arora) and Mr Alok Arora (Director).
As per the publicly available information, Mr. Deepak Arora is the son of Mr. J.K. Arora (Source).
Spearheaded by industry veteran, Jagdish Arora (CMD) and ably supported by his young & dynamic son,
Deepak Arora as the CEO, the company is expanding its footprints in the country’s fast evolving alcoholic
beverages industry.
While reading the annual reports of SOM Distilleries & Breweries Ltd, an investor notices many signs that
indicate that the promoters of the group manage all the group companies with an overall common strategy
without segregating the management and resources of each of the companies.
An investor gets first such instance in FY2009 when the promoters Mr J.K. Arora and Mr S.K. Arora
resigned from SOM Distilleries & Breweries Ltd from their positions of CMD and Director respectively.
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With effect from 21.3.2009, Shri Jagdish Kumar Arora resigned as Chairman / Managing Director, Shri
Ajay Kumar Arora resigned as Director and Shri Surjeet Lal who has been a director since 19.5.1993 was
appointed as Managing Director.
The investor notices that the promoters of SOM Distilleries & Breweries Ltd resigned from the board of
directors of the company and in their place, Mr Surjeet Lal was appointed as the MD of the company.
An investor further notices that SOM Distilleries & Breweries Ltd did not propose to pay any remuneration
to the new MD, Mr Surjeet Lal because he is also the CMD of another group company Som Distilleries
Pvt. Ltd. (SDPL) and takes his salary from SDPL.
Shri Surjeet Lal is a B.Sc. He is 65 years old… He is also Chairman and Managing Director of Som
Distilleries Pvt. Ltd. from which company he draws his remuneration. He holds 5010 shares of the
company. He may be regarded as a person acting in concert with the promoters. But he is not a promoter.
From the above incident, an investor would appreciate that the promoters of the company put Mr Surjeet
Lal as an executive in charge of both their group companies, SOM Distilleries & Breweries Ltd. as well as
Som Distilleries Pvt. Ltd. (SDPL). For the compensation, the promoters decided to pay him his
remuneration only from SDPL. Such an arrangement indicates that the promoters of the SOM group manage
all the companies of the group as different parts fitting in their common vision for the group instead of
maximizing the resources and returns for any one company and their shareholders like for SOM Distilleries
& Breweries Ltd.
The promoter of the company, Mr J.K. Arora returned to SOM Distilleries & Breweries Ltd as CMD in
FY2017 and Mr Surjeet Lal was assigned as a Director of the company.
Upon reading the FY2017, FY2018, FY2019 and FY2020 annual reports of SOM Distilleries & Breweries
Ltd, an investor notices that Mr J.K. Arora did not take any remuneration from the company for all these
years. The company proposed to start paying remuneration to Mr J.K. Arora in the AGM in 2020.
To approve payment of Remuneration to Mr. Jagdish Kumar Arora, Chairman & Managing Director as
per the provisions of the Companies Act, 2013, applicable SEBI Regulations
Therefore, an investor would appreciate that the promoters of the SOM group keep moving resources from
one group company to another as they deem fit. The management personnel keep handling responsibilities
of the listed company (SOM Distilleries & Breweries Ltd) as well as other promoter group companies as
per the requirements of the promoters. The promoters use the resources of one company to pay salaries to
compensate for the managements’ efforts on multiple group companies.
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We discuss different implications of this approach of the promoters of SOM group of intermixing the
resources of the public listed company with other group companies later in the article.
Nevertheless, while ascertaining the succession planning for the publicly listed company, SOM Distilleries
& Breweries Ltd, even though, an investor may feel that currently, only one member of the promoter family,
Mr J.K. Arora (age 65 years) is present on the board of directors. However, the presence of other members
of the younger generation of the promoters’ family as executive members of the SOM group of companies
may show visibility of succession planning for the investors.
are still handling responsibilities, looks like a structured succession plan. This is because the young
members can learn about the fine nuances of the business under the guidance of senior members until the
seniors decide to take retirement.
2) Multiple instances of the arrest of promoters of SOM Distilleries & Breweries

Ltd:
While reading the various news developments related to the promoters of SOM Distilleries & Breweries
Ltd, an investor notices that the promoters of the company have been arrested by law enforcement agencies
multiple times in the past.
In the latest such instance, in July 2020, the promoters, Mr J.K. Arora and Mr S.K. Arora were arrested by
GST intelligence officers when Directorate General of GST Intelligence (DGGI) officials found evasion of
GST payments by a promoter group company, SOM Distilleries Pvt. Ltd (SDPL) on the manufacture of
sanitizers. (Source: GST intelligence officers arrest SOM distilleries CEO in over Rs 30 crore tax evasion
case: Business Insider, July 13, 2020).
As per the news article, SDPL manufactured about 4.9 million litres of hand sanitizer and sold it in the
market without payment of GST.
The Directorate General of GST Intelligence (DGGI) officials had already arrested liquor baron and
promoters of the firm — Jagdish Arora, his brother Ajay Arora…
“After accounting for the declared sale as per invoices the sanitizers found on stock, it is estimated that
about 49 lakh litres of hand sanitizers with an estimated value of Rs 187 crore and involving a GST amount
of Rs 33.53 crore was removed clandestinely and/or without payment of taxes by M/s SDPL,” it said.
“M/s SDPL has voluntarily paid GST amounting to Rs 8 crore in cash on 09.7.2020. The total estimated
GST evasion on hand sanitizers is estimated to be Rs 33.53 crore,” it said.
As per the media reports, the promoters had to stay in jail from the date of their arrest, July 9, 2020, to
August 19, 2020, when the MP High Court granted them bail (Source).
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An investor may track the investigations in this case to understand more about the role of SDPL and the
promoters in the alleged evasion of GST.
On reading more about the news coverage of the promoters of SOM Distilleries & Breweries Ltd, an
investor notices that this was not the first incidence when the promoters of the company were arrested by
law enforcement agencies.
Previously, in 2001, Mr Jagdish Arora was arrested in a case of an attack on income tax officials to snatch
the documents seized by them from Mr Arora’s residence. (Source: MP liquor baron held, remanded: The
Tribune, March 12, 2001).
Liquor baron of Madhya Pradesh Jagdish Arora has been remanded by a Bhopal court to judicial custody
till March 22. The police had arrested for his alleged involvement in the attack on the Income Tax officers
to snatch the documents, which the officers had seized from Mr Arora’s residence on January 11.
Early this year the IT Department raided various premises of Mr Arora and was said to have recovered a
large number of incriminating documents. As the IT officers were leaving with the documents around 3
a.m., they were ambushed by more than a dozen persons who attacked them and snatched the documents
from them.
The article also highlights the political influence of Mr. Arora. The article also mentions a previous case
when the promoters have submitted a fake demand draft as a deposit for the auction of liquor shops in
Raipur.
Mr Arora, who was once literally dictating the Digvijay Singh government on excise matters,
he became the benami owner of all liquor shops in Bhopal
Mr Arora and his group of industries had hogged the headlines last year for submitting a fake draft for Rs
3 crore as deposit for the auction of liquor shops in Raipur.
In light of the above incidences, an investor may search more about the media coverage of the promoters
of SOM Distilleries & Breweries Ltd and also increase her own due diligence while doing the management
analysis of the company.
From the above incidences, an investor would appreciate that the promoters of SOM Distilleries &
Breweries Ltd have had multiple instances of investigations from law enforcement agencies. Moreover,
while reading the annual reports of the company, the investor notices that in the mandatory section in the
annual reports about disclosure of legal disputes, the company has stated that it has ongoing legal disputes
as a normal course of business.
The company has repeated the below disclosure in each of its annual reports from FY2015 to FY2020.
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The company’s pending litigations pertain to claims and cases occurring in the normal course of business.
The company has reviewed its pending litigations and expects that the outcome of the proceedings will not
have any material effect on its financial position
In light of the above discussion, an investor may do deeper due diligence while doing the analysis of SOM
3) Using resources of one group company for another:

From the above discussion, an investor would remember that the promoters of SOM Distilleries &
Breweries Ltd use all of their companies whether it is publicly listed or is a privately held promoter entity,
as parts of their common group strategy. They seem to use the manpower as well as the financial resources
of each company for use by other companies as they deem fit.
In the discussion on succession planning, an investor noticed how the promoters had one person, Mr Surjeet
Lal as the MD of public-listed company, SOM Distilleries & Breweries Ltd, as well as the CMD of the
privately held promoter entity SOM Distilleries Pvt. Ltd (SDPL). At the same time, Mr Lal worked for the
public-listed company as well as the promoters’ personal company.
While analysing SOM Distilleries & Breweries Ltd, an investor got to know many other instances where it
becomes difficult for the investors to ascertain whether the resources and shareholders’ interest of the
public-listed entity can be segregated from the issues of other promoter entities.
3.1) Promoter entity, SOM Distilleries Pvt. Ltd (SDPL) selling same IMFL brands as public-
listed company, SOM Distilleries & Breweries Ltd:
While analysing the business of promoter group entities, when an investor reads the credit rating rationale
of the promoter entity, SOM Distilleries Pvt. Ltd (SDPL) prepared by Brickwork in May 2018, then she
notices that SDPL sell many IMFL brands. The investor is surprised to notice that many of the IMFL brands
sold by SDPL are the IMFL brands manufactured by SOM Distilleries & Breweries Ltd.
Credit rating report of SOM Distilleries Pvt. Ltd (SDPL), Brickwork, May 2015, page 2:
Som Distilleries Pvt Ltd (SDPL) was incorporated in 1986 at Mumbai. SDPL is part of the Bhopal, Madhya
Pradesh based Som Group… The company has established brand names viz., for Whisky- Milestone 100,
2Ist Century Pure Malted Whisky, Gypsy Whisky, Blue Chip, Super Master; for Rum –Black Fort, Super
Master and Gypsy; for Vodka – White Fox and Blue Chip and for Gin – Blue Chip Extra Dry Gin and 21st
Century Gin.
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An investor notices that out of the above mentioned IMFL brands of SPDL, Milestone 100 (Whisky), Gypsy
(Whisky and Rum), Blue Chip (Whisky, Rum, Vodka and Gin), and White Fox (Vodka) are the same brands
that are sold by the public listed company SOM Distilleries & Breweries Ltd as well.
An investor gets to know the brands sold by SOM Distilleries & Breweries Ltd in its annual reports.
FY2020 annual report of SOM Distilleries & Breweries Ltd, page 12:
The Company’s flagship brands include Hunter, Black Fort, Power Cool and Woodpecker in the Beer
segment and Milestone 100 whisky and White Fox vodka in the IMFL segment. Other popular IMFL brands
of SOM include Legend, Genius, Sunny, Gypsy and Blue Chip.
When an investor notices common brands in the liquors sold by the public listed company SOM Distilleries
& Breweries Ltd as well as the promoter-owned entity SDPL, then she faces multiple questions.
 She would want to know who owns these brands. Is it the public listed company, SOM Distilleries
& Breweries Ltd, or the promoters or anybody else?
 How the promoters distribute the business, sales, and revenue earned from the sale of these brands
among different entities?
 How can a public investor be certain that the public listed company SOM Distilleries & Breweries
Ltd is able to get the maximum benefit that it can achieve by selling these IMFL brands and the
promoter-owned entity SDPL is not competing with it for the same set of customers?
An investor may contact the company directly for clarifications in this regard.
In addition, during the analysis of annual reports of SOM Distilleries & Breweries Ltd comes across another
promoter group company, Legend Distilleries Pvt. Ltd (LDPL), which is engaged in the same business
activities as SOM Distilleries & Breweries Ltd. In FY2014, the promoters tried to merge LDPL with SOM
Merger of Legend Distilleries Private Limited: ln March 2014, a board resolution was passed to merge
Legend Distilleries and SDBL. As both the companies are engaged in similar business activity, it is expected
that this merger will result in significant synergies in the operations. The objective of the merger is to
achieve economies in various aspects of operations and management such as marketing, purchases,
accounts, legal services, secretarial, finances and borrowings.
Legend Distilleries is based out of Biaspur in Chhattisgarh with an annual bottling capacity of 6.5 lakh
cases per annum and blending capacity of 8lakh cases per annum.
SOM Distilleries & Breweries Ltd provided some updates about the progress of the merger with LDPL for
some of the subsequent annual reports. E.g. FY2016 annual report, page 25:
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In respect of Merger of Legend Distilleries Private Limited in the company, court convened meetings of
members, secured creditors and unsecured creditors were held at Delhi on 03.03,2016 whereas the merger
proposal was approved at the three meetings and such approval was reported to the court for further action.
However, thereafter, the company stopped providing updates about the merger with LDPL.
Currently, when an investor tries to find the details of Legend Distilleries Private Limited (LDPL), then she
notices that LDPL exists as an independent company and the promoters of SOM Distilleries & Breweries
Ltd, Mr Jagdish Kumar Arora and Mr Ajay Kumar Arora are the directors of the company. It may mean
that the merger of LDPL with SOM Distilleries & Breweries Ltd did not succeed.
Details of Legend Distilleries Private Limited from corporate database Zaubacorp:
Therefore, from the above discussion, an investor would observe that the promoters run different companies
in the same business activities as the public listed company, SOM Distilleries & Breweries Ltd. In such a
situation, an investor bears the risk that the promoter-entities may compete for business opportunities with
the public listed company. Also, in case the promoters come across any new business opportunity, then
they may attempt to give the business to their own company instead of the public listed company.
Therefore, an investor should be very cautious while analysing companies where promoters have competing
entities doing business in the same industry. This is because the investor would not get to know when the
promoters lose their commitment to the listed company and start focusing more on their personal companies
and by the time, an investor is able to conclusively decide that the promoters are no longer committed to
the public listed company, it might have already been very late.
3.2) Promoter-owned entities freely using the money of public listed company, SOM
Distilleries & Breweries Ltd and vice-versa:
While reading the annual reports of SOM Distilleries & Breweries Ltd, an investor notices that for a long
time, the company freely shifts money to and from another promoter-entity, SOM Distilleries Pvt. Ltd
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(SDPL). The auditor of the company highlighted to the shareholders in the annual reports that the give and
take money transactions of SOM Distilleries & Breweries Ltd with SDPL are very frequent, just like a
current account with a bank.
the Company has an account in the nature of a current account with another Company under the same
management. The maximum amount due at any time during the year was Rs. 13,30,97,158, and the year
end balance was Rs. 13,30,97,158.
While reading the FY2008 annual report further and analysing the related-party-transactions section, an
investor gets to know that the promoter entity under question is SDPL.
Advances include…Rs.11,41,90,917 due to Som Distilleries Private Ltd., (previous year due from at Rs.
13,30,97,158) towards trading and current account.
When an investor analyses more annual reports of SOM Distilleries & Breweries Ltd, then she notices that
the current account of the company with SDPL is an interest-free account. It indicates that when the public
listed company, SOM Distilleries & Breweries Ltd, gives money to the promoter-entity, SDPL, then it is
free of cost money available to SDPL.
FY2013 annual report, page 18 (iii):
lt has been explained to us that since the current account mentioned above is not in the nature of a loan,
there are no stipulations for levy of interest.
A reading of additional annual reports of SOM Distilleries & Breweries Ltd, tells an investor that at times,
a significantly large amount of money have been given by the company to SDPL. Moreover, at times, SOM
Distilleries & Breweries Ltd has borrowed money from lenders to give it to SDPL.
In FY2015, at one point in time, SOM Distilleries & Breweries Ltd has given about ₹46 cr to SDPL as
interest-free money.
However, the Company has an account in the nature of a current account with a company under the same
management. It has been explained to us that the transactions with this company are in the ordinary course
of business. The maximum amount due from that company at any time during the year was ₹ 46,24,74,613.
While reading the FY2015 annual report of SOM Distilleries & Breweries Ltd, the investor notices that
during the year, the company borrowed about ₹55 cr as its total debt increased from ₹6 cr in FY2014 to ₹61
cr in FY2015. However, the company did only a capital expenditure of about ₹3 cr during FY2015.
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However, at the end of FY2015, the advances given by SOM Distilleries & Breweries Ltd to its related
party had increased by ₹15 cr, from ₹7 cr in FY2014 to ₹22 cr in FY2015.
On page 59 of the FY2015 annual report, in the related-party-transactions section, the company highlighted
that ₹22 cr mentioned as an advance to a related party is given to SDPL.
In this light, an investor may conclude that during the year, SOM Distilleries & Breweries Ltd borrowed
money from lenders to give interest-free advance to the promoter-entity, SDPL.
While reading the FY2015 annual report, an investor is amused when she notices that the company
mentioned high-interest costs as one of the reasons for the decline in profits.
There has been an increase in the turnover during 2014-15 over the previous year. However, the profit has
declined due to interest cost and higher taxation.
The credit rating agency, ICRA has also highlighted in its report for SOM Distilleries & Breweries Ltd in
November 2018 that the company had been giving a significant amount of money to the group companies.
ICRA also takes note of sizeable advances extended to the Group companies in the past for capital
expenditure
Nevertheless, an investor may note that the flow of money to SDPL is not a one-way route. When an
investor analyses the financial position of SDPL by reading its credit rating reports, then she notices that
SDPL has given a lot of money to other SOM group entities.
The credit rating report of SDPL prepared by ICRA in July 2020 mentions that SDPL gave an advance of
₹112 cr to SOM group companies. As a result, its liquidity position was stretched and it has fully utilized
its working capital limits.
Full utilisation of working capital limit and sizeable advances to Group companies – SDPL has been fully
utilising its working capital limits. Any major deviation in working capital parameters might exert further
pressure on its liquidity position. This apart, the company has extended long-term advances to the tune of
~Rs. 112 crore as on December 2019 to the various Group companies, which has kept the liquidity under
pressure.
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At times, the promoters helped the public-listed entity, SOM Distilleries & Breweries Ltd, by infusing
interest-free money in the company to meet the funds’ requirement.
The credit rating report for SOM Distilleries & Breweries Ltd prepared by ICRA in November 2018
highlighted that promoters infused interest-free loans of ₹19 cr in the company to meet funds’ requirement
of construction of a brewery in Hassan, Karnataka.
The commercial production from the Hassan unit commenced in June 2018. The total project cost of Rs.
122 crore was funded by internal accruals of Rs 78 crore, term loans of Rs. 25 crore and interest-free
unsecured loans from promoters amounting to Rs. 19 crore.
From the above examples, an investor would note that the promoters of SOM Distilleries & Breweries Ltd
are using money and resources of one group company freely for another, including from public listed
company to privately held promoter-entity. An investor may appreciate that despite owning less than 25%
of SOM Distilleries & Breweries Ltd (promoter’s shareholding in the company is 24.48% on December 31,
2020, as per BSE), the promoters treat the company and its resources like their other privately held
companies.
In light of such incidences of intra-promoter-group transactions, an investor would appreciate that the
shareholders of the public listed company, SOM Distilleries & Breweries Ltd get exposed to a higher risk.
This is because, if any of the other promoter-entities faces a liquidity crunch, then the promoters may not
hesitate to take money out of SOM Distilleries & Breweries Ltd to give it to the troubled promoter-entities
even if they have to make SOM Distilleries & Breweries Ltd borrow money to give money to these entities.
In addition, when an investor notices that the SOM group is also active in infrastructure and real estate
business via promoter-entities, then she would appreciate that the risk of eventually supporting promoter-
entities increases further. This is because the operations of the infrastructure division of the company are
running into losses.
The credit rating agency, Brickwork, in January 2021, downgraded the credit rating of Aryavrat Tollways
Pvt. Ltd., which is the SOM group company active in the infrastructure segment, from B to B-, which
represents a high risk. Brickwork highlighted that the company is not doing well and is reporting losses and
the cash flow of the company is barely sufficient to meet its debt obligations.
The revision of rating takes into account fall in revenue, losses incurred resulting in deterioration of
financial profile in FY20, diversion of traffic in one of the main toll roads affecting toll collection, continued
stretched liquidity profile of the company.
Brickwork has highlighted in its report that until now, Aryavrat Tollways Pvt. Ltd., was able to meet its
debt repayment by either operating cash flow or from money infused by promoters. However, going ahead,
the debt repayments are going to increase and the company would face difficulties in repayment. The fact
that traffic is diverted from its toll road is making it difficult for the company to generate sufficient cash
flows.
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While, the company was able to meet its debt obligations with existing cash generation and support from
promoters, going forward the repayment obligations will increase considerably in line with the debt
amortization schedule and the current level of cash generation is not sufficient to meet the same.
Therefore, in the light of frequent intra-group transactions between the public listed SOM Distilleries &
Breweries Ltd and other promoter-entities, the risk of SOM Distilleries & Breweries Ltd having to
eventually support other financially stressed promoter-entities increases further. Therefore, an investor
should increase her due diligence before she makes any opinion about the company.
While ascertaining the support given by the public listed company to other group entities, an investor should
also keep in mind that many times the support is beyond the straightforward transfer of money. At times,
the support is in the form of a corporate guarantee given by the public listed company, SOM Distilleries &
Breweries Ltd, to the bankers of the promoter-entity for the loans taken by the promoter-entity from the
bankers. In such a situation, the ultimate risk of repaying the loans shifts from the promoter entity to the
public listed company.
In the past, on multiple occasions, SOM Distilleries & Breweries Ltd has given guarantees for the loans
taken by promoter entities. For examples in the FY2011 annual report, an investor notices that SOM
Distilleries & Breweries Ltd has given corporate guarantee to bankers on behalf of a group company, for
₹6.79 cr in FY2010 and FY2011.
At times, an investor would notice that SOM Distilleries & Breweries Ltd gave corporate guarantees to
bankers on behalf of others and the same was pointed out by the auditor in its report; however, the company
did not disclose it in the table of contingent liabilities like during FY2012 (refer to page 19 and 32 in the
annual report).
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However, at times, SOM Distilleries & Breweries Ltd refused to share the details of these corporate
guarantees with the auditor and the auditor had to include the lack of details in its report e.g. in FY2014.
According to the information given to us during the year the Company has given a corporate guarantee for
a loan taken by others from a bank ln the absence of necessary information, we are unable to comment as
to whether the terms and conditions of such guarantee are prejudicial to the interests of the company or
not.
An investor would appreciate that the only reason for an auditor to not get necessary information about a
corporate guarantee given by it, is if the company refuses to share the information with the auditor.
Otherwise, it is safe to assume that the company would definitely have the information related to the
corporate guarantees issued by it.
Therefore, an investor would appreciate that if a company refuses to share information with the auditor,
then it becomes difficult for an investor to make any informed opinion about the company.
Therefore, whenever an investor comes across instances of related party transactions between the public
listed company and promoter-entities, then it is essential for an investor to increase her level of due
diligence.
Apart from loans & advances as well as guarantees, many times promoters make the public listed companies
invest in the equity of promoter entities. This route also shifts money/economic interest from the public
listed company to the promoter entity.
While reading the FY2005 annual report, an investor gets to know that in the past, SOM Distilleries &
Breweries Ltd had given money to one of the promoter-owned entity, Som Power Ltd (SPL) as share
application money; however, until then, SPL had not allotted shares to SOM Distilleries & Breweries Ltd.
Advances include Rs. 42,67,000 (previous year Rs. 42,67,000) given to Som Power Limited, a company
under the same management, towards share application money, for which shares are yet to be allotted.
When an investor reads the subsequent annual reports, then she notices that SOM Distilleries & Breweries
Ltd did not receive these shares. The said advance kept appearing in the balance sheet of SOM Distilleries
& Breweries Ltd until FY2012 as Share Application Money under section “Advance to a Related Party.”
In FY2013, the amount was removed from the annual report.
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An investor notices that in FY2013, the advance disappeared from the balance sheet; however, she could
not find shares of Som Power Ltd under investments.
An investor may contact the company directly to understand this transaction where the money was given
to the promoter-entity by the public listed company for buying shares of the promoter-entity. However, in
FY2013, the money was removed from the balance sheet, though, apparently, the public listed company
did not receive the shares of promoter-entity. She may ask whether the company wrote off the advance
given to the promoter entity as a loss/non-recoverable amount.
We believe that whenever an investor comes across instances of related party transactions between the
public listed company and promoter entities, then she should do a deeper level of due diligence.
4) Large advances given by SOM Distilleries & Breweries Ltd to retailers and
large sales promotions expenses:
While reading the annual reports of the company, an investor notices that over the years, the company’s
balance sheet has shown significantly large sums of money as advances to retailers. At times, the amount
of advances to retailers has been more than ₹40 cr.
When an investor looks at the normal business practices, then she notes that it is the customer, who buys
something from a supplier, usually, pays an advance to the supplier to ensure that the customer will honour
its commitment to buy the goods. This normal business transaction of giving advances to the suppliers is
visible in the balance sheet of SOM Distilleries & Breweries Ltd in the form of advances to suppliers.
However, when an investor comes across transactions as “advance to retailers” who are the customers of
SOM Distilleries & Breweries Ltd, then she is confused. Why is it that SOM Distilleries & Breweries Ltd
is giving advances to the retailers who actually buy liquor from the company and then sell it to people?
Ideally, the retailers should give advances and deposits to SOM Distilleries & Breweries Ltd to ensure that
they will honour their purchase orders given to the company.
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An investor gets some information about the nature of the transactions underlying these advances to retailers
when she reads the November 2018 credit rating report of the company prepared by ICRA. The credit rating
agency has highlighted that these advances are given by SOM Distilleries & Breweries Ltd to the retailers
under a marketing agreement.
ICRA also takes note of sizeable advances extended to the Group companies in the past for capital
expenditure and to the retailers under a marketing arrangement.
From the above information, it looks like SOM Distilleries & Breweries Ltd uses retailers for sales
promotions and pay them substantial money to promote its goods (liquor). As a result, to ensure that the
company would honour its commitment to pay the sales promotion amount, the retailers demand a
substantial amount of advances from it.
When an investor analyses the sales promotion expenses incurred by SOM Distilleries & Breweries Ltd
over the years, then she notices that the company has spent about ₹30 cr to ₹50 cr in sales promotion
expenses every year. The amount of sales promotion expenses seems in line with the amount of advances
of about ₹20 cr to ₹40 cr given by it to retailers under the marketing arrangement.
In addition, an investor notices that SOM Distilleries & Breweries Ltd has spent about 11%-13% of its
revenue every year as sales promotion expenses. Over FY2011-2020, the company has spent a total of ₹338
cr i.e. 13% of its total revenue as sales promotion expenses.
An investor may think that the company is spending significant money on sales promotions in recent years
because it has entered two new markets of Karnataka and Odisha. However, if an investor looks at the
history of sale promotions expenses by SOM Distilleries & Breweries Ltd, then she notices that in the
period FY2011-2015, when the sales of the company were growing at a very slow pace, even then it was
spending about 15% of its revenue on sales.
During FY2011-2015, SOM Distilleries & Breweries Ltd spent a total of ₹147 cr on sales promotions
whereas, during this period, the sales of the company increased only from ₹176 cr in FY2011 to ₹206 cr in
FY2015.
Therefore, an investor would appreciate that even after spending substantial money on sales promotions
(about 15% of revenue) during FY2011-2015; the company could increase its sales by about 4% per annum.
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On the contrary, when an investor compares the sales promotion expenses of SOM Distilleries & Breweries
Ltd with its competitors and industry peers, then she notices that other companies spend a much lower
proportion of their revenue on promotions.
The investor notices that:
 Large companies like United Breweries Ltd and Radico Khaitan Ltd, which are 5 to 10 times bigger
in size than SOM Distilleries & Breweries Ltd, spend only about 5%-6% of their revenue on sales
promotion.
 Another company, Globus Spirits Ltd, which is double the size of SOM Distilleries & Breweries
Ltd, spends about 0.3% of its revenue on sales promotions.
 On the other hand, G M Breweries Ltd, which is similar in size to SOM Distilleries & Breweries
Ltd spends merely 0.2% of its revenue on sales promotions.
Therefore, the investor faces many questions regarding the reasons why SOM Distilleries & Breweries Ltd
spends a disproportionately large amount of money on sales promotion when compared to its peers. On top
of it, SOM Distilleries & Breweries Ltd gives most of the money to be spent on sales promotions to retailers
as an advance.
In addition, an investor would also notice that SOM Distilleries & Breweries Ltd continued to spend heavily
on sales promotion even in the recent years when it has been facing liquidity stress and fully utilizing its
working capital facilities.
Credit rating report of the wholly-owned subsidiary, Woodpecker Distilleries & Breweries Private Limited
by ICRA in September 2019:
Full utilisation of working capital limit – The Group has been fully utilising its working capital limits. Any
major deviation in working capital parameters may lead to a tight liquidity position.
Credit rating report of SOM Distilleries & Breweries Ltd by ICRA in July 2020:
The liquidity profile of the Group is stretched due to limited cushion available in working capital limits.
Moreover, while reading the FY2019 as well as FY2020 annual reports, an investor gets to know that at the
end of FY2018, FY2019 as well as FY2020, the company had pending interest liabilities where the payment
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had already become due; however, SOM Distilleries & Breweries Ltd had not yet made the payment for
the same.
The indebtedness table in the FY2019 annual report on page 13 indicated that at the end of FY2019, the
company had an interest of ₹0.7 cr due for payment that it had not paid.
The fact that the company had interest payment due but it could not pay them off might indicate that the
company is facing a liquidity crunch and is facing difficulties to arrange for funds for making payment to
its lenders.
(Error in the annual report: The indebtedness table shown in the above section also highlights an error in
the presentation of the data by SOM Distilleries & Breweries Ltd in the annual report. An investor would
observe that in the above table, the total indebtedness (i.e. total debt) at the start of FY2019 is ₹46 cr.
During the year, the total debt increased by ₹60 cr. Therefore, an investor would expect that at the end of
the year, the total debt would increase to ₹106 cr (= 46 + 60). However, the indebtedness table presented
above shows that the total debt at the end of FY2019 is ₹82 cr. In this regard, an investor may contact the
company directly to get clarifications about the mismatch/totalling error in the numbers in the table.)
An investor would notice that if any company is facing liquidity stress, then usually, it cuts down its
advertising/sales promotion expenses. However, in the case of SOM Distilleries & Breweries Ltd, an
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investor notices that the company has continued to spend more than 10% of its revenue on sales promotions
even when it is going through liquidity stress.
Therefore, an investor notices that SOM Distilleries & Breweries Ltd has been continuously spending a
disproportionately large amount of money on sales promotions when compared to its peers. The company
has continued to spend a large amount of money on sales promotions even when the results have not been
very encouraging (FY2011-2015). The company has continued to spend a large amount of money on sales
promotions even when it is facing stress in its liquidity position.
Moreover, the company seems to follow a marketing arrangement where it pays a large amount of
advertising budget to retailers. In addition, over the years, it has given a large amount of money as an
advance to the retailers.
Looking at all the above observations, if an investor needs clarifications, then she may contact the company
directly to understand the nature of its marketing arrangements with retailers. Why the company needs to
pay the retailers a large amount in advances whereas it has been in this line of business for many decades.
How these retailers provide sales promotions for SOM Distilleries & Breweries Ltd in a manner that it ends
up spending comparatively multiple times of the money spent by its peers on sales promotions.
Understanding all these aspects of the significantly large expense of sales promotions is essential for an
investor to make an opinion about SOM Distilleries & Breweries Ltd.
5) Frequent defaults by SOM Distilleries & Breweries Ltd to its lenders:

From the above section on the business analysis of the company, an investor would remember that SOM
Distilleries & Breweries Ltd faced a liquidity crunch in the last decade and it defaulted to the lenders.
When an investor reads about the various business decisions taken by the company during that period, then
she comes across the following insights.
5.1) SOM Distilleries & Breweries Ltd blamed the bankers for its poor business
performance:
In the FY2005 annual report, the company told its shareholders that its business has suffered losses from
the last 3 years. The company highlighted that the shape of its business was so poor that it could not even
repay its lenders and as a result, it defaulted in its repayments.
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Default in repayment of dues to Bankers and Financial Institutions are due to losses incurred by the
company during last three years. Various efforts are being made to regularize the accounts with Banks and
Financial Institutions.
As discussed above, SOM Distilleries & Breweries Ltd blamed the banker for its poor state of business
affairs.
The Company has clear dependency on its bankers. This confidence was on the basis of long term
relationship with the Bankers without realizing that the Bankers provide umbrella for non-raining days
only. This dependency on and prolonged persuasion with the Bankers has put the Company into difficult
situation where the Company has suffered huge losses due to non-availability of small requirement of
working capital since last three years.
Nevertheless, the company could restructure its debt in FY2007-FY2008, with the help of Kotak Mahindra
Bank and repaid its debt to the previous lenders.
The company has completed the process of restructuring and with the induction of funds from Kotak
Mahindra Bank as Working Capital, Company has turned around completely. The Company has also made
settlement with the bankers for their dues with the help of Kotak Mahindra Bank.
5.2) The loss of its bankers became the profit of SOM Distilleries & Breweries Ltd:
While doing the restructuring of its debt in FY2007-FY2008, the company negotiated with its bankers and
repaid them a lower sum of money than what the actual loan was due. The bankers had to take a loss to the
extent of lesser repayment by SOM Distilleries & Breweries Ltd.
However, the company included the savings due to lesser repayment to the bankers as its income.
During the previous year, Kotak Mahindra Bank Ltd. (KMBL), had taken over the total outstandings of the
Bank of Baroda and Bank of India by way of assignment of those liabilities. Accordingly the Company had
transferred the liability towards these banks to KMBL.
During the year the Company has started repayment of the assigned liabilities to KMBL. Therefore, the
difference between the assigned liability and the amount settled with KMBL has been shown in the Profit
and Loss Account as “Bank Loan Settlement.”
In FY2008, the company showed an income of ₹8.8 cr as “Bank Loan Settlement”

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Therefore, an investor would note that due to the debt restructuring in FY2007-FY2008, the bankers of
SOM Distilleries & Breweries Ltd had to take a loss of about ₹8.8 cr and the company recognized a profit
of ₹8.8 cr at the cost of its bankers.
5.3) SOM Distilleries & Breweries Ltd had disputes with Kotak Mahindra Bank Ltd as well:
In the FY2011 annual report, when the company had turned around and had started reporting profits, the
auditor of SOM Distilleries & Breweries Ltd intimated to the shareholders that the company is not paying
Kotak Mahindra Bank Ltd regularly. The auditor highlighted that there are some disputes between SOM
Distilleries & Breweries Ltd and Kotak Mahindra Bank Ltd and the auditor is not able to ascertain the
delays in the payments.
As per its records, the repayment of the loans from the Kotak Mahindra Bank Ltd., (KMBL) has not been
in accordance with the initially accepted terms. As per the explanations given to us, this is due to the
difference of opinion on certain matters between the Management of the Company and KMBL. We are
therefore unable to determine the period of default, if any
In the same annual report, the management of the company intimated the shareholders that it is trying to
arrive at a mutually agreeable solution with Kotak Mahindra Bank Ltd for the money due to the bank.
The Company in an advanced stage of finalization of the terms of repayment of the outstandings of Kotak
Mahindra Bank Ltd. (KMBL). The management is hopeful of mutually acceptable solution, which is likely
to fructify shortly.
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An investor may contact the company directly to understand whether this renegotiation of the terms with
the bank was another episode of debt restructuring.
5.4) SOM Distilleries & Breweries Ltd defaulted in payments to Madhya Pradesh State
Industrial Development Corporation Ltd., (MPSIDC):
While reading the annual reports of the company, an investor gets to know that the company got an inter-
corporate deposit (ICD) from MPSIDC and it had to repay this ICD to MPSIDC; however, it stopped
making repayments of ICD from 2002.
In FY2005, SOM Distilleries & Breweries Ltd applied to MPSIDC for a one-time settlement (OTS), which
effectively meant that the company appealed to MPSIDC for a reduction in the interest rate and repayments.
However, what comes as a surprise to the investor is that in its financial statements, SOM Distilleries &
Breweries Ltd started showing lower interest rate obligations/expense even when the OTS proposal was
not approved by MPSIDC.
The auditor of the company highlighted it in its report in the annual report.
The Company was unable to meet its commitments towards the Inter Corporate Deposits (ICD) obtained
in the earlier years from the Madhya Pradesh State Industrial Development Corporation Ltd., (MPSIDC).
Subsequently, during the year, in accordance with the One Time Settlement Scheme (OTS) of MPSIDC, the
Company had submitted a proposal for a downward revision of interest and repayment of the outstandings
in suitable installments. Pending the formal acceptance of the OTS proposal, interest on the ICD has been
accounted for, up to 31.03.2005, in accordance with the said OTS guidelines. The Company may be deemed
to be contingently liable to the extent of the difference in the contracted rate of interest and that as per the
OTS guidelines of MPSIDC.
An investor would appreciate that in the case of such requests for OTS, it is up to the govt. authority like
MPSIDC to accept or reject the proposal and any company may not take a decision in its favour as
guaranteed.
After 4 years, in FY2009, SOM Distilleries & Breweries Ltd intimated its shareholders that it has now sent
a fresh request to MPSIDC for OTS. It may mean that the previous request for OTS submitted by the
company to MPSIDC in FY2005 was not entertained.
The Company is taking up the matter afresh for settlement of its outstandings with the Madhya Pradesh
State Industrial Corporation Ltd. (MPSIDC) as per the policy of MPSIDC in this regard….The unprovided
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interest at the contracted rate (compounded annually) amounts to Rs. 7,56,27,382 upto 31.03.2009
(previous year Rs. 5,28,59,242). The Company may be deemed to be contingently liable to that extent.
After two more years, in FY2011, the company had to again submit another fresh proposal for OTS to
MPSIDC, which was almost after 6 years after the submission of the first request for OTS in FY2005.
Finally, in FY2011, MPSIDC seemed to have agreed to OTS and accepted a token payment.
The Company has made a fresh offer for settlement of its outstandings with the Madhya Pradesh State
Industrial Development Corporation Ltd. (MPSIDC) as per its policy in this regard. The Company had also
made a token payment which has been realised.
Finally, in FY2014, after more than 12 years of the start of the default in FY2002, SOM Distilleries &
Breweries Ltd settled the inter-corporate deposit (ICD) taken by it from MPSIDC.
The unsecured Inter Corporate Deposit outstanding as on 31st March 2013 has been paid off during the
year 2013-14.
An investor may note that the request for the OTS was finally accepted by MPSIDC in FY2011 when it
agreed to accept the token repayment. However, SOM Distilleries & Breweries Ltd started recognizing the
lower interest rate under OTS from the FY2005 itself when it had first applied for the OTS to MPSIDC.
Recognition of a lower interest rate on the inter-corporate deposit without approval from MPSIDC had the
impact of lowering the interest expense in the profit and loss statement (P&L). This decision of the company
increased the amount of profits by that amount.
6) Capital expenditure of ₹24 cr done by SOM Distilleries & Breweries Ltd in

FY2012:
When an investor analyses the capital expenditure done by the company and the increase in its production
capacity, then she gets the following insights.
 Until FY2007, the company had a production capacity of 23,800 KL of beer

 In FY2008, the company increased its capacity to 29,200 KL of beer. To increase the capacity by
5,400 KL of beer, it spent about ₹8 cr (FY2008 annual report, page 29).
 In FY2011, the company increased its production capacity to 59,200 KL of beer. The company
spent ₹29.6 cr to increase its capacity by 30,000 KL of beer (=59,200 – 29,000).

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The company has added to the production capacity 30,000 KL of beer with a capital investment of around
Rs.296 million.
The installed capacity of your Company for production of beer has now been increased to 59,200 KL in
year under consideration.
In the same year, FY2011, SOM Distilleries & Breweries Ltd intimated its shareholders that it now plans
to further increase its capacity by another 40,000 KL of beer and plans to complete it within one year i.e.
by FY2012.
In view of the increase in demand for the Company’s products and expanding the marketing area of the
products in India and abroad, your Company is prompted to go for yet another expansion. The expansion
of capacity by another 40,000 KL is under way and is expected to be commissioned by the end of the F.Y.
2011-12.
In the next year, FY2012, the company intimated that the construction of the new production capacity to
increase its capacity to 99,200 KL is underway.
The expansion of the company is underway from the existing capacity of 59,200 KL to 99,200 KL due to
wide acceptance of our products, the full effect of which will be seen in the financial year 2012-2013.
When an investor analyses the FY2012 annual report to find out the amount of capital expenditure done by
it for the new plant, then she notices that the company spent about ₹23.8 cr on fixed assets. As per the
schedule containing details of tangible fixed assets, out of this expenditure, assets worth ₹23.4 cr were
completed and functional whereas ₹0.4 cr were still under execution i.e. in capital work-in-progress
(CWIP).
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An investor would appreciate that until the time a manufacturing plant is under construction, companies
show the money spent on it under CWIP. When the construction is completed and the plant becomes
functional, then the companies shift the amount from CWIP to gross fixed assets.
Therefore, when an investor observes an increase in the gross fixed assets by ₹23.4 cr in FY2012, then she
analyses the future annual reports of the company to assess the increase in the production capacity of SOM
Distilleries & Breweries Ltd due to this capital expenditure.
However, as per the annual report of the next year, FY2013, the company’s capacity did not increase. It
was still 59,200 KL of beer; the same level as of FY2011 and the IMFL capacity was 5,400 KL, which is
constant since at least FY2004.
The Company has an installed capacity of 59,200 KL of Beer and 5,400 KL of IMFL after having tripled
its capacity in the past two years.
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In FY2013, the management of the company highlighted that it has tripled its capacity in the past two years,
i.e. from FY2011 to FY2013. However, an investor notices that its beer capacity is at the same level of
59,200 KL since FY2011 and its IMFL capacity is at the same level of 5,400 KL since FY2004. Therefore,
an investor is not sure how she should interpret the management claim about “having tripled its capacity
in the past two years.”
An investor would notice that until FY2018, the company had its production facilities only in one location
i.e. in Bhopal, MP. In April 2018, the company started its second production facility in Hassan, Karnataka.
Upon reading the FY2018 annual report, the investor gets to know that the Bhopal plant still has a capacity
of 59,200 KL of beer.
The Company and its subsidiary have two manufacturing plants in Bhopal, Madhya Pradesh and Hassan,
Karnataka. The Bhopal facility has a manufacturing capacity of 7.6 million cases of beer and 0.6 million
cases of IMFL per year. The Karnataka facility was commissioned in April 2018 and has a manufacturing
capacity of 3.4 million cases of beer and 2.7 million cases of IMFL.
As per the FY2019 annual report of the company, page 21, a case of beer contains 12 bottles of 650 ml
each.
In 2018 India accounted for consumption of 2,426 million liters or 311 million cases of beer. (1 case is
equivalent to 12 bottles of 650 ml each).
Therefore, if an investor converts the production capacity of the Bhopal plant in FY2018 from 7.6 million
cases of beer to Kilolitres (KL), then she gets the data as 59,280 KL (7,600,000 * 12 * 0.650 = 59,280,000
Litres).
Therefore, an investor notices that even though the annual reports of SOM Distilleries & Breweries Ltd
shows that in FY2012, the company spent ₹23.4 cr on fixed assets, which were completed and included in
its gross fixed assets; however, still, its production capacity did not increase even until FY2018. In FY2019,
the company started the project for increasing the capacity of the Bhopal plant.
During the year, we also started investment for doubling the capacity of the Bhopal plant based on the
opportunities that we foresee from the neighbouring states.
Therefore, an investor may contact the company directly to get clarity about where did the company spend
₹23.4 cr in FY2012, and what assets were created by the company by spending this ₹23.4 cr in FY2012.
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7) Weakness in internal systems and processes by SOM Distilleries & Breweries

Ltd:
While reading the auditor’s reports in various annual reports of the company, an investor notices that the
auditor has repeatedly highlighted aspects of SOM Distilleries & Breweries Ltd, which indicate a weakness
in the processes, controls and systems in the company.
7.1) Weakness in the procedures for purchase of inventory:
The first time, while reading the FY2005 annual report, an investor gets to know in the auditor’s report that
the processes of purchase of inventory followed by SOM Distilleries & Breweries Ltd are weak and they
need to be strengthened.
there are adequate internal control systems commensurate with the size of the Company and the nature of
its business with regard to purchase of fixed assets and for the sale of goods and services. Such procedures
for purchase of inventory need to be strengthened.
The management of SOM Distilleries & Breweries Ltd acknowledged the weakness in the FY2005 annual
report and intimated the shareholders that it is strengthening the procedures for the purchase of inventory.
Procedures for purchase of inventory are being strengthened.
After reading about the acknowledgement by the management of the weakness in the processes for the
purchase of inventory and getting the commitment of the management for strengthening them, an investor
would think that these weaknesses would be rectified soon.
However, upon reading subsequent annual reports, an investor notices that these weaknesses continued for
more than 10 years. This is because the auditor of the company continued to highlight the weaknesses in
the procedures for the purchase of inventory until FY2015.
In our opinion and according to the information and explanations given to us, there are adequate internal
control systems commensurate with the size of the Company and the nature of its business with regard to
purchase of inventory and fixed assets and for the sale of goods and services. However, procedures for
purchase of inventory need to be strengthened.
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In light of the continued weaknesses in the processes of purchase of inventory, an investor may appreciate
that the company may have bought inventory that it did not need or it may have bought inventory without
checking whether it already has those goods in the stock or not or it might have overpaid for certain
inventory etc. Therefore, when in FY2008, an investor comes across an instance where SOM Distilleries &
Breweries Ltd wrote-off inventory worth a significant amount of ₹8.75 cr, then she fears that the weak
processes may be one of the reasons behind it.
Materials consumed shown in Schedule “H” at Rs. 33,62,01,106 includes obsolete and damaged packing
and other materials written off estimated at Rs. 8,75,00,000.
There might be a possibility that if the company had acted on its commitment to strengthening the processes
for the purchase of inventory, then this loss could have been avoided.
An investor may contact the company directly to understand what the weaknesses in the purchase processes
were that led the auditor to highlight them in its report. What steps did the company take to rectify them?
Why did the weaknesses continue even after 10-years from the acknowledgement by the management in
FY2005? Moreover, whether the company could have avoided the loss of ₹8.75 cr in FY2008 if it had acted
upon the weaknesses highlighted by the auditor earlier.
7.2) Absence of internal audit in many divisions of SOM Distilleries & Breweries Ltd:
While reading the FY2005 annual report, an investor notices that as per the auditor of the company, SOM
Distilleries & Breweries Ltd lacks internal audit in some of the divisions.
As per the information given to us, two depots have been internally audited by the Company’s own staff. In
our view, a regular system of internal audit of all areas of the Company’s operations needs to be put in
place and implemented.
Just like the acknowledgement of weaknesses in the processes for the purchase of inventory, in the case of
internal audit also, in FY2005, the management acknowledged the shortcoming and committed to
shareholders that a regular system of internal audit is being implemented in all the areas of the company
from FY2015 itself.
Regular system of internal audit of all areas of the company’s operation is being initiated from the current
financial year.
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However, just like the weakness in the processes for the purchase of inventory, in the case of internal audit
too, the company did not implement it for many years. Even after 9-years of FY2005, until FY2014, the
auditor of the company continued to highlight the need of implementing the internal audit in all the areas
of the company’s operations.
In our view, a regular system of internal audit of all areas of the Company’s operations needs to be put in
place and implemented.
8) Instances of noncompliance with regulatory guidelines by SOM Distilleries &

Breweries Ltd:
While reading the annual reports of the company, an investor comes across multiple instances where the
company did not comply with the stipulated regulatory guidelines. Let us see some of these instances:
 In FY2020, the composition of the board of directors of SOM Distilleries & Breweries Ltd was not
in compliance with the legal requirements for a period of almost 5 months. (FY2020 annual report,
page 34):
The composition of Board of Directors was not in compliance in terms of Regulation 17 of SEBI
(Listing Obligation & Disclosure Requirement), Regulations, 2015 during the period from August
23, 2019 to January 20, 2020
 In FY2019, the composition of the company’s audit committee, and nomination and remuneration
committee was not in compliance with the legal requirements and the company was fined by BSE
and NSE for this reason. (FY2019 annual report, page 16-17):
BSE/NSE have imposed fines in regard to non-conformity in constitution of Audit Committee and
Nomination and Remuneration Committee during a period. The said mistake has since then been corrected.
 Even though the company intimated in the FY2019 annual report that it had rectified the non-
compliance in the constitution of the audit committee, and nomination and remuneration
committee; however, in the FY2020, SOM Distilleries & Breweries Ltd was once again found non-
compliant in the composition of the audit committee, and nomination and remuneration committee.
(FY2020 annual report, page 34):
Non- conformity in constitution of Audit Committee and Nomination and Remuneration Committee in terms
of Regulation 18 and 19 of SEBI (Listing Obligation & Disclosure Requirement), Regulations, 2015 during
the period from April 1, 2019 to May 26, 2019
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 As per recent guidelines, if any shareholder does not claim dividends for seven years, then the
companies have to transfer these shares to Investor Education and Protection Fund (IEPF).
However, in the FY2020 annual report, the auditor intimated the shareholders that SOM Distilleries
& Breweries Ltd has not transferred such shares to IPEF. (FY2020 annual report, page 34):
The company has not transferred the share to Investor Education and Protection Fund (“IEPF”) in respect
of which dividend was unpaid/unclaimed for more than seven consecutive years
While reading past annual reports, an investor notices that it is not the first instance where the company has
not fulfilled its statutory liabilities. In the past also, at various instances, the company delayed the deposit
of undisputed statutory dues to govt. authorities.
 In the FY2012 annual report, the auditor of the company pointed out that the company has delayed
the deposit of undisputed income tax of about ₹45 cr for FY2011 (the assessment year 2011-12)
for more than 6-months. (FY2012 annual report, page 16):
As per the records of the Company there are no undisputed statutory dues outstanding as at 31.03.2012 for
a period exceeding a period of six months from the date they became payable other than Income tax for the
assessment year 2011-12 aggregating to Rs. 2,45,62,000.
 Similarly, in the FY2013 annual report, the auditor of the company pointed out that the company
has delayed the deposit of undisputed income tax of about ₹43 cr for FY2013 (the assessment year
2013-14) for more than 6-months. (FY2013 annual report, page 18.iii):
As per the records of the Company there are no undisputed statutory dues outstanding as at 31.03.2013 for
a period exceeding a period of six months from the date they became payable other than Income tax for the
assessment year 2013-14 aggregating to Rs. 2,43,36,500.
Moreover, after reading the annual reports of the company, an investor gets to know that at times SOM
Distilleries & Breweries Ltd did delays in intimating the stock exchanges about allotment of shares to the
promoters. As a result, in FY2019, the stock exchanges put a fine on the company.
There was a delay of 56 days in submitting applications to BSE and NSE for listing of shares in respect of
1288906 equity shares allotted to promoters on 02.03.2019 for which the stock exchanges have levied fine
and which has been paid by the company
A similar case of delay in intimation about shares allotted to promoters in FY2011-FY2013 is currently
pending before SEBI for adjudication.
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The matter regarding delays in intimating purchase of Shares by the promoters during 2011-13, though
technical in nature is under consideration of Adjudicating officer of SEBI.
Therefore, an investor notices that at multiple times in the past, SOM Distilleries & Breweries Ltd has not
complied with the legal requirement like the proper composition of the board of directors or its committees
like audit committees. The company has delayed the deposit of its obligations like shares to the IPEF and
income tax liabilities to the Income Tax authorities.
While reading the annual reports of the company, an investor also comes across instances where the
company has:
 Not conducted familiarization programs for independent directors.
No familiarization programmes were arranged for independent directors since there was no such need.
 Not formed any remuneration policy for the management.
Affirmation that the remuneration is as per the remuneration policy of the company: No remuneration
policy has been framed so far.
 Not linking remuneration of key management personnel with the performance of the company.
Comparison of the remuneration of the Key Managerial Personnel against the performance of the
company: The remuneration of KMP is not related to company performance at present.
Therefore, an investor would appreciate that while analysing SOM Distilleries & Breweries Ltd, an investor
needs to employ a high level of due diligence before making any final opinion.
Going ahead, an investor should keep a close watch on the compliance status of the company with various
legal requirements so that she can get to know about any serious lapse in time and thereafter, she may take
a decision accordingly.
9) When SOM Distilleries & Breweries Ltd declared that the promoter-entity Som
Distilleries Pvt. Ltd (SPDL) is not its related party:
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While reading the annual reports of SOM Distilleries & Breweries Ltd, an investor comes across numerous
disclosures by the company stating that SOM Distilleries Pvt. Ltd. (SPDL) is a company under the same
management. Over time, SOM Distilleries & Breweries Ltd has given numerous loans & advances to SDPL.
It also had an arrangement of a current account with SDPL.
SDPL has always been present as a large shareholder under the promoters’ shareholding in SOM Distilleries
& Breweries Ltd. On December 31, 2020, SDPL owned a 9.77% stake in the company and was classified
under promoter and promoter group (Source: BSE).
Until FY2015, SDPL was clearly disclosed as a related party in the annual report in the dedicated section
on related party transactions (FY2015 annual report, page 59).
However, in FY2016, an investor is surprised when SOM Distilleries & Breweries Ltd disclosed that SDPL
is no longer a related party.
Transactions with Related Parties: During the year SOM Distilleries Pvt. Ltd. ceased to be a related party,
hence details of transaction with this company are not given.
While analysing the shareholding pattern of SOM Distilleries & Breweries Ltd on Bombay Stock Exchange
during FY2016, an investor notices that SDPL held a 10.93% stake in the company on June 30, 2015
(source), 11.01% on September 30, 2015 (source), 11.01% on December 31, 2015 (source) and 11.01% on
March 31, 2016 (source).
Throughout FY2016, the company disclosed SDPL as a shareholder under promoter and promoter group
to the Bombay Stock Exchange.
Therefore, it does not look like the relationship of SOM Distilleries & Breweries Ltd and SDPL underwent
any change in FY2016 than what it had in FY2015. However, still, in FY2016, SOM Distilleries &
Breweries Ltd removed SDPL from the list of related parties and did not disclose its transactions with SDPL
in the FY2016 annual report.
In the very next year, in FY2017, SOM Distilleries & Breweries Ltd included SDPL again in the list of
related parties. While recognizing SDPL as a related party in FY2017, the company gave the reason that as
now Mr J.K. Arora has taken over as CMD of SOM Distilleries & Breweries Ltd; therefore, SDPL is
recognized as a related party. However, it disclosed only the transactions with SDPL from February 4, 2017
onwards in the annual report.
On February 4. 2017, Mr. J K Arora was appointed Chairman and Managing Director of the Company.
Prior to this, on January 27, 2017 he was also appointed Managing Director of Som Distilleries Private
Limited (SDPL). Therefore, with effect from February 4, 2017, SDPL became a related party as per AS-I8.
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Accordingly, transactions entered into between the two companies between February 4. 2017 and March
31, 2017 are given above.
From the above disclosure, an investor would appreciate that SOM Distilleries & Breweries Ltd did not
disclose its transactions with SDPL from April 1, 2015, to February 3, 2017 i.e. during the period it did not
recognize SDPL as a related party.
An investor may note that Mr J.K. Arora had resigned from the board of SOM Distilleries & Breweries Ltd
in FY2009 from March 21, 2009. He was not a part of the board of directors from March 21, 2009, and the
company continued to show the promoter-entity SDPL as a related party until March 31, 2015.
An investor may contact the company directly for seeking any clarifications regarding removal and then
recognition of SDPL as a related party in FY2016 and FY2017. In addition, she may also seek details of
transactions between SOM Distilleries & Breweries Ltd and SDPL during April 1, 2015, and February 3,
2017, the period during which these transactions were not disclosed in the related party transactions of the
annual reports.
The Margin of Safety in the market price of SOM Distilleries & Breweries Ltd:
Currently (April 14, 2021), it is not possible to estimate a price to earnings ratio (PE ratio) for SOM
Distilleries & Breweries Ltd because the company has reported a net loss of ₹(47) cr on the consolidated
basis for 12-months ending December 2020 (i.e. January 2020-December 2020). An investor would
appreciate that a loss-making company does not offer any margin of safety in the purchase price as
described by Benjamin Graham in his book The Intelligent Investor.
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Analysis Summary
Overall, SOM Distilleries & Breweries Ltd is a company that is has grown its sales at a rate of 11% year
on year for the last 10 years. However, the company faced challenging times during its history. The
company faced bankruptcy due to poor business performance in the last decade. Moreover, in recent years,
the company is again facing a liquidity crunch.
The company does not have any pricing power and the govt. decides the prices of its key products once a
year. As a result, the company has to take a hit on its margins if the raw material prices go up. The
company’s business suffered badly during coronavirus linked lockdown as its main product, beer, has a low
shelf life and the company had to take large inventory losses. The company has reported net losses in the
last 12-months ending December 2020 (i.e. January 2020-December 2020).
In the last decade, SOM Distilleries & Breweries Ltd increased its brewing capacity in FY2011. Thereafter,
it expanded production capacity from FY2018 by making a new brewery in Karnataka, buying and
upgrading a brewery in Odisha and increasing capacity at its Bhopal plant. As per the annual reports of the
company, it spent about ₹24 cr in FY2012 in capital expenditure (capex); however, an investor is not able
to find any increase in production capacity of the company related to this capex from FY2012 to FY2017.
SOM Distilleries & Breweries Ltd.’s operations are working capital intensive as it needs to invest a
significant amount of money in the inventory, packaging, supply chain etc. when it enters any new market.
In recent years, SOM Distilleries & Breweries Ltd has entered two key markets of Karnataka and Odisha.
As a result, its liquidity situation is stressed, which is indicated by its full utilization of working capital
limits, and delayed payments of interest to its lenders. The company opted for a moratorium for all its bank
facilities during coronavirus related lockdown.
The capital-intensive nature of the business of SOM Distilleries & Breweries Ltd has made the company
raise more debt and dilute its equity (preferential allotment and warrants) to meet its funds’ requirements
for Karnataka, Odisha and Bhopal plant expansions. The company has reported a significant negative free
cash flow and it seems that on an overall basis, the company’s dividends over last years are funded by debt
or equity dilution.
The promoters seem to have put in place a succession plan where the next generation of the promoters is
already active in the business.
The company’s promoters seem to run the entire group with a common business strategy where they keep
on intermixing the manpower and economic resources of one group company with another. The promoters
seem to control the executive position at the group level and the business level executive authority is given
to professionals, who at times act as MD/CMD of more than one company of the group. In the past, the MD
of SOM Distilleries & Breweries Ltd, Mr Surjeet Lal, also held responsibilities of CMD of SOM Distilleries
Pvt. Ltd. (SDPL), a promoter-entity. Mr Lal did not take any remuneration from SOM Distilleries &
Breweries Ltd as he took his salary from SDPL.
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The intermixing of resources of all the group companies have led to a situation where the public listed
company, SOM Distilleries & Breweries Ltd has supported other promoter-entities by way of giving loans
& advances, giving corporate guarantees to their bankers, giving money to promoter-entity for share
allotment etc. At times, the flow of money among the group companies is so frequent that the account of
one company with another acts as a current account. Moreover, there is no interest applicable on such
current account type transactions; therefore, the group company used the money of SOM Distilleries &
Breweries Ltd without any cost.
The promoters own many entities that are in the same business as SOM Distilleries & Breweries Ltd. A
promoter entity, SDPL, claims to sell many liquor brands, which are produced and sold by SOM Distilleries
& Breweries Ltd as well. Therefore, there is always a risk that they may prefer growing their own entities
to the public listed company.
An investor notices that SOM Distilleries & Breweries Ltd spends a very high amount on sales promotions.
Its spending on sales promotions as a percentage of revenue is even higher than its peers who are more than
5-10 times bigger in size. Moreover, SOM Distilleries & Breweries Ltd has continued to spend heavily on
sales promotion even when it faced liquidity stress and even when its sales did not grow substantially for
almost 5 years (FY2011-FY2015). The company seems to have a marketing arrangement with its retailers
where it gives a large amount of advance to retailers who are actually the customers of SOM Distilleries &
Breweries Ltd. An investor needs to understand more about this marketing arrangement of the company
with its retailers.
In the past, SOM Distilleries & Breweries Ltd has defaulted multiple times in repayments to multiple
parties. It defaulted to public sector banks in 2005-2007. It defaulted on the ICDs received from Madhya
Pradesh State Industrial Development Corporation Ltd. (MPSIDC). Then, it seemed to have renegotiated
with Kotak Mahindra Bank Ltd as well who had helped it in repayments to PSU banks in the past.
The promoters of the company were arrested in July 2020 on charges of avoiding GST payments on the
sale of hand sanitizers in their entity, SDPL. Previously, in 2001, the promoter, Mr J.K. Arora was arrested
on the charges related to attacking Income Tax officials and snatching documents after they had searched
his house.
An investor notices various instances of weaknesses in the processes and systems of the company like
processes of purchase of inventory and the need for implementing internal audit in all the operating areas
of the company. However, an investor notices that these weaknesses continued for almost a decade before
the auditor stopped highlighting them in its report.
The company also seems to have failed to comply with many statutory requirements like the proper
composition of the board of directors, audit committee as well as nomination and remuneration committee.
The company delayed intimation to stock exchanges about critical matters, which led to fines on the
company as well as adjudication proceedings at SEBI.
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The company highlighted in its annual reports that it did not have any remuneration policy, the salary of its
key management personnel was not linked to the performance of the company. In addition, the company
felt that there was no need for any familiarization program for its independent directors.
In the past, SOM Distilleries & Breweries Ltd removed one of the promoter-entity, SDPL, which owned
about 10% shares in the company, from the list of related parties. As a result, SOM Distilleries & Breweries
Ltd did not report its transactions with SDPL in the annual report from April 1, 2015, to February 3, 2017.
While assessing SOM Distilleries & Breweries Ltd, an investor realizes that she needs to do deeper due
diligence before she makes any opinion about the company. She needs to keep a close watch on the
profitability margins of the company, its liquidity situation, the conversion of its capital expenditure into
an increase in production capacity, and fructification of its sales promotion expenses in increased revenue
and margins. She needs to monitor the compliance level of SOM Distilleries & Breweries Ltd with the
statutory requirements as well as the progress of the investigation of the GST evasion case against the
promoters.
These are our views on SOM Distilleries & Breweries Ltd. However, investors should do their own analysis
before making any investment-related decisions about the company.
P.S.

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9) Asian Energy Services Ltd

Asian Energy Services Ltd, previously known as Asian Oilfield Services Limited, is an Indian company
specializing in generating seismic data for oil & gas exploration. The company also provides operation and
maintenance of oil & gas production units.
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While analysing Asian Energy Services Ltd, an investor would notice that over the last 10-years, the
company has had multiple subsidiaries, both in India as well as overseas. On March 31, 2021, Asian Energy
Services Ltd had the following subsidiaries (FY2021 annual report, page 110):
 Asian Energy & Energy Services DMCC (in UAE)

 AOSL Petroleum Pte. Limited (in Singapore)
 Ivorene Oil Services Nigeria Limited (up to 17 June 2020) (in Nigeria)
 AOSL Energy Services Limited (in India)
 Optimum Oil & Gas Private Limited (in India)
As a result, the company reported both standalone as well as consolidated financials over the entire period
of the last 10 years.
such a picture.
Therefore, in this analysis of Asian Energy Services Ltd, we have studied the consolidated financial
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Financial and Business Analysis of Asian Energy Services Ltd:

While analyzing the financials of Asian Energy Services Ltd, an investor notices that the sales of the
company have grown at a pace of more than 20% year on year from ₹41 cr in FY2012 to ₹229 cr in FY2021.
Further, the sales of the company have increased to ₹236 cr in the 12-months ended June 30, 2021, i.e.
during July 2020-June 2021.
While analysing the revenue growth of the company over the last 10-years, an investor notices that the
journey of the company has not been smooth. Asian Energy Services Ltd witnessed its sales decline multiple
times. In FY2016, the sales of the company declined by 45% from ₹141 cr in FY2015 to ₹78 cr in FY2016.
In FY2019, the sales of the company declined by 13% from ₹222 cr in FY2018 to ₹194 cr in FY2019.
Thereafter, in FY2021, the sales of the company declined by 16% from ₹273 cr in FY2020 to ₹229 cr in
FY2021.
Therefore, an investor would appreciate that the business of Asian Energy Services Ltd has witnessed
significant fluctuations over the last 10-years.
On similar lines, when an investor observes the operating profit margin (OPM) of Asian Energy Services
Ltd over the last 10-years (FY2012-FY2021), then she notices that for the first 6 years (FY2012-FY2017),
the company continuously reported operating losses. Thereafter, from FY2018 onwards, Asian Energy
Services Ltd started reporting profits and the OPM of the company increased from 18% in FY2018 to 24%
in FY2021. The OPM of the company improved further to 29% in the 12-months ended June 2021.
To understand the reasons for the decline in the revenue of the company in FY2016, FY2019 and FY2021,
the reasons for operating losses until FY2017, and the improvement in its OPM later on, an investor needs
to read the publicly available documents of the company like annual reports, credit rating reports, open
offer documents as well as its corporate announcements.
influence the business of Asian Energy Services Ltd. An investor needs to keep these factors in her mind
1) Main business of seismic data collection is cyclical and uncertain:

While analysing Asian Energy Services Ltd, an investor notices that the business of seismic data collection,
which is its core business is cyclical in nature. The availability of orders in this business is highly dependent
on the following factors:
 prevailing crude oil price because it determines the economic viability of exploration activities and
 the amount of budget available with the oil & gas exploration companies because they are the main
customers of Asian Energy Services Ltd
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In the FY2007 annual report, the company has highlighted to its shareholders that the oil exploration
activities become unviable when crude oil prices fall below $20, which may affect the entire seismic data
collection business.
A decline in the price of oil below $20 a barrel could make exploration activities unviable and jeopardise
all seismic assignments.
An investor would appreciate that when the crude oil price is higher, then the exploration companies make
a good profit on their oil discoveries. As a result, they are willing to spend more money on exploration
activities including seismic data collection. However, when the crude oil prices decline, then due to a lack
of economic incentives, they cut down on the budgets allocated to exploration activities. This, in turn,
reduces the business available to seismic data collection companies like Asian Energy Services Ltd.
While looking at the historical trend of crude oil prices, an investor would notice that they have been very
volatile throughout the last 20-years (2001-2021).
From the above data, an investor would notice that the crude oil prices have been fluctuating between $20
to $140 with intermittent periods of increasing oil prices and decreasing oil prices.
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While reading the annual reports of Asian Energy Services Ltd, an investor comes across that most of the
periods of its poor business performance have coincided with periods of declining crude oil prices. E.g. in
FY2016, when the company witnessed a 45% decline in sales, then it mentioned a decline in oil prices and
resultant exploration activities as the reason for lower demand for its services.
With falling crude oil prices and decreasing oil & gas exploration activities, we have re-grouped and
worked around our strategies to adapt to the persistently weak demand.
Once again, in FY2019, an investor would notice that the decline in the business of the company coincided
with the decline in the crude oil prices.
Apart from declining crude oil prices, general cycles of economic activity also affect the budgets of
exploration companies, which in turn affects the business available to seismic data collection companies
like Asian Energy Services Ltd.
There have been numerous occasions where deferment of spending by exploration companies affected the
business of Asian Energy Services Ltd.
During FY2010-FY2012, when the company reported a poor business performance including operating
losses, then the company blamed deferment of spending by exploration companies for it.
Over 2010-12, the Company’s revenues and profitability were adversely impacted by the deferment of
capital expenditure by E&P companies following the global economic slowdown.
In the FY2015 annual report, once again, Asian Energy Services Ltd mentioned the deferment of capital
expenditure by exploration companies as the reason for its poor performance.
Going into the year 2014-15, we witnessed deteriorating demand and utilisation in seismic industry on the
back of substantial decline in oil prices. The increase in oil supply and corresponding market instability
had a cascading effect on budgets allocated for seismic exploration by the Oil & Gas companies.
softening of the oil prices led to the oil industry cancelling most of the tenders in 2014-15.
The credit rating agency, CRISIL, also highlighted in its report for Asian Energy Services Ltd in April 2017
that the investments by oil & gas exploration companies follow a cyclical pattern, which affects the business
of seismic data providers like Asian Energy Services Ltd.
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AOSL’s revenue driver is the business of onshore seismic survey for oil exploration companies and oilfield
O&M services. The investment cycles of these companies result in fluctuations in revenue of oilfield services
companies such as AOSL.
Therefore, an investor would appreciate that the business opportunity available to Asian Energy Services
Ltd in the seismic data collection is highly cyclical. The orders from exploration companies depend on
factors like prevailing crude oil prices, availability of budgets and the phase of the economic cycle.
The company has intimated its shareholders on multiple occasions that seismic data collection companies
benefit from the minimum seismic mapping requirement put by the govt. while allocating exploration
blocks.
The government mandated the conduct of minimum 2D surveys for all oil and gas exploration and
production companies for their NELP blocks.
As a result, companies and investors have assumed that seismic data collection companies would always
have a minimum level of business opportunity available to them due to the compulsion of allottee
companies to do a minimum amount of seismic surveys. However, an investor should appreciate that if the
allottee of an exploration block is facing economic challenges due to the crude oil price down-cycle and
the oil exploration has become economically unviable, then it is not going to spend money on doing seismic
studies of unexplored blocks.
Therefore, companies like Asian Energy Services Ltd may witness periods of large order inflows where
they get business more than what it can handle. However, soon thereafter, when the cycle turns, then they
may face periods where there are no orders to justify the investments done by the company in its man &
machinery. As a result, an investor needs to be very cautious before she projects the business performance
of the recent past into the future.
From the above chart, an investor would notice that in the recent past, crude oil prices have started
increasing. In light of the same, it does not come as a surprise that seismic data collection companies like
Asian Energy Services Ltd have started receiving many orders.
When an investor reads the comments of the management in its different conference calls, then she can feel
the enthusiasm. In fact, the management seems so optimistic that they have started denying the cyclicity in
the business.
Ashutosh Kumar:….the demand for seismic activities in country is so high, that for the next two – three
years there is no scarcity of tenders, so that cyclicity is gone.
The management also highlighted that the company has become very choosy in accepting orders.
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Kranthi Bathini: Okay you are very choosy in terms of selecting the orders.
Ashutosh Kumar: Yes.
From the above discussion, an investor would appreciate that the business opportunity available to seismic
data collection companies like Asian Energy Services Ltd witnesses a cyclical pattern. Factors like crude
oil prices and exploration budgets available with their customers determine the order inflow. Therefore,
they witness periods of high order inflow followed by periods of low order inflow.
During the periods of high order inflows, if the management loses sight of the overall big picture of the
cyclical nature of business, then it may get hurt when the cycle turns and the company might be left with a
large investment in man & machinery but with no orders to execute.
In the past, Asian Energy Services Ltd has faced challenges when its investment decisions were not optimal
and the business situation changed leading to the near bankruptcy stage. As a result, it had to be sold to
different owners multiple times in the last 15 years.
Its original promoters, Mr Krishna Kant and Mr Avinash Manchanda could not run the company profitably
and gave up control of the company to Samara Capital in 2010. Thereafter, Samara Capital also could not
run the company profitably and then sold it to Oilmax Energy in 2016.
Therefore, an investor should always keep in her mind the cyclical nature of the seismic data collection
business and not ignore its cyclical nature even if the management of the company states that the cyclicity
is gone.
2) High competition:
The seismic data collection is a specialized business with the presence of only a few independent players
like Asian Energy Services Ltd. However, the business opportunity available to the independent players is
limited, which increases the competitive intensity among the independent players.
Asian Energy Services Ltd intimated to its shareholders in the FY2008 annual report, page 16, that India
had only three key third party seismic data collection players.
The Indian seismic services industry is marked by only three large-scale third-party service providers.
A presence of only three key players in the industry may give an impression to the investor that the
competitive intensity in the industry is low. However, investors should keep in mind that most of the seismic
data collection is done by the exploration companies on their own. This is because exploration companies
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have in-house seismic data collection teams. As a result, they only outsource some seismic data collection
business to outside third-party players.
As per Asian Energy Services Ltd, nearly 50% of the total seismic data collection activities are done by the
exploration companies in-house.
Around 50% of this emerging business opportunity will be explored through captive in-house crews of
ONGC and OIL who possess their own crews while the remaining will be executed by private third party
crews.
Therefore, an investor would appreciate that third party seismic data collectors like Asian Energy Services
Ltd get only a limited business opportunity for which they have to compete with other players.
The credit rating agency, CRISIL, highlighted the aspect of intense competition in its report for the company
in April 2017.
AOSL is also exposed to competition from peers due to limited market size.
Because of the intense competition, on multiple occasions, Asian Energy Services Ltd had to accept
business at very low prices, which has been one of the reasons for its poor business performance and
operating losses in the past.
In FY2005, when the sales, as well as net profits of the company, declined, then it intimated its shareholders
that it was due to taking up very difficult contracts at very low prices.
The reduction in the income and therefore in the profits has been caused due to our having secured
contracts on very competitive rates and that too in difficult areas of operations.
In FY2019, when the company won orders, it intimated to the shareholders that it won the orders by offering
discounted prices.
Attractive Bidding Price: We offer discounted bidding price, which is reasonable. It has helped us to bag
orders of worth more than ₹ 850 Crores.
In the past, an investor notices that the company did not quote proper prices, which might have factored in
all the risks (geopolitical and environmental) in the contracts. As a result, the company ended up making
losses even after completing the project.
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In FY2015, the company reported losses because it could not profitably complete the contract bid by it in
Kurdistan, Iraq. The geopolitical issues increased the cost of executing the contract and as a result, the
company reported losses despite completing the contract.
The credit rating agency, CRISIL, highlighted the operating losses of the company in FY2015 due to
geopolitical issues of the Kurdistan project in its report in August 2015.
The losses during 2014-15 were mainly on account of significant increase in operating cost due to
emergence of geopolitical issues in the Kurdistan region where AOSL had its largest order and the company
chose to complete the project even in spite of a force majeure event.
The insufficiency of the bid price for this project came up again in FY2017 when the company had to write
off all the equipment it had used in Kurdistan, Iraq because transporting them back to India proved
economically unviable.
IMPAIRMENT LOSS: The Group recorded an impairment loss of ₹ 27,098,563 (under the head “other
expenses” in its consolidated financial statements) relating to its fixed assets… The fixed assets were in
Iraq where the subsidiary Company no longer has any presence and considering the high transportation
cost of importing these fixed assets, same were impaired.
As a result, an investor would appreciate that due to limited business opportunities available to third-party
seismic data collectors, Asian Energy Services Ltd has won contracts at discounted prices, which have
proved loss-making for the company.
The limited business opportunity available to the company becomes apparent to the investor when she
notices that in FY2014, Asian Energy Services Ltd presents the Middle-East North Africa (MENA) region
as highly attractive while simultaneously highlighting that two large players had shut down their operations
in the region.
While the market scenario remains temporarily unclear, optimism emanates from the fact that the market
space is marked by low competition. Over the recent past, two leading players withdrew services in the
Middle East, creating a wider space for our Company
It seems that due to limited business opportunities, seismic data collection companies end up targeting
tough markets and projects that others have already given up. Moreover, due to competition, they end up
bidding contracts at non-profitable prices.
In light of the same, it does not come as a surprise to the investor that the company reported operating losses
for years together, reached the bankruptcy stage multiple times and had to be sold off by its owners
repeatedly.
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3) Risks faced by Asian Energy Services Ltd in its business:

While analysing the annual reports and other public documents about Asian Energy Services Ltd, an
investor comes across numerous risks that it faces in its business, which an investor should always keep in
her mind.
3.1) Geopolitical risk:
This is one of the major challenges faced by Asian Energy Services Ltd. Most of the time, oil exploration
activities take place in areas, which are less developed. Such areas are usually a focus of civil protests,
sometimes armed protests, raising demands of the local population. Under such circumstances, carrying out
seismic data collection activities may prove impossible or very costly. As a result, companies like Asian
Energy Services Ltd taking up projects in such areas face project delays and operating losses.
In the above discussion, an investor would remember the incidence of the project taken up by Asian Energy
Services Ltd in Kurdistan, Iraq where the company faced operating losses due to high operating costs due
to geopolitical issues. Moreover, it faced additional losses when it had to write off its equipment in this area
as it was unviable to bring the equipment back from Kurdistan.
However, such issues are not limited to troubled overseas areas like Iraq. Within India also, Asian Energy
Services Ltd has faced many instances of geopolitical issues.
In FY2009, the company faced a sharp decline in its profits. While discussing its performance, the company
highlighted that its profits had declined due to the sudden stoppage of one of its projects.
Unexpected suspension of one of the key projects hit the margins and returns of your Company. Net profit
declined to Rs. 53 million as compared to Rs. 96 million in the previous year
Upon further analysis, an investor gets to know that it was a project allotted by ONGC in Nagaland where
due to socio-political issues; differences arose between ONGC and the Govt. of Nagaland. As a result, the
company faced the consequences of geopolitical risk.
ONGC decided to stall the project in February, 2009 owing to political issues in the region. The
Government of Nagaland and ONGC were unable to reach an understanding over a long standing issue…
The revenue loss due to suspension of work was immense for the Company
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Even in FY2008, the company has faced disruption in its project execution in North East India when
insurgency/violence affected the working of its people. Similarly, bomb blasts in Assam also created
challenges in project execution.
We are operating in the Northeast where insurgency is prevalent. During the last season, violence disrupted
operations in one of our crews. While we have deployed security…
October Assam blasts made it emotionally difficult for our employees; and our planned growth is dependent
on a peaceful working environment in Nagaland.
Thereafter, as discussed above, in 2015-2017, the company faced significant losses due to geopolitical
issues in Kurdistan, Iraq.
Again, in FY2018, Asian Energy Services Ltd faced geopolitical challenges when it could not work
properly on one of the projects in the state of Manipur.
The Company is witnessing local challenges at Oil India Ltd, Manipur project, resulting in slower progress
in this project
Similarly, in FY2020, the company faced delays in the commencement of a project in Iraq due to local
unrest and geopolitical tensions in the region.
The seismic data capturing project in Iraq has been delayed owing to the geopolitical tensions and local
unrest in the region
In light of the above instances, an investor should appreciate that most of the projects undertaken by the
company are in areas, which are undeveloped and have socio-political issues. As a result, there is a
continuous state of uncertainty related to project execution and progress. It might happen that a project,
which has been progressing well for a period, is stalled suddenly due to local unrest. An investor should
keep this very important risk due to geo-political factors always in her mind.
3.2) Environment and weather risk:
Another major risk faced by Asian Energy Services Ltd in its project execution is related to the environment.
It includes both the harsh geographical terrain as well as unfavourable working conditions like monsoons.
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In the FY2013 annual report, the company highlighted to its shareholders that it runs the risk of cost
overruns in its projects due to difficult terrain.
The business is exposed to cost overruns due to a substantial part of the project being conducted in
inhospitable terrains.
In FY2010 when the company faced a very sharp decline in its revenue and reported losses, it highlighted
to its investors that the key reason for the poor performance was slow progress on its project in North East
India where it is difficult to transport equipment by vehicles like tractors. The company has to move
equipment using human labour, which has resulted in a slow project progress.
almost all the revenues for the seismic vertical for the 9 months ending March 2010, was contributed by a
single 2D project being executed in North East. The primary reason for this slow pace of execution for this
project compared to last year is that the terrain, where fieldwork is being executed currently, is not
accessible by tractor mounted rigs. The shot hole drilling is currently being carried out by man portable
rigs.
In FY2009 as well, Asian Energy Services Ltd had faced challenges in executing a project in Mizoram,
where the company had to allocate more resources to the project and import special equipment, which
people can carry to the difficult project location.
we were a little behind the set target since the work coincided with the onset of monsoon season and because
of the teething problems associated with project execution in the difficult geographical landscape of
Mizoram. We have realized our shortcomings in this scenario and accordingly we have increased our
resources to carry out Seismic Data Acquisition. We have imported especially designed Man Portable
Drilling Rigs for the tough terrains of Mizoram.
An investor would appreciate that whenever a company is not able to assess the difficulty level in execution
of a project, then it ends up bidding at a price where it may not recover its costs and as a result, it ends up
making operating losses.
Apart from the difficulty in accessing the project site, Asian Energy Services Ltd also faces challenges in
executing the projects during monsoon season. This is because monsoons present multiple challenges in
seismic data collection:
First, the project sites become difficult to assess. Second, the life of the equipment deteriorates during
monsoons. Third, the quality of seismic data collected during the monsoons is not good.
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Unseasonal rainfall and logistics in remote areas represent another challenge, as many of our areas of
operation do not have regular paved roads.
Due to monsoon impact, the seismic data collected during the monsoon season could be erratic. Another
challenge involved is of logistics, to move the rigs at respective safe places as wet weather deteriorates the
lifespan of the equipment.
As a result, many times, if the monsoon season gets prolonged, then the project execution by Asian Energy
Services Ltd gets affected. In such a situation, the company needs to deploy additional resources to meet
the project deadlines, which increases the project cost.
For example, in FY2018, the company’s project work suffered a loss of about 45 days due to prolonged
monsoon season and the company had to increase resources for the project.
The Company’s seismic services projects in North-east India saw a loss of 45 operational days in
October/November 2017 owing to prolonged rainfall; however, the Company has deployed necessary
resources to ensure timely completion of project
In addition, an investor should also note that seismic data collection damages the local environment.
Therefore, Asian Energy Services Ltd might face hurdles on part of its project execution as well.
Environmental Risk: The process of seismic data acquisition involves environmental degradation that can
invite regulatory censure.
Therefore, an investor should always keep the risks related to social-political/geopolitical factors,
environmental damages, difficult operating terrain and weather risks to the project execution in her mind
whenever she assesses the order book of the company.
In the past, Asian Energy Services Ltd has suffered because of these risks and has resulted in losses. Going
ahead, an investor should be cautious while assessing the project execution of the company.
She should be aware that the oil exploration activities and as a result, seismic data collection business is
cyclical in nature, which depends upon the crude oil prices, exploration budgets of companies as well as
the general economic cycle of the country. As a result, the investor should be very cautious while projecting
the performance of the company into the future. This is because; the performance of the recent past may be
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a result of upcycle in the crude oil prices or the general economy. During the down cycle, Asian Energy
Services Ltd had reported operating losses for multiple years on a stretch.
While analysing the tax payout ratio of Asian Energy Services Ltd., an investor notices that for most of the
years, the tax payout ratio of the company has been lower than the standard corporate tax rate prevalent in
India.
During FY2012-FY2017, the company had reported losses. As a result, the company was not required to
pay any taxes. However, even from FY2018 onwards, when the company started reporting profits, its tax
payout ratio is lower than the standard corporate tax rate.
While going through the annual reports of the company, an investor notices that the key reasons for a lower
tax payout ratio for Asian Energy Services Ltd are (i) carried forward losses and (ii) differences in the tax
rates of overseas countries where subsidiaries are located e.g. UAE.
The above table from the FY2021 annual report shows the income tax reconciliation between the standard
corporate tax rate applicable in India and the tax payout in the profit & loss (P&L) statement of Asian
Energy Services Ltd. An investor may notice that the carried forward losses is the biggest factor leading to
a lower tax payout ratio for Asian Energy Services Ltd in both FY2020 as well as FY2021.
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The above table from the FY2019 annual report shows that “difference tax rate in countries in which group
operates” is the biggest factor leading to a lower tax payout ratio for Asian Energy Services Ltd in both
FY2018 as well as FY2019.
In addition, an investor may also note that govt. keep giving incentives to the activities of oil & gas
exploration in order to increase domestic production. In the FY2007 annual report, Asian Energy Services
Ltd highlighted that the oilfield services provider were taxable at 10% of their gross receipts.
Attractive fiscal Incentives, 1999-2003: Oilfield service provider taxable on 10% of gross receipts
An investor may contact the company directly to understand more about the income tax incentives available
to it.
Operating Efficiency Analysis of Asian Energy Services Ltd:
a) Net fixed asset turnover (NFAT) of Asian Energy Services Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Asian Energy Services Ltd in the past
years (FY2013-21), then she notices that the NFAT of the company has improved from 1.3 in FY2013 to
2.1 in FY2021. The NFAT reached a low of 0.8 in FY2016 and a high of 3.1 in FY2020. Nevertheless, on
an overall basis, the NFAT has seen an improvement over the last 10-years.
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An investor would appreciate that the NFAT of any company represents its asset utilization efficiency. An
increasing NFAT indicates an improved utilization of fixed assets of the company whereas a declining
NFAT indicates a deterioration in the asset utilization efficiency.
In addition, the level of NFAT indicates whether the business of any company is capital intensive or asset-
light.
Over the years, Asian Energy Services Ltd has seen three different managements controlling it. The original
promoters controlled it from 1992 to 2010. Samsara Capital controlled it from 2010 to 2016 and thereafter,
Oilmax Energy took over its control from 2016 onwards until now.
While reading the history of Asian Energy Services Ltd, its business strategy under three different
managements, an investor notices that different managements have managed the strategy of its assets in
very contrasting ways.
a.1) First phase: Original promoters: Shift from asset-light model to asset-heavy model:
The original promoters, which included Mr Krishna Kant and Mr Avinash Manchanda, originally attempted
to manage the company in an asset-light manner. They tried to rely on leasing equipment whenever needed.
Till 2005-06 we took our survey equipment on lease and that limited our gross margins on projects. We
were fairly comfortable with this arrangement as we did not require to invest in the direct ownership of
assets
However, they realized that to grow in the business of seismic data collection, they need to buy the
equipment. After this realization, the promoters started to invest money in owning the seismic exploration
equipment. They even had to dilute a stake in the company by bringing in an investor.
In 2006, when we saw the huge opportunity unfolding in the oil exploration space in India, we realized that
in order to scale we needed to own our equipment and also increase the number of crews we were operating.
Working on this strategy we roped in strategic investor (Consolidated Securities Limited) to fund the
purchasing of our assets.
As per the promoters, they had realized that in the seismic data collection business, ownership of assets
provides a competitive advantage. In subsequent annual reports, they highlighted the importance of
buying/owning equipment as a competitive advantage to the shareholders.
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Capital assets represent a robust competitive edge in the business of seismic services. Asian Oilfield
consistently invested substantial amounts in fixed assets.
In a business where gross block strength represents competitive advantage, we invested in capital assets.
After owning seismic assets, the company intimated to its shareholders that its profit margins have
improved.
EBIDTA margin improved, thanks to the following reasons: Deployment of own assets against leased assets
Therefore, an investor would notice that under the original promoters, Asian Energy Services Ltd shifted
its strategy from being asset-light to asset-heavy i.e. capital intensive stating that ownership of the assets
provides a competitive advantage.
a.2) Second phase: Samsara Capital: claims of shifting to asset-light strategy:
Samsara Capital took control of Asian Energy Services Ltd in 2010 and brought in a new management team
for the company.
The new management team decided that instead of owning equipment, the strategy of being asset-light
would provide a competitive advantage. Therefore, the new management started to focus on leasing
equipment as and when needed.
The new management has embarked on a strategy to reduce the cost of asset engagement as its first step
towards competitiveness. The Company is leveraging the benefit of low-cost leasable assets…
this approach will make it possible for the Company to lease assets across international geographies,
reducing the turnaround time in responding to new orders and reducing logistic costs.
Therefore, an investor would notice that the original promoters believed that in the seismic data business,
owning the assets provides a competitive advantage. However, the new management under Samsara Capital
took a complete U-turn and said that being asset-light and leasing assets, when needed, would provide a
competitive advantage.
The new management also stated that the main reason for the failure of many companies in the seismic data
collection business had been buying equipment by taking a loan.
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We recognise that the principal cause of failure of a number of companies engaged in our business has
been a predominant preference for debt-financed assets. Our business model will be dictated by an asset-
light approach that leverages the availability of low-cost leasable crews and asset
However, when an investor notices the investment decisions of the management under Samsara Capital
from FY2010 to FY2016, then she notices that during this period, the gross fixed assets of Asian Energy
Services Ltd increased from ₹50 cr in FY2010 (page 42 of FY2010 annual report) to ₹170 cr in FY2016
(page 143 of FY2016 annual report).
Therefore, despite declaring a strategy of being asset-light, Samsara Capital invested heavily in seismic
equipment and increased the gross block by about 3.5 times over the period of its ownership by investing
about ₹120 cr in fixed assets.
For example, in the FY2013 annual report, on page 8, the management under Samsara Capital highlighted
how over the last 3 years, the company had invested about ₹95 cr (₹22.4 cr + ₹72.2 cr) in buying seismic
equipment.
The Company invested ₹224 million in India over the last three financial years in seismic and drilling
equipment. During the first half of the 2012-13, it procured seismic equipment (including seismic systems,
vibroseis trucks, drilling rigs and other ground electronic equipment) aggregating over ₹722 million for
its Indian and overseas operations.
However, at the same time, the management kept on claiming that it is following an asset-light strategy.
Over the last three years, the management at Asian Oilfield has virtually reinvented itself through various
initiatives: Proactively responded with an asset-light business model
Therefore, during this second phase period of ownership of Samsara Capital, the company seemed to
contradict its own stated strategy of being asset-light and invested in fixed assets despite claiming to stay
asset-light in the annual reports.
At the same time, an investor would notice that during the entire period under the ownership of Samsara
Capital, i.e. FY2010-FY2016, Asian Energy Services Ltd never reported a profit.
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Therefore, it seems that Samsara Capital decided to sell its investment in Asian Energy Services Ltd to
Oilmax Energy.
a.3) Third phase: Oilmax Energy: Stressing on asset-light strategy:
When Oilmax Energy took over Asian Energy Services Ltd in 2016, then immediately, it started claiming
to prioritize an asset-light strategy.
FY2017 annual report, pages 1 and 7:
The Management Changed. So did the way of doing business. FY 2016-17 will be marked as the year of
change and turnaround in the Company’s history.
Replacing capital intensive business model to an asset-light model
When an investor notices the change in gross fixed assets over FY2016-FY2021, then she notices that the
gross fixed assets of Asian Energy Services Ltd have increased from ₹170 cr in FY2016 (page 145 of
FY2016 annual report) to ₹212 cr in FY2021 (page 129 of FY2021 annual report).
Therefore, an investor notices that in relation to the strategy around the ownership of assets and equipment,
different managements of Asian Energy Services Ltd have focused on different approaches.
The original promoters believed that owning the assets provides a competitive advantage and therefore,
invested money in buying seismic equipment.
Samsara Capital stated that being asset-light provides a competitive advantage; however, invested heavily
in buying seismic equipment. Moreover, the company never made any profits under the management of
Samsara Capital. In addition, the NFAT, an indicator for asset utilization efficiency by the company,
declined during this period.
Oilmax Energy also claimed about focusing on being asset-light. However, even it ended up investing more
than ₹50 cr in assets over FY2017-FY2021. However, during this period, the NFAT increased showing an
improvement in the asset utilization efficiency.
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Going ahead, an investor should focus on the disclosures by the management about their strategy regarding
ownership of assets as well as whether they are able to utilize the assets efficiently. She should focus on
her own assessment of the actual asset strategy followed by the company instead of claims by the
management in its annual reports.
b) Inventory turnover ratio of Asian Energy Services Ltd:

While analysing the efficiency of inventory utilization by Asian Energy Services Ltd, an investor notices
that over the last 10 years, the consolidated inventory turnover ratio (ITR) of the company has been very
high, above 25 and at times above 100 as well. This is because, due to the services nature of business, the
company does not need to maintain a lot of inventory.
As a result, the inventory turnover ratio is not highly relevant in the assessment of Asian Energy Services
Ltd.
c) Analysis of receivables days of Asian Energy Services Ltd:

Over the last 10 years, the receivables days of Asian Energy Services Ltd have consistently been above 100
days, even though for a few years, the company reported lower receivables days of about 40 days in
FY2014-FY2015. However, during most of the period, the receivables days have been high and in FY2021,
the company reported the highest receivables days of 170 days.
If an investor compares the receivables days over the last 10 years, then she notices that it has increased
from 125 days in FY2013 to 170 days in FY2021. An increase in receivables days over the years indicates
a deterioration in the collection efficiency of the company.
In FY2021, against the revenue of ₹229 cr, the company has trade receivables of ₹125 cr at the end of the
year. Therefore, more than half of the sales reported by the company in FY2021 is yet to be recovered by
the company from its customers. Moreover, as per the FY2021 annual report, page 145, out of these trade
receivables, about ₹57 cr (i.e. 45%) are outstanding for more than 6 months from the date they became due
for payment.
While doing her analysis, an investor notices multiple reasons for high receivables days for Asian Energy
Services Ltd.
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c.1) Most of the project execution work in Q4 of the financial year:
Asian Energy Services Ltd highlighted to its investors that its project execution work is impacted by
seasons. The work is stopped during monsoons and picks up after the rainy season stops. As a result, most
of the project execution work happens in the last quarter of the financial year.
In FY2007, when the company reported receivables of about ₹18 cr, which were almost two-third of the
revenue of ₹27 cr for the year, it explained that such high receivables are normal for its business because
most of the project work happens in March & April. The bills raised by the company in the work done in
March remain outstanding at the year-end.
Sundry debtors: The Company’s receivables increased from Rs. 6.31 cr to Rs. 18.35 cr in line with an
increase in its operations. This is a normal part of the business cycle as the business is at its peak during
the month of March and April.
c.2) Project nature of work with progressive billing: Delayed receivables + unbilled revenue:
The contracts undertaken by the company are in the nature of projects where it completes a part of the
project/seismic data collection and then raises bills on the customer. In such an arrangement, many times,
disputes arise between the company and the customers about the amount of work done, whether done within
agreed timelines etc.
While Asian Energy Services Ltd may claim that it has done the required work with satisfactory quality
and within the agreed time, the customer may dispute the quality and as well as timeliness of work. As a
result, the customer may refuse to release the payments against the bills raised by the company.
Another aspect of the project nature of work is that at times, Asian Energy Services Ltd completes some
work on the project site; however, it recognizes it as revenue even when it has not raised any bill on the
customer. This is called unbilled revenue. In such instances, the customer may dispute the amount of work
done by the company and investors may realize that the unbilled revenue, which is already recognized in
the profit & loss statement, was not correct.
For example in FY2017, Asian Energy Services Ltd reported unbilled revenue of ₹24.5 cr (page 128 of
FY2017 annual report), which was almost 20% of the revenue of ₹124 cr reported by the company in
FY2017.
In FY2018, the company reported an unbilled revenue of ₹17.13 cr (page 119 of FY2018 annual report).
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Previously, the company used to report accrued service income on similar lines. As per the FY2012 annual
report, page 57, Asian Energy Services Ltd reported an accrued service income of ₹6.7 cr, which was more
than 16% of the revenue of ₹41 cr reported by the company in FY2012.
On similar lines, in FY2020, Asian Energy Services Ltd reported unbilled work in progress of about ₹7.4
cr, which looks like the project work done by the company for its customers, which it had not yet billed to
them. However, in the same report, the company mentioned that it has impaired its unbilled work in progress
by ₹5.78 cr.
Contract assets – unbilled work in progress: 740.62
 Less: Allowance for impairment: (578.34)
Therefore, it looked like a case, where Asian Energy Services Ltd worked for its customers on a project
and invested ₹7.4 cr in the same; however, before billing, the customer rejected the work worth ₹5.78 cr
and the company had to impair the same.
As a result, while analysing Asian Energy Services Ltd, an investor notices that there have been numerous
instances where the company could not recover money from its customers, it had to write-off its receivables;
customers did not agree with the amount of unbilled receivables and the company had to make provisions.
One of the biggest incidences where Asian Energy Services Ltd had already recognized revenue when the
receipt of a large sum of money is under dispute from the customer is in relation to the operation and
maintenance work done by the company for one of the clients in Nigeria, M/s Amni International. In this
case, Asian Energy Services Ltd has already recognized revenue for ₹62.5 cr ($8.5 million) whereas the
company and the customer are continuously in a dispute about the contract.
As a result, in the FY2021 annual report, the auditor of the company qualified its opinion on the financial
statements stating that receivables of $8.5 million are unconfirmed.
Accounts receivable amounting to USD 8,499,254/- remain unconfirmed as at reporting date from one
customer M/s Amni International Petroleum Development OML 52 Company Limited, who has issued a
notice of suspension of the contract.
An investor would appreciate that if the company is not able to recover this money, then its sales, profits,
as well as net worth reported in the past would be inflated.
An investor should note that in FY2021, Asian Energy Services Ltd has reported unbilled work in progress
of ₹31 cr (page 134 of FY2021 annual report).
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The below table shows all the write-offs done by Asian Energy Services Ltd in the last 5-years (FY2017-
FY2021) on the money it had to recover from others. An investor is surprised to note that in the last 5-years,
the company has written off more than ₹85 cr.
An investor would appreciate that this ₹85 cr of write-off represents the money that the company either had
given to others as advances or had done the work for the customers, which others are now refusing to pay.
Such big write-offs raise a question on the credit risk assessment done by the company before it accepts
contracts from customers or decides to give advances to the suppliers. An investor would appreciate that if
a company does not do a proper credit risk assessment of its counterparties, then there is a high chance that
the other parties will run away with its money or refuse to pay it back when demanded.
In the FY2015 annual report, on page 155, an investor is surprised to notice that the company has made
provisions for ₹77,000 for advances given to the employee of the company. It looks like an employee of
the company took the money from the company and refused to pay it back. Moreover, the company could
not recover the money.
At times, the auditor of the company had to highlight the poor chances of recovery of money in its report
as a qualified opinion or emphasis of matter.
In the FY2015 annual report, the auditor of the company highlighted to the investor as a qualified opinion
that it does not think that the company can recover almost ₹14 cr of receivables and advances due from
others.
Basis for Qualified Opinion: The Company’s trade receivables, short term loans & advances and long
term loans & advances as at 31st March, 2015 include Rs. 313.53 Lacs, Rs. 993.99 Lacs and Rs. 95.70
Lacs respectively, which are due for a period exceeding one year. Based on the information and
explanations given to us, we are of the opinion that these are doubtful of recovery
An investor may contact the company directly about such write-offs and provisions because it looks like so
many counterparties like customers, suppliers, and employees are taking money and services from the
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company and are refusing to pay. As a result, the shareholders of the company have to pay the price for
poor credit risk assessment by the management of the company.
Going ahead, an investor needs to keep a close watch on the receivables position of the company. She
should monitor its disclosures for checking write-offs of receivables, provisions or reversals of unbilled
receivables etc. This is because, if the customers dispute the amount of money claimed by Asian Energy
Services Ltd from them, then the reported financial statements by the company may not represent the true
financial position.
operations (cCFO) of Asian Energy Services Ltd for FY2012-21 then she notices that despite cumulative
losses over the last 10-years (FY2012-FY2021), the company has reported a positive cash flow from
operations.
Over FY2012-21, Asian Energy Services Ltd reported a total cumulative net loss of (₹44) cr. During the
same period, it reported cumulative cash flow from operations (cCFO) of ₹97 cr.
Learning from the article on CFO will indicate to an investor that the cCFO of Asian Energy Services Ltd

The Margin of Safety in the Business of Asian Energy Services Ltd:

target growth.
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Where,

While analysing the SSGR of Asian Energy Services Ltd, an investor would notice that over the years, the
company had a very low to negative SSGR in the range of -45% to 0%. At the same time, she would notice
that Asian Energy Services Ltd has grown at a CAGR of about 21% in the last 10-years from ₹41 cr in
FY2012 to ₹229 cr in FY2021.
Asian Energy Services Ltd has grown at a pace, which is higher than what its internal resources can afford;
therefore, over the years, the company had to rely on additional funds by way of equity dilution to meet its
growth requirements.
On March 31, 2021, Asian Energy Services Ltd is a debt-free company. However, an investor should not
believe that the company is debt-free because, over the years, it had generated a lot of surplus from its
operations. On the contrary, on a cumulative basis, the company has reported net losses in the last 10-years.
The company is debt-free due to a significant amount of money infused by its shareholders in the form of
equity dilutions.
The weakness in the operating business of Asian Energy Services Ltd can be assessed from the fact that the
lenders to the company charged very high-interest rates on the loans given by them. It was as if the lenders
treated the company as a very risky borrower with a very high possibility of default.
For example, as per the FY2016 annual report, page 141, the State Bank of India (SBI) had given a cash
credit loan of ₹6 cr to Asian Energy Services Ltd. On this loan, SBI charged an interest rate of 16.7%,
which was despite having the security of fixed deposit of ₹5.1 cr in addition to other securities like
 All current assets (inventory + receivables) of the company.

 Company’s office building at Vadodara, Gujarat
 A shop in Vadodara
 2 million shares of the company owned by Samara Capital
 All the fixed assets of the company including plant, machinery, and equipment viz.
 Guarantee by Samara Capital, Mauritius.
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An investor would appreciate that SBI asked for a very extensive security arrangement, in addition to the
fixed deposit of ₹5.1 cr, which is 85% of the loan amount of ₹6 cr and still it charged an interest rate of
16.7% on the loan. It indicated that SBI almost did not have any faith in the business of the company and
felt that the company had a very high probability of defaulting in repayment of the loan.
Such security arrangements asked by the lenders of Asian Energy Services Ltd are a sign of the weaknesses
in the business model of the company.
Moreover, all the fears of the lenders came true as Asian Energy Services Ltd did default in repayments to
its lenders. In essence, it had become bankrupt.
The credit rating agency, CRISIL had to downgrade its credit rating to “D” indicating a default when the
company failed to repay its lenders.
CRISIL has downgraded its ratings on the bank facilities of Asian Oilfield Services Limited (AOSL) to
‘CRISIL D/CRISIL D’ from ‘CRISIL BB-/Negative/CRISIL A4’. The rating downgrade reflects non-
payment of interest for over 30 consecutive days, as continued losses weakened liquidity.
When an investor analyses the business history of Asian Energy Services Ltd, then she notices that the
company had to raise capital continuously year after year in order to buy equipment, meet the net worth
criteria of tenders, repay lenders etc. The operating business of the company seems to be weak throughout
the year where it could not sustain its expenses as well as its investment needs.
Let us analyse various instances of capital raising done by Asian Energy Services Ltd to meet its funds’
requirements when its operating business profits turned out to be insufficient.
FY2007:
 ₹3.38 cr by issuing 1,650,000 shares at ₹20.5 to Consolidated Securities Ltd (FY2007 annual report,
page 18).
 ₹3.21 cr: issued 3,00,000 warrants to a promoter group company, Nimit Finance Pvt Ltd and
12,70,000 warrants to Consolidated Securities Ltd. Each warrant was convertible into one equity
share at ₹ 20.50 (FY2007 annual report, page 18).
FY2008:
 ₹28.50 cr: from Samara Capital: issue of 1,500,000 shares at ₹190 per share. (FY2008 annual
report, page 11).
 ₹22.8 cr: issued 750,000 warrants to Samara Capital and 450,000 warrants to other investors at
₹190 each (FY2008 annual report, page 19).
 ₹30.8 cr: issued 4,062,900 warrants to promoters and other strategic investors at ₹76 each (FY2008
annual report, page 19).
 Some of these warrants were forfeited later on as the investor chose not to put in additional money
in the company.
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FY2010:
 ₹24.8 cr: issued 4,050,000 shares at ₹61.2 per share to Samara Capital (FY2010 annual report, page
6).
FY2014:
 ₹15 cr: issued 7,000,000 shares at ₹50 to Samara Capital (FY2014 annual report, page 87).
FY2017:
 ₹116 cr: issued 10,000,000 warrants to Oilmax Energy at ₹80 each and 4,500,000 warrants to non-
resident investor (Mr Balram Chinrai) at ₹80 each (FY2017 annual report, page 122).
 ₹20.6 cr: issued 1,250,000 shares at ₹165 each to a non-resident investor (Mr Balram Chinrai)
(FY2017 annual report, page 121).
From the above discussion an investor would appreciate that over the last 15 years, Asian Energy Services
Ltd raised more than ₹250 cr by way of equity dilution (preferential allotment of shares and warrants) to
meet its funds’ requirements.
Apart from the above instances of direct equity infusion, Asian Energy Services Ltd also got indirect equity
infusion when the promoters/shareholders who had given loans to the company by way of inter-corporate
deposits, wrote them off and did not receive a part of their money back. The amount of money whose
repayment was waived off by the shareholders is an indirect equity infusion by the shareholders in Asian
Energy Services Ltd.
In FY2017, after Oilmax Energy took over Asian Energy Services Ltd, then it negotiated with the outgoing
owners (Samsara Capital and its other associate companies) on the inter-corporate deposits given by them
to the company. Oilmax Energy succeeded in offering a full & final settlement to Samsara Capital and its
associates, which was lower by about ₹20 cr than the principal and interest outstanding to these entities. As
a result, in FY2017, Asian Energy Services Ltd reported a non-operating income of more than ₹20 cr, which
was effectively savings from non-payment to Samsara Capital and its associates.
As per FY2017 annual report, page 124: under the details of inter-corporate deposits (unsecured), an
investor notices the following details:
i) ₹12.7 cr was waived off by Samara Capital Partners: On March 31, 2016, the outstanding amount was
₹34.18 cr and interest liability was ₹4.65 cr. During FY2017, the company also took a loan of $300,000
(₹1.94 cr). The company repaid ₹14.11 cr and entered into a settlement agreement to repay ₹13.94 cr on
June 30, 2017, and therefore, ₹12.7 cr is recorded as an exceptional income.
ii) ₹3.47 cr waived off by Global Coal and Mining Private Limited: On March 31, 2016, the outstanding
amount was ₹11.5 cr lacs and interest liability was ₹ 8.47 cr. The company entered into a settlement
agreement and repaid ₹ 16.5 cr as full and final settlement and recorded ₹3.47 cr lacs as exceptional income.
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iii) ₹2.97 cr waived off by Thriveni Earthmovers Private Limited: On March 31, 2016, the outstanding
amount was ₹11 cr and interest liability was ₹2.97 cr. The company entered into a settlement agreement to
pay ₹11 cr on June 30, 2017, and therefore, ₹2.97 cr is recorded as an exceptional income.
Therefore, in total, about ₹19.14 cr was waived off by Samsara Capital and its associates when they exited
the company in FY2017. This amount of ₹19.14 cr is an indirect equity infusion by the shareholders in
Asian Energy Services Ltd.
Therefore, an investor would appreciate that over the years, Asian Energy Services Ltd attempted to grow
at a pace of 21% year on year whereas its operating business was not strong enough for sustaining its
operating expenses as well as investment needs. As a result, the company reported multiple years of
operating losses and defaulted to its lenders. The company had to dilute equity multiple times and had to
raise almost ₹270 cr from its shareholders to survive and meet its growth requirements.
An investor arrives at the same conclusion when she analyses the free cash flow (FCF) position of Asian
Energy Services Ltd.
b) Free Cash Flow (FCF) Analysis of Asian Energy Services Ltd:

While looking at the cash flow performance of Asian Energy Services Ltd, an investor notices that during
Therefore, during this period (FY2012-2021), Asian Energy Services Ltd had a negative free cash flow
(FCF) of (₹149) cr (=97 – 246).
of ₹59 cr. As a result, the company had a total negative free cash flow of (₹208) cr (= -149 + 50 – 59).
Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.
After looking at the above cash flow shortfall of ₹208 cr in the last 10-years, an investor would appreciate
that the company had to raise money by way of equity dilution over ₹200 cr as discussed in the above
section on SSGR.
Going ahead, an investor should keep a close watch on the free cash flow generation by Asian Energy
Services Ltd to understand whether the company continues to remain a cash consuming business or it starts
to generate surplus cash for its shareholders.
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Additional aspects of Asian Energy Services Ltd:

On analysing Asian Energy Services Ltd and after reading annual reports, DRHP, its credit rating reports
1) Management Succession of Asian Energy Services Ltd:

Currently, the majority shareholding of Asian Energy Services Ltd is owned by Oilmax Energy Private Ltd,
which, in turn, is controlled by Mr Kapil Garg and Ms Ritu Garg.
July 2016 open offer document by Oilmax Energy Pvt. Ltd (Source: SEBI), page 9:
The key shareholders / person in control of the Acquirer are Mrs. Ritu Garg and Mr. Kapil Garg in their
personal capacities as well as through entities controlled by them.
Currently, Mr Kapil Garg is present on the board of directors of Asian Energy Services Ltd as a non-
executive promoter-director.
When Oilmax Energy had taken over the control of the company in FY2017, then it had appointed Mr Rohit
Agarwal as whole-time director (WTD) to manage the affairs. Later on, it replaced him with Mr Ashutosh
Kumar from August 1, 2018, and since then Mr Kumar is looking at the day-to-day operations of the
company as its chief executive officer (CEO) and whole-time director (WTD).
Looking at multiple instances of change in the control over Asian Energy Services Ltd in the last 15-years,
it looks like different owners are now buying it as a financial investment and deploy professional managers
for day-to-day execution.
Therefore, an investor may closely monitor the developments about Asian Energy Services Ltd to
understand whether Oilmax Energy intends to be a long-term shareholder of the company or it intends to
sell its stake as and when it is able to get a profitable exit.
An investor may contact the company directly to seek clarifications in this regard.
2) Transaction between Samara Capital and Oilmax Energy:

An investor notices that in FY2017, Oilmax Energy bought the entire stake of Samara Capital in Asian
Energy Services Ltd and took over its management control.
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When an investor analyses different publicly available documents about this transaction, then she gets to
know that apart from the deal where Oilmax Energy bought out stake of Samara Capital in Asian Energy
Services Ltd, there was another transaction where Samara Capital put in a large amount of money in Oilmax
Energy.
2.1) Oilmax Energy bought out shares from Samara Capital and put in more money in Asian
Energy Services Ltd:
In May 2016, Oilmax Energy bought out a 56.32% stake of Asian Energy Services Ltd owned by Samara
Capital for about ₹30 cr.
On May 23, 2016 the Holding Company of AOSL “Samara Capital Partners Fund I Limited” has entered
into an Share Purchase Agreement (“SPA”) with Oilmax Energy Private Limited “Acquirer”… Pursuant
to the SPA, the Acquirer agreed to acquire 12,572,600 equity shares representing 56.32% of fully paid-up
equity share capital of the Company in two tranches at a price of ₹23.86 per share aggregating to ₹299.98
million.
In addition, Oilmax Energy agreed to put in ₹60 cr in Asian Energy Services Ltd as an inter-corporate
deposit.
The Acquirer has entered into an agreement with the Target Company where under the Acquirer has agreed
to provide inter corporate deposit of Rs. 60,00,00,000/- (Rupees Sixty Crores) to the Target Company, in
mutually agreed tranches.
Therefore, an investor would appreciate that in FY2017, Oilmax Energy agreed to put in a total of ₹90 cr
in the form of buying out shares from Samara Capital (₹30 cr) and inter-corporate deposit to Asian Energy
Services Ltd (₹60 cr).
Now, let us see the other leg of the transaction between Samara Capital and Oilmax Energy.
2.2) Samara Capital puts in ₹100 cr in Oilmax Energy:
As per the letter of open offer filed by Oilmax Energy to SEBI in July 2016, Samara Capital agreed to give
₹100 cr to Oilmax Energy.
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The Seller has agreed to make an investment of Rs. 100 Crores (Rupees One Hundred Crores) in the
Acquirer in two tranches by subscribing to 4,63,821 (Four Lac Sixty Three Thousand Eight Hundred
Twenty One) equity shares of the Acquirer constituting 8.40% of emerging equity share capital of the
Acquirer under a separate share subscription agreement dated May 13, 2016.
An investor would notice that this agreement was entered by Samara and Oilmax on May 13, 2016, which
is 10 days before the date of purchase of shares of Asian Energy Services Ltd by Oilmax Energy on May
23, 2016.
In addition, out of the promised ₹100 cr (8.40% stake), Samara Capital invested more than ₹71 cr (6.03%)
in Oilmax Energy on May 18, 2016, i.e. 5 days before the date of purchase of shares of Asian Energy
Services Ltd by Oilmax Energy on May 23, 2016.
1st tranche 3,24,675 (Three Lac Twenty Four Thousand Six Hundred Seventy Five) equity shares
constituting 6.03% of present equity share capital of Acquirer has already been subscribed and allotted on
May 18, 2016.
An investor should analyse both the set of transactions between Samara Capital and Oilmax Energy
together, i.e. Samara Capital putting in money in Oilmax Energy and then Oilmax Energy buying out shares
held by Samara Capital in Asian Energy Services Ltd and agreeing to put in more money in the company.
Looking at both the transactions together, she would notice that Oilmax Energy agreed to put money in
Asian Energy Services Ltd only after getting money from Samara Capital.
Therefore, it looks like a possibility where Samara Capital arranged and funded its own exit from Asian
Energy Services Ltd by finding a buyer in the form of Oilmax Energy and then giving it money to buy it
out.
However, before arriving at any final conclusion in this regard, an investor may contact the company
directly and seek clarifications in this regard.
3) Assumption that private equity funds can bring in money and professional
management, which can turn around sick businesses:
Asian Energy Services Ltd presents a case study where a private equity company decided to take over the
control of one of its portfolio companies, bring in new management and invest more money in order to turn
it around.
Initially, Samara Capital invested ₹28.5 cr in Asian Energy Services Ltd in FY2008 to take a 14.9% stake
by buying 1,500,000 shares at a price of ₹190 per share.
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We mobilised Rs 28.50 cr from Samara Capital, a reputed global private equity (PE) major, through the
issue of 15 lakh shares at a price of Rs 190 per share.
2007: Samara Capital invests for a 14.9% stake in the Company
Thereafter, Samara Capital decided to take over full control of Asian Energy Services Ltd and in FY2010,
it invested an additional ₹24.8 cr in the company by buying 4,050,000 shares at ₹61.2 per share.
During the period under review, 40,50,000 Equity Shares of Rs.10/- each were issued and allotted to M/s.
Samara Capital Partners Fund I Ltd. on a premium of Rs.51.20 per share
In one of the subsequent annual reports (FY2012), the company highlighted this change of ownership and
management control in 2010 as a means by Samara Capital to provide its intellectual capital and help the
company grow.
To enable the Company to realise the opportunities provided by its growing sector and the potential of its
resident intellectual capital, Samara Capital, a private equity investment firm, acquired a majority stake in
Asian Oilfield and assumed management control from 2010.
Now, the moment Samara Capital took the control of Asian Energy Services Ltd, the new management
started bashing the original/founding promoters for their allegedly flawed business strategy and decision.
The following comments from various annual reports would give a good idea to the investor.
FROM A COUNTRY TO A CONTINENT: For nearly two decades, Asian Oilfield was largely focused
on seismic exploration opportunities coming out of India. The new management restructured the company’s
focus to capitalise on sectoral opportunities across Asia.
FROM ASSET-HEAVY TO ASSET-LIGHT: For nearly two decades, Asian Oilfield invested in its gross
block in a technology-evolving business, making it vulnerable to changes beyond its control. The new
management has embarked on a strategy to reduce the cost of asset engagement as its first step towards
competitiveness
FROM THE SIMPLE TO THE CHALLENGING. For nearly two decades, Asian Oilfield focused on any
assignments that came its way. The new management has embarked on a strategy to embrace challenging
assignments with the objective to reinforce its positioning as a specialized solution provider
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FROM TRADITION TO TECHNOLOGY. For nearly two decades, Asian Oilfield invested in prevailing
technologies. The new management has embarked on a strategy to invest in cutting-edge technologies with
the objective to emerge as an industry leader.
In the annual reports, the new management started highlighting that the strategies of the old management
had many flaws, which the new management has now started to rectify and it has now started to guide the
company in the right direction.
The new management under Samara Capital did an extensive rebranding of Asian Energy Services Ltd to
highlight this change to everyone.
Re-branding: At Asian Oilfield, we have re-branded our identity — logo to websites — to communicate
that whereas the name and business may be the same, there has been a change in management, intent and
strategic direction. Our Company is now being positioned as an imaging organization as opposed to a
conventional data acquisition function. Our Company is being positioned around an Asian personality with
a global aspiration.
However, almost every year, the new CEO presented the shareholders with excuses to justify the weak
performance of the company. In FY2013, when the company reported losses for the fourth consecutive
year, then again, the CEO stressed that now is the turnaround time for the company.
During the last four years, our performance was unsatisfactory. Growth trends were negative with income
dropping from ₹642 million in 2008-09 to ₹458 million in 2011-12. However, 2012-13 represented a
watershed following the induction of the new management.
In FY2014, when the company reported losses for the fifth year in a row, the CEO acknowledged that the
company is not able to make any significant progress in its business in India.
the Company could not make significant headway in the Indian markets
In FY2014, even after being in charge of Asian Energy Services Ltd for about 5-years and with losses in
all those five years, the new management was still comparing itself with the original/founder promoters and
portraying how they have reinvented the company.
Earlier: Focused on any assignments that came its way
 Now: Focus on high margin, challenging assignments to emerge as a specialized solutions provider
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Earlier: Invested in prevailing technologies
 Now: Invests in cutting-edge technologies and embarked on an investment in wireless seismic

technology
While observing the losses in the company year after year and reading about the obsession of the
management in comparing itself with the original promoters even more than 5 years of being in charge of
the company, an investor feels that the new management was overly obsessed with highlighting the change
in management to the investors. The financial performance on the ground was lacking all throughout this
period.
In FY2014, the continuous losses of the company for 5-years (FY2010-FY2014) forced Samsara Capital to
put in additional money in the company to meet its expenses and investment requirements. Samsara Capital
invested ₹15 cr by buying 7,000,000 shares at ₹21.50 per share.
Company allotted 7,000,000 equity shares of ₹10 each at premium of ₹11.50 each on November 7, 2013 to
Samara Capital Partners Fund I Ltd.
An investor would notice the diminishing value of Asian Energy Services Ltd over the years.
 In FY2008, Samara Capital had invested money at ₹190 per share.

 In FY2010, Samara Capital had invested money at ₹61.2 per share and
 In FY2014, Samara Capital had invested money at ₹21.5 per share and
Therefore, over 7 years, including the 5 years (FY2010-FY2014) under the control of new management
brought in by Samara Capital, the value of Asian Energy Services Ltd had declined by almost 90% from
₹190 per share to ₹21.5 per share.
In the next year, FY2015, the company again reported losses, its 6-year of losses in a row. In the annual
report, when asked the reasons for another year with poor performance, the CEO again said that they are in
a process of transformation.
As I had mentioned last year, we are in the process of transformation
An investor is left perplexed whether the new management would ever start making profits in the business.
When an investor analyses the remuneration taken by the management appointed by Samara Capital during
this period, then notices that Asian Energy Services Ltd was paying a very high remuneration of ₹2.74 cr
to its CEO and whole-time director (WTD). The auditor of the company had highlighted that the
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remuneration was higher than the legal limits. Moreover, the company had not taken the prior approval of
the central govt. for high remuneration.
We draw attention to note 20 to the consolidated financial statements regarding managerial remuneration
of Rs. 274.46 Lacs paid by the Company to their whole time director, which exceeds the limits as per the
provisions of Schedule V of the Companies’ Act, 2013, without the approval of the Central Government, by
Rs. 41.31 Lacs.
However, the payment of a high remuneration by Asian Energy Services Ltd to its managers did not make
any difference in its business performance. Even in the next year, FY2016, the company reported losses,
which was the seventh year of losses in a row under the control of new management put in by Samara
Capital.
The following table shows the financial performance of Asian Energy Services Ltd over the years and
highlights the performance under the management brought in by Samara Capital from FY2010-FY2016
Under the control of Samara Capital, an investor would appreciate that the company and the management
acted like typical new-age startup companies where the management burns cash in order to grow without
prioritizing the profits.
During FY2010-FY2015, an investor notices that the revenue of Asian Energy Services Ltd increased from
₹19 cr in FY2010 to ₹141 cr in FY2015. However, during the same period, the net losses of the company
also increased from (₹1) cr in FY2010 to (₹27) cr in FY2015. Therefore, it became a case where higher
revenues led to higher losses, which we see in private-equity-funded-new-age-technology startup
companies.
Moreover, an investor notices that in the year FY2014 when the sales of the company had increased by
about 150% from ₹50 cr in FY2013 to ₹122 cr in FY2014, which is a significant jump in the revenue. In
the same year, the net losses of the company had also increased by 130% from (₹10) cr in FY 2013 to (₹23)
cr in FY2014. Upon deeper analysis, an investor observes that during FY2014, Asian Energy Services Ltd
had spent an exceptionally high amount on business promotions.
In FY2014, the company spent ₹7.4 cr on business promotions, which was more than 12 times increase
from ₹0.6 cr spent on business promotions by the company in FY2013. Moreover, after high spending in
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FY2014, the spending on business promotions declined to ₹0.54 cr in FY2015. However, the sales growth
also slowed down to 16% in FY2015.
Therefore, it seems that under Samara Capital, the approach of Asian Energy Services Ltd as well as the
management was to spend more money on business promotions/advertising etc. with an assumption that
the profitable business/orders would follow. However, continued losses, year-after-year indicate that this
strategy did not work out in the oil exploration services business.
It seems that in FY2016, finally, after 7-years of consecutive losses, Samara Capital realized that managing
Asian Energy Services Ltd is a difficult business. Despite putting in money and bringing in so-called
professional management, the financial performance of the company under Samara Capital was very weak.
As discussed above, in 2016, the company defaulted to its lenders and was rated “D” by CRISIL.
As a result, Samara Capital decided to exit Asian Energy Services Ltd. However, it seems that it was finding
it very difficult to find a buyer for its stake in the company. As a result, an investor would remember from
the earlier discussion that it had to first put in money in Oilmax Energy and only after getting money from
Samara Capital; Oilmax Energy bought out its stake from Asian Energy Services Ltd.
Effectively, Samara Capital had to fund its own exit from Asian Energy Services Ltd.
The exit of Samara Capital from Asian Energy Services Ltd was at a huge loss. (Samara Capital exits Asian
Oilfield Services at huge loss: Financial Express, May 24, 2016)
Overall, it had invested ₹68.5 cr in the equity shares of the company (= 28.5 + 24.8 + 15). However, it could
get only ₹30 cr from Oilmax Energy for its stake, which is a loss of more than 50%. On top of it, when an
investor factors in the loss by writing off inter-corporate deposits of about ₹20 cr given by Samara Capital
to Asian Energy Services Ltd (discussed above), then the amount of loss suffered by Samara Capital
increases further.
As a result, an investor would appreciate that the investment of Samara Capital in Asian Energy Services
Ltd comes across as a case study where a private equity player entered the picture by putting in money and
bringing in new professional management. However, the new management failed to report any profits
throughout the entire period of their control. As a result, the experiment by the private equity player to run
a public company seemed to have failed completely. Therefore, the private equity player had to take an exit
from the company at a loss and that too by funding its own exit by giving money to the future buyer.
4) Project execution by Asian Energy Services Ltd:

From the above discussion on the business analysis of Asian Energy Services Ltd, an investor would
remember the various risks that it faces while executing its projects like geopolitical risk, weather risk,
terrain risk, and environmental risk etc. An investor would appreciate that in many such situations, the
factors leading to the delays in project execution are outside the control of the company and therefore, they
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are covered under force majeure (an act of God). Most of the time, the company is not held responsible for
delays in such cases.
However, while analysing the project execution by Asian Energy Services Ltd, an investor notices that at
times, the delay in the project execution has been due to the shortcomings by the company and as a result,
it had to pay a penalty to its customers.
For example, in FY2016, for one of the projects allotted to Asian Energy Services Ltd by ONGC, in Jorhat,
ONGC claimed that Asian Energy Services Ltd delayed the mobilization of resources at the project site.
Asian Energy Services Ltd had to complete the mobilization by October 1, 2015. However, it completed
the mobilization by December 28, 2015, a delay of about 3-months. Because of the delay, ONGC terminated
the contract, levied liquidating damages on the company and invoked the performance guarantee of ₹5.13
cr.
As per the terms of the contract the mobilization of the project should have been completed by October 1,
2015. The Company was however able to complete the mobilisation by December 28, 2015 owing to delay
caused by acts and inactions on the part of ONGC. This delay led to liquidated damages of ₹33.3 million
being levied by ONGC. ONGC vide its correspondence dated March 28, 2016 sent a show cause notice to
the Company wanting to invoke the termination clause of the contract and bank guarantee of ₹51.29 million
on grounds of non-satisfactory performance by the Company.
Asian Energy Services Ltd claimed that the delay was on the part of non-fulfilment of responsibilities by
ONGC like providing security to its team. Therefore, the company initiated legal proceedings and
arbitration against ONGC.
Company initiated legal proceedings and filed arbitration petition under Section 9 of the Arbitration and
Conciliation Act, 1996 with District court, Jorhat on the ground that the Company was not provided with
adequate security by ONGC.
However, after disputing the allegations of ONGC about non-satisfactory performance for 3 years, in
FY2018, an Outside Expert Conciliation Committee determined that Asian Energy Services Ltd would have
to pay ONGC an amount of ₹5.13 cr, which is equal to the performance bank guarantee provided by the
company to ONGC.
The Group received recommendation dated March 7, 2018 from Outside Expert Conciliation Committee
which has been accepted by both the parties and accordingly provision aggregating INR 512.98 Lacs has
been made towards this matter.
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Finally, in FY2020, Asian Energy Services Ltd paid ONGC a sum of ₹5.13 cr to settle the dispute.
Pursuant to settlement agreement dated 10 May 2019 entered with its customer, the Group has settled its
obligation during the current year for which a provision of ₹ 512.98 Lacs was created in previous year.
From the above incident and the payment by Asian Energy Services Ltd to settle the claims of non-
performance made by ONGC, an investor would appreciate that the delay in mobilization at the site and the
resultant termination of the project by ONGC was due to deficiencies on part of Asian Energy Services Ltd.
While reading the February 2020 conference call, an investor gets to know of another project being executed
by the company in Mizoram where the customer had invoked the performance bank guarantee of about
₹12.5 cr due to deficiencies on part of the company. The management of Asian Energy Services Ltd
intimated to the investors that it would start arbitration in this regard.
Priyanka Singh: So as you had mentioned in your press release, one of your customers has encashed
performance bank guarantee of somewhere around Rs. 12.5 Crore provided for Manipur seismic project.
So how it is likely to impact our P&L going forward?
Ashutosh Kumar: Yes you are right that PBG has incurred. We are in dispute with that customer and we
have documentation and reasons to believe that the customer has been unreasonable in this case. We are
first trying to resolve with amicably. If not there is a dispute resolution mechanism in the contract. We are
going to use that and take the dispute to arbitration and get the arbitration award.
As per the FY2020 annual report, the customers have withheld its payments for about ₹4.25 cr and invoked
the bank guarantee for about ₹11.66 cr; thereby, a total amount of about ₹16 cr.
Trade receivables (current) and Other financial assets (non-current) as at March 31, 2020 of the Holding
Company includes an amount of ₹ 424.79 Lacs and ₹ 1,166.07 Lacs, respectively, mainly representing
amounts withheld by the customers towards certain projects and performance guarantee invoked by a
customer towards alleged non-performance on a project awarded to the Holding Company.
An investor would appreciate that in case of any project execution, in case of delays, usually; first, there
are numerous follow-ups on progress. It is only after the execution does not improve after follow-ups, then
the customers resort to steps like the invocation of bank guarantee as it has the potential of spoiling the
relationships between the parties.
It is advised that an investor may contact the company directly to understand why there have been such
instances of invocation of performance bank guarantees by its customers. It might be a case that in the
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mentioned cases, the performance of the company was very deficient and the customer was losing hope of
any possibility of any catch to the project schedules.
An investor may do her own due diligence and seek clarifications from the company about its project
execution.
5) Almost all overseas projects/investments by Asian Energy Services Ltd failed:

While analysing the history of Asian Energy Services Ltd, an investor notices that each of three
managements who controlled it, original promoters until 2010, Samara Capital from 2010-2016 and Oilmax
Energy from 2016-until date, have attempted to diversify in foreign markets. However, an investor realizes
that almost all of the decisions of each of these different managements resulted in failure.
5.1) Investment in Ensearch Petroleum Ltd, Singapore under original promoters:
In 2008, Asian Energy Services Ltd invested $4.99 million (about ₹30 cr) in Ensearch Petroleum Ltd,
Singapore, which, in turn, had part holdings in 10 oil & gas exploration blocks in different countries
including one in India.
Company has invested USD 4.99 million in August 2008 through its wholly owned subsidiary AOSL
Petroleum Pte. Limited into Ensearch Petroleum Limited, Singapore. Ensearch Petroleum Limited is into
oil and gas exploration and production, having participating interest in portfolio of 10 assets with net
combined acreage of around 40,000 sq. km and has operating offices in India, Nigeria and Jordan with
corporate offices in India and Singapore.
The original promoters, Mr Krishna Kant and Mr Avinash Manchanda, were very happy by making this
investment and considered it a very good step for the business growth of the company. They believed that
this investment served multiple purposes. It took the company to international markets, helped the company
to diversify into the downstream segment of the oil & gas industry and it provided the company with an
assured customer for its seismic data collection business.
Ensearch did two things for us in one shot – extended us into the larger downstream play and took us
international simultaneously.
we considered it important to extend ourselves forward, creating a ‘captive’ customer.
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This will provide Asian Oilfield with assured seismic business opportunities across international
geographies.
However, the investment in Ensearch did not produce any benefits to the company and after a few years, in
FY2011, Asian Energy Services Ltd had to exit from Ensearch by taking a loss of about ₹7 cr on its
investment.
Company also recovered INR 22 Cr. from its investments made in FY2007. Though this resulted in onetime
loss of ~7Cr. for the year
An investor would appreciate that when such overseas investment decisions go wrong, then the loss is not
limited to only the shortfall in the recovery. To recover their money, companies have to hire legal experts
in India as well as foreign locations, which is an added expense that ideally, should be added to the loss
suffered by the company to arrive at the total loss for shareholders.
For example, in the case of Asian Energy Services Ltd, in FY2011, the legal and professional charges
witnessed a very sharp increase over FY2010 and after FY2011, these charges reduced substantially in
FY2012.
 FY2010: legal and professional charges: ₹0.95 cr

 FY2011: legal and professional charges:₹4.86 cr
 FY2012: legal and professional charges: ₹1.71 cr
Therefore, an investor would appreciate that the overall loss suffered by Asian Energy Services Ltd on its
investment in Ensearch may not be limited to a shortfall of ₹7 cr in its recovery. The total loss may be ₹11
cr when one also considers the additional legal and professional charges of ₹4 cr incurred by the company.
5.2) Project undertaken by Asian Energy Services Ltd under Samara Capital in Kurdistan,
Iraq:
In FY2013, under Samara Capital, the company accepted a seismic data collection project from Gazprom
in Kurdistan, Iraq.
During 2012-13, the company secured two overseas contracts – in Indonesia and Iraqi Kurdistan from
GSPCL and Gazprom respectively.
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From the above discussion, in the business analysis section, an investor would remember that Asian Energy
Services Ltd suffered large losses in this project; first, because of increased operating costs due to
geopolitical issues and second, because of write-off of equipment used in this area due to high import costs.
The credit rating agency, CRISIL, highlighted the operating losses of the company in FY2015 due to
geopolitical issues of the Kurdistan project in its report in August 2015.
The losses during 2014-15 were mainly on account of significant increase in operating cost due to
emergence of geopolitical issues in the Kurdistan region where AOSL had its largest order and the company
chose to complete the project even in spite of a force majeure event.
Again, in FY2017, the company had to write off all the equipment it had used in Kurdistan, Iraq because
transporting them back to India proved economically unviable.
IMPAIRMENT LOSS: The Group recorded an impairment loss of ₹ 27,098,563 (under the head “other
expenses” in its consolidated financial statements) relating to its fixed assets… The fixed assets were in
Iraq where the subsidiary Company no longer has any presence and considering the high transportation
cost of importing these fixed assets, same were impaired.
As a result, an investor would appreciate that Asian Energy Services Ltd suffered losses on undertaking the
overseas project under Samara Capital.
5.3) Overseas projects in Nigeria under Oilmax Energy:
After Oilmax Energy took over the management of Asian Energy Services Ltd, then it highlighted
operations & maintenance (O&M) as one of the focus areas for the company. It mentioned that O&M
business provides better cash flows prospects.
Diversifying into O&M activities to add additional avenue of growth. O&M business also gives better cash
flow visibility to the Company
Therefore, under the control of Oilmax Energy, Asian Energy Services Ltd started looking for O&M
projects in foreign locations and it won two projects in Nigeria.
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5.3.1) O&M project from Koral Energy in Nigeria:
The company won an O&M contract from Koral Energy in Nigeria. However, the very next year, in
FY2018, the contract was terminated by the customer. As a result, the company had to move out of the
project. (Asian Oilfield tanks 20% as unit gets termination notice from Koral Energy: Business Standard,
May 10, 2018)
The Company’s subsidiary Asian Oilfield & Energy Services DMCC, Dubai O&M contract in Nigeria has
been terminated by the client in May 2018. Necessary steps are being taken to protect the Company’s
interests as per the contract. The Company has successfully de-mobilised from operations post-termination.
On further analysis, the investor gets to know that the client has not made payments for the work done by
Asian Energy Services Ltd and now the companies are fighting it out by arbitration.
ADMCC had filed for arbitration in ‘The London Court of International Arbitration’ on 19 June 2018
against early termination of ‘Service Contract for Operations and Maintenance of Floating Production
Unit’ by its customer… On 5 February 2019, ADMCC had demanded payment of second installment of
US$ 1,759,564 (INR 1,217.11 Lacs) where the last day expired on 19 February 2019 and the customer did
not settle the payment. ADMCC’s management has re-initiated arbitration proceedings against the
customer
As per the FY2020 annual report, the company and the customer were looking to explore an out-of-court
settlement of the dispute.
FY2020 annual report, 119:
Both the parties had agreed on suspension of arbitration proceedings and evaluating an out-of-court
settlement…both the parties have mutually agreed to a further extension of the current stay of the
arbitration proceedings up to and including June 30, 2020
An investor may contact the company directly to understand whether the dispute with Koral Energy is
currently, settled and whether Asian Energy Services Ltd has received its dues of about $2 million.
Moreover, an investor should get a clarification from the company that in case, it is not able to realize $2
million, then whether it made any profits on this project or it ended up losing money by working on this
project.
An investor should focus that Asian Energy Services Ltd has already recognized the entire money to be
received from Koral Energy in its sales and profits in the P&L.
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Ganpat Mehta: But if you receive this $ 2 million it is income for that quarter?
Sumit Maheshwari: No, that will not be an income for that quarter that will be realization of receivables,
which are in dispute.
Ganpat Mehta: Okay it is already shown in the receivables?
Sumit Maheshwari: Yes this will be a recovery of the receivables. It will not have any impact to the P&L.
And as I explained earlier all the income and expenditures and liabilities related to these projects have
already been accounted for, when we were doing this project.
Therefore, an investor should note that in case, the company is not able to recover its dues from Koral
Energy, then the sales, profits and the net worth of the company declared in the past may prove to be inflated
to this extent.
On a side note, it seems that in June 2020, Asian Energy Services Ltd sold a subsidiary in Nigeria, Ivorene
Oil Services Nigeria Limited, which it had bought in February 2017, for a sum of $45,000 (₹34 lac).
The Group had disposed off its entire equity holding of 99.99% in ‘Ivorene Oil Services Nigeria Limited’
for a consideration of USD 45,000 (₹ 34.04 Lacs).
An investor may seek clarification from the company about this sale and whether it was the subsidiary,
through which it executed the project for Koral Energy.
Let us now see what happened in the case of another project won by Asian Energy Services Ltd under the
management of Oilmax Energy in Nigeria from Amni International.
5.3.2) O&M cum EPC project from Amni International in Nigeria:
In the presentation to investors in July 2020, Asian Energy Services Ltd highlighted to its investors that it
is executing a construction cum O&M project for Amni International in Nigeria.
Production Facility Construction and O&M
Client: Amni International (Nigeria)
Order worth: ~ US $56 Million. Have booked US $36 Million in revenue in FY20 and balance will be
booked in FY21
An investor should focus that the total scope of this project was worth $56 million out of which Asian
Energy Services Ltd had already booked $36 million (about ₹270 cr @₹75/$) in FY2020.
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When an investor notices that in FY2020, the total consolidated operating income of Asian Energy Services
Ltd was ₹273 cr, then she appreciates that in the entire financial year (FY2020), this project from Amni
International, Nigeria was the only project where Asian Energy Services Ltd worked. She may conclude
that in the entire FY2020, Asian Energy Services Ltd did not have any seismic project to work on where it
could recognize any revenue.
This project from Amni International, Nigeria was the key reason for the increase in operating profit margin
(OPM) of Asian Energy Services Ltd in FY2020 to 24% from 17% in FY2019.
The credit rating agency, India Ratings, highlighted this in its report for the company in October 2021.
AESL Group’s EBITDA margins expanded to 24% in FY20 (FY19: 17%) due to an increase in the high-
margin engineering, procurement and construction (EPC) orders executed.
However, the moment an investor starts to feel happy that finally, after a gloomy period of almost 10 years
since the company started reporting losses in FY2010, now the company has found a business where is
making good profits; she gets a setback.
The auditor of the company in its FY2021 report qualified its opinion by stating that an amount of $8.5
million (about ₹63.75 cr @₹75/$) is pending from Amni International, which is unconfirmed and on top,
Amni International has cancelled the contract.
Accounts receivable amounting to USD 8,499,254/- remain unconfirmed as at reporting date from one
customer M/s Amni International Petroleum Development OML 52 Company Limited, who has issued a
notice of suspension of the contract.
While reading the Q1-FY2022 results, an investor gets to know that Asian Energy Services Ltd is still in
dispute with Amni International and it has not yet received the amount of about ₹64 cr, which remain
unconfirmed.
USD 8,499,254/- & USD 76,161/- respectively remain unconfirmed as at reporting date from one customer
M/s Amni International Petroleum Development OML 52 Company Limited, who had issued a notice of
suspension of the contract on November 16, 2020… Company’s receivables & amount due from customer
for contract work are subject to impairment testing and the net profit, account receivable & amount due
from customer for contract work and net worth would be overstated to the extent of impairment, if any.
An investor would appreciate that if Asian Energy Services Ltd is not able to recover its money from Amni
International, then almost all the work done by it in FY2020 may amount to nil and instead of reported
consolidated net profit of ₹29 cr in FY2020; it might have actually made losses in the year.
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In addition, in the Q1-FY2022 results, the investor also gets to know that Asian Energy Services Ltd is yet
to pay $5 million (about ₹37 cr) to its suppliers for the work done for Amni International.
There are certain trade payables amounting to INR 3,718.02 lakhs (USD 5,000,997) directly linked to the
project executed with AMNI, which are subject to confirmation. As the underlying project is on standby due
to notice of suspension of work effective 16 November 2020, the scope of work of these vendors has also
been held in abeyance.
From the above disclosure, it seems that for the work done by Asian Energy Services Ltd for Amni
International, it is yet to receive ₹64 cr and at the same time, Asian Energy Services Ltd has withheld
payments of about ₹37 cr to the suppliers/vendors who supplied goods/services to the company for its work
on the project.
An investor would appreciate that a supplier may not wait endlessly even if Asian Energy Services Ltd is
not able to recover money from Amni International. After some time, a situation may arise when the
suppliers would start legal proceedings against Asian Energy Services Ltd to recover their dues.
An investor should be cautious while assessing the future cash flow position of Asian Energy Services Ltd
in the light of these dues of ₹37 cr to the suppliers because, on March 31, 2021, the company has a cash &
investment balance of ₹24 cr only.
Nevertheless, an investor would appreciate that initially, it looked that in FY2020, Asian Energy Services
Ltd has hit a jackpot where it could work on a very profitable project. However, now in FY2022, it turns
out that the company is in trouble with its customer refusing to pay ₹64 cr and its suppliers asking for
payments of ₹37 cr from it.
Therefore, from the above discussion, an investor would appreciate that whenever Asian Energy Services
Ltd attempted to venture out into overseas markets whether by way of investments, or seismic data
collection projects, or O&M projects, or construction projects, it faced issues and it lost money. This has
been true irrespective of the entity controlling and managing Asian Energy Services Ltd. The company lost
money in overseas markets whether the original promoters (Mr Krishna Kant and Mr Avinash Manchanda),
Samsara Capital, or Oilmax Energy decided to venture overseas.
Therefore, going ahead, whenever Asian Energy Services Ltd attempt to venture into foreign markets, then
the investor should be very cautious and increase her due diligence on the customers of Asian Energy
Services Ltd to check whether they have a history of cancelling contracts with their vendors.
In addition, an investor should continuously monitor the developments around arbitrations of Asian Energy
Services Ltd with its customers and the status of receipt of money from them.
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6) Weakness in internal controls and processes of Asian Energy Services Ltd:

While analysing the company, an investor comes across many instances, which indicate that the internal
controls and processes at Asian Energy Services Ltd leave room for improvement. An investor finds such
instances in the company under all the three managements i.e. original promoters until 2010, Samara Capital
2010-2016 and Oilmax Energy 2016-until date.
6.1) Weakness in verification and valuation of assets:
An investor comes across many instances where there were issues in the valuation/verification of assets
like fixed assets or inventory.
In FY2016, the company expensed about ₹0.9 cr as overvaluation of inventory as a prior period item, which
indicates weakness in the processes for inventory valuation.
Over-valuation of opening stock 9,359,512
In FY2013, the auditor of the company qualified its opinion stating that inventory for ₹0.9 cr could not be
verified by an auditor.
Basis for Qualified Opinion: The Group’s inventories are carried in the Balance Sheet at ₹591.03 lacs, of
which the counting of inventories of ₹93.15 lacs at one of the subsidiary could not be observed by the other
auditors and they were unable to independently satisfy themselves of the inventory quantities as at Balance
Sheet date.
In FY2015, the auditor of the company highlighted that the fixed assets of about ₹87 cr of the company
lying in Kurdistan, Iraq could not be verified by an auditor. Instead, the auditors relied on a letter from a
law firm for the presence of these fixed assets.
Physical verification of property, plant and equipment amounting to Rs. 8,736.37 Lacs and Rs. 9.85 Lacs
could not be carried out by the auditors of Asian Oilfield & Energy Services DMCC as these were lying in
the warehouse at project site office at Gas Qalaga Factory street, Old Kalar, Sulaymaniyah, Kurdistan,
Republic of Iraq and guest house at Bahrain city, Sulaymaniyah, Kurdistan, Republic of Iraq respectively.
The other auditors of Asian Oilfield & Energy Services DMCC have relied upon a letter of confirmation
received from an independent law firm, M/s. Alwakeel regarding physical existence and valuation of said
assets.
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From the earlier discussion, an investor would remember that later on, Asian Energy Services Ltd had to
write off assets in Kurdistan because the company found it economically unviable to import the assets from
there. As a result, the shareholders of the company had to accept a loss of these assets.
In FY2013, the auditor of the company also highlighted that the process of the company for verification of
fixed assets needs to be streamlined.
According to the information and explanation provided to us, the fixed assets were physically verified
during the period by the Management, however the process needs to be streamlined.
Even under the management of Oilmax Energy, in FY2018, FY2019 and FY2020, the auditor of the
company did not do a physical verification or valuation of the assets of the company. Instead, the auditor
relied on a certificate produced by the management.
We have relied on certificate of physical verification of assets received from an independent audit firm
which has conducted physical verification of the property, plant & equipment lying at various project
locations in India and who has also certified carrying amount.
An investor would appreciate that when there are questions being raised about the verification of assets of
the company by the auditors or the assets are lying at places where the auditors are not able to independently
verify their existence, then the risk for the investors of the company increases. This is because, later on, the
company may say that the assets, which were until now shown on the balance sheet do not exist or are non-
recoverable.
Moreover, in the case of Asian Energy Services Ltd, in FY2015, the auditors of the company could not
confirm and verify the tax liability arising due to the overseas operations of its subsidiary.
Tax liability of Asian Oilfield & Energy Services DMCC on profits generated on projects in Iraq has been
considered on the basis of tax certificate from tax consultant in Iraq, M/s Razan Samaan Touza Auditing
and Consultancy and the auditors of Asian Oilfield & Energy Services DMCC could not provide any
assurance on the adequacy or otherwise of such tax liability.
Such situations increase the margin of error while an investor assesses the financial position of any
company. Therefore, an investor needs to increase her due diligence for companies where there are
instances of weaknesses in the verification and valuation of assets.
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6.2) Non-compliance with statutory requirements:
In October 2014, SEBI penalized Samara Capital for a delay of more than 400 days in the disclosure of its
shareholding in Asian Energy Services Ltd to the stock exchanges. (Sebi slaps Rs 20lakh fine on Asian
Oilfield Services’ promoter: Business Standard, October 10, 2014)
As per the SEBI order, Samara Capital responded to SEBI stating that it missed the disclosure due to
unfamiliarity with the regulatory/compliance requirements. (Source: SEBI)
SEBI order, Oct. 2014, page 3:
As regards the required disclosures in AOSL, Samara missed out the annual disclosures due to sheer lack
of internal familiarity with the compliance requirements for a listed entity.
The open offer document filed by Samara Capital for acquiring shares of Asian Energy Services Ltd in
December 2013 highlighted another instance where the company had made a delay of 190 days in
complying with SEBI regulations (Source: SEBI).
December 2013, open offer document, page 19:
there was a delay of 190 days in complying with Regulation 8(3) of the SEBI (SAST) Regulations, 1997 for
the year 2006. SEBI may initiate appropriate action against the Target Company for this violation
In FY2016, the secretarial auditor of the company highlighted that the company has not appointed a chief
financial officer (CFO) within 6-months of the resignation of the prior CFO, as required by the Companies
Act, 2013.
FY2016 annual report, pages 29 and 151:
The Company did not appoint Chief Financial Officer (CFO) in place of earlier CFO who resigned from
the Company, within a prescribed period of 6 Months as required in terms of Section 203(4) of the
Companies Act, 2013, thereby not complied with the said provision;
Company did not have a CFO from January 16, 2015 to May 20, 2015. From September 18, 2015, the
Company does not have any Chief Financial Officer.
An investor would appreciate that non-compliance with various legal requirements indicates that the
internal control and processes of the company leave room for improvement. Simultaneously, they indicate
that an investor should increase her level of due diligence while doing the analysis of the company.
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6.3) Delay in depositing undisputed dues to govt. authorities:
When an investor analyses whether Asian Energy Services Ltd has deposited its legal dues on time to govt.
authorities, then she realized that the company had done delays under all the three managements (original
promoters, Samara Capital and Oilmax Energy).
Under the original promoters, in FY2009, the auditor of the company highlighted that the company has not
deposited undisputed statutory dues on time.
The Company has been generally regular in depositing with appropriate authorities undisputed statutory
dues including provident fund,…and other material statutory dues applicable to it though there has been
slight delay in few cases.
Under Samsara Capital (2010-2016), the auditors of the company highlighted in FY2013, FY2014, FY2015
and FY2016 reports that the company had done delays in depositing undisputed statutory dues to govt.
authorities.
The Company has been generally regular in depositing undisputed dues, including provident fund…and
other material statutory dues applicable to it with the appropriate authorities, except for some delays which
have been paid along with interest.
In FY2016, the auditor highlighted that there have been significant delays in a large number of cases of
depositing undisputed dues to govt. authorities.
Undisputed statutory dues including provident fund,…and other material statutory dues, as applicable,
have not been regularly deposited to the appropriate authorities and there have been significant delays in
a large number of cases.
Under the current management, Oilmax Energy (2016-until date), as well, Asian Energy Services Ltd has
done continuous delays almost every year, in depositing undisputed dues to govt. authorities.
have not been regularly deposited to the appropriate authorities and there have been significant delays in
a large number of cases.
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have generally been regularly deposited to the appropriate authorities, though there has been a slight delay
in a few cases.
Therefore, an investor would notice that the internal controls and processes at Asian Energy Services Ltd
have shown weaknesses under all three different managements. The presence of private equity players as
owners or professional managers did not seem to make any difference in the processes and controls at the
company.
An investor should note that in companies where internal controls and processes are weak, there is a high
probability of coming across frauds conducted by employees or other stakeholders like suppliers, customers
etc.
An investor may read an example in the case of National Peroxide Ltd, a Wadia Group company, where
the managing director of the company attempted to take advantage of the weaknesses in the internal
processes and controls and did fraud on the company: Analysis: National Peroxide Ltd
Therefore, wherever during her analysis, an investor comes across companies showing signs of weakness
in controls and processes, then she should increase the depth of her due diligence.
7) Curious case of joint venture Optimum Oil & Gas Private Limited:
In FY2018, Asian Energy Services Ltd formed a joint venture (JV), Optimum Oil & Gas Private Limited
(OOGPL) with certain entities. At the end of the year, the company had a 23% stake in the JV. However,
when an investor analyses it further, then she notices that originally, the company has bought a 49% stake
in the JV for ₹0.49 lac (i.e. at ₹1,000 per 1% stake in the company) and then sold a 26% stake in the JV for
₹0.26 lac. Therefore, a 23% stake of the JV at a cost of ₹0.23 lac stayed with the company at the end of
FY2018.
On November 13, 2017, the Group acquired 49% of the equity shares of Optimum Oil & Gas Private
Limited, a India based Company engaged in the exploring the opportunity as Oil and gas service provider.
The total consideration for the said acquisitions was ₹ 0.49 Lacs. On January 24, 2018, the Group disposed
26% of the aforesaid equity stake in Optimum Oil & Gas Private Limited for an aggregate consideration
of ₹ 0.26 Lacs
In FY2020, the company bought an additional 51% stake in the OOGPL JV and increased its stake in the
JV to 74%. As a result, OOGPL became a subsidiary of Asian Energy Services Ltd.
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The Holding Company has acquired an additional equity stake of 51% in Optimum Oil & Gas Private
Limited (OOGPL). Accordingly OOGPL has been treated as subsidiary with effect from 30 November 2019,
which was treated as joint venture till 29 November 2019.
However, when an investor reads further to understand the money paid by the company to buy an additional
stake in OOGPL, then she comes across the following information in the FY2020 annual report, at page
146, in the section on the business details of OOGPL.
The Holding Company has recognised goodwill for an equivalent amount of ₹ 26.47 Lacs and has impaired
the same considering limited operations of acquiree.
From the above information, an investor can derive the following inferences:
 Asian Energy Services Ltd bought a stake in a company, which currently does not have any
meaningful operations. The fact that the goodwill is impaired immediately indicates that there is
little hope for any recovery for the money paid for the acquisition.
 Goodwill of ₹26.47 lac indicates that the company paid this money for the purchase of a 51% stake,
which was over and above the book value of 51% in the balance sheet of OOGPL.
 From the information provided in the FY2018 annual report, the value of the stake in OOGPL was
₹1,000 per 1% stake. Moreover, OOGPL does not have any operations; therefore, the value of the
company would go down without any income but having to incur minimum expenses on meeting
regulatory compliances. Therefore, a 51% stake in OOGPL should not cost more than ₹0.51 lac.
 However, goodwill of ₹26.47 lac means that Asian Energy Services Ltd paid at least ₹26.47 lac for
the 51% stake in OOGPL.
 Immediate impairment of the goodwill means that this money is now almost dead/a probable loss.
In such a situation, a few questions come to an investor’s mind:
 What was the need to put in money for buying a 51% stake in OOGPL?
 Why Asian Energy Services Ltd decided to pay at least ₹26.47 lac for buying the stake when it paid
only ₹1,000 per 1% stake in FY2018?
 What benefit does this transaction bring to the public shareholders of Asian Energy Services Ltd?
It may look like a case where Asian Energy Services Ltd decided to give an exit to the shareholders of
OOGPL by buying out their stake. However, it may seem that the cost of such an exit is being borne by the
public shareholders of Asian Energy Services Ltd.
An investor may contact the company directly to understand the reasons behind such decisions of Asian
Energy Services Ltd to first buy 49%, then sell 26%, then buy an additional 51% stake in OOGPL and then
immediately impair the goodwill. She may ask the company how this transaction benefits the company and
its minority shareholders.
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8) Error in the annual report of Asian Energy Services Ltd:

While reading the FY2016 annual report of the company, an investor notices that the data of the debt at the
start of the year, change in the year and at the end of the year do not reconcile.
An investor notices that the company has stated its debt as ₹30 cr at the start of the year and has mentioned
that during the year, the debt increased by about ₹8.36 cr. Therefore, at the end of the year, the amount of
total debt should be about ₹38.36 cr (=30 + 8.36). However, Asian Energy Services Ltd has disclosed the
total debt at the end of the year as ₹40.37 cr.
An investor may contact the company directly to seek clarifications whether it is a typographical error or
the data of the debt presented in the annual report needs some change.
The Margin of Safety in the market price of Asian Energy Services Ltd:
Currently (October 6, 2021), Asian Energy Services Ltd is available at a price to earnings (PE) ratio of
about 12.4 based on consolidated earnings of the last 12-months (July 2020-June 2021). An investor would
appreciate that a PE ratio of 12.4 offers some margin of safety in the purchase price as described by
Benjamin Graham in his book The Intelligent Investor.
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Analysis Summary
Overall, Asian Energy Services Ltd seems a company, which has grown its sales at a growth rate of 20%
year on year for the last 10 years. However, this growth journey has been very eventful for the company.
Over the years, the company has witnessed a change of three owners/managements, seen a continuous
stretch of losses for 7-years, and when it returned to profits, then the customers cancelled its contracts and
it is now trying hard to recover payments from them.
The business of Asian Energy Services Ltd is cyclical and is dependent on crude oil prices, stage of general
economic cycle and availability of budget with oil exploration companies. The business opportunity
available with third party seismic data collectors is limited; therefore, there is intense competition in the
industry. The business becomes more difficult due to the tough terrain of project sites, geo-political tensions
and environmental challenges like monsoons. Asian Energy Services Ltd has faced challenges in
completing a few projects and had to pay penalties to customers for project delays.
All the three managements of Asian Energy Services Ltd, the original promoters (1992-2010), Samara
Capital (2010-2016) and Oilmax Energy (2016-until date) have managed the business with completely
different strategies. Original promoters preferred to buy their own equipment and invested in overseas
companies; however, soon the strategy failed and the company lost money. Thereafter, Samara Capital
brought in professional management, which did a U-turn on prior decisions, spent more money buying
equipment despite claiming to follow an asset-light strategy, spent money on business promotions,
undertook overseas projects; however, the company reported losses in all the 7-years under Samara Capital
(FY2010-FY2016).
Oilmax Energy decided to undertake overseas operations and maintenance contracts. However, in each
case, the customers cancelled the contract after Asian Energy Services Ltd had worked a lot. Now, the
company is working hard to recover its payments.
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The company always has a lot of receivables stuck with customers where disputes are very common. Over
the years, Asian Energy Services Ltd had lost a lot of money, about ₹85 cr in the last 5 years, due to refusal
by customers, suppliers etc. to pay. Its credit risk assessment practices need serious rethinking.
The company’s business cash flows have never proved sufficient for meeting operating expenses and its
investment needs. The company has to always rely on a large amount of equity infusion to survive and
grow. At times, it even defaulted to lenders and reached the stage of near-bankruptcy. No wonder, it has
changed hands quite often.
At times, the owners of the company have found it difficult to find buyers when they wanted to exit the
company. Samara Capital had to invest about ₹100 cr in Oilmax Energy for convincing it to buy the stake
of Samara Capital in the company, that too at a loss of about 50%. Samara Capital had to exit because
despite its best efforts, infusion of money, hiring very qualified managers, the company continuously made
losses for 7-years (FY2010-FY2016).
The project execution by Asian Energy Services Ltd has left a lot to be desired where it has not bid for
projects at remunerative prices and therefore, suffered operating losses. It delayed mobilization and project
execution; therefore, customers have withheld their payments and invoked bank guarantees. Almost all the
overseas projects whether seismic data collection or operations & maintenance undertaken by the company
seem to have lost money.
An investor notices many instances of weakness in internal controls and processes in the company. In
numerous instances, the auditors could not verify its assets, inventory, and tax liabilities etc. At times, it
did not comply with regulatory requirements and on numerous occasions, it did not pay its dues to govt.
authorities on time.
On one occasion, Asian Energy Services Ltd invested in a joint venture and immediately impaired its
investment. An investor is left wondering what benefit this investment decision brought to the minority
shareholders.
There are many areas where an investor may contact the company directly for seeking clarifications.
Going ahead, an investor should put a strong focus on the customers with whom it is dealing with. If she
comes across such names, which have previously cancelled contracts of their suppliers, then she should be
very cautious. She should monitor whether the company is able to recover its payments for the work done
by it in Nigeria. She should keep a close watch on the receivables position of the company. She should
monitor whether the company is able to generate a free surplus for investors or continues to survive on the
regular equity infusion by the shareholders.
These are our views on Asian Energy Services Ltd. However, investors should do their own analysis before
P.S.
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10) Beekay Steel Industries Ltd

Beekay Steel Industries Ltd is a secondary steel producer that converts one form of steel like billets into
final forms like TMT bars, which can be used by end consumers.
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While analysing Beekay Steel Industries Ltd, an investor would notice that until FY2015, the company
used to report only standalone financials. However, from FY2016 onwards, the company started to report
standalone as well as consolidated financials.
Currently, Beekay Steel Industries Ltd has one subsidiary and one associate whose financials it includes in
the consolidated financials. FY2021 annual report, page 33:
Subsidiaries, Associates or Joint Ventures: Your Company has Wholly Owned Subsidiary Company
namely M/S. Beekay Utkal Steel Pvt. Ltd. and one Associate Company, i.e. M/S. AKC Steel Industries Ltd.
and does not have any joint ventures, during the year under review.
such a picture.
Therefore, in this analysis of Beekay Steel Industries Ltd, we have studied standalone financials until
FY2015 and consolidated financials from FY2016 onwards.
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Financial and Business Analysis of Beekay Steel Industries Ltd:

While analyzing the financials of Beekay Steel Industries Ltd, an investor notices that the sales of the
company have grown at a pace of 5% year on year from ₹557 cr in FY2012 to ₹874 cr in FY2021. Further,
the sales of the company have increased to ₹1,043 cr in the 12-months ended June 30, 2021, i.e. during July
2020-June 2021.
While analysing the revenue growth of the company over the last 10-years, an investor notices that the
journey of the company has not been smooth. Beekay Steel Industries Ltd has witnessed its sales move in
a cyclical pattern with periods of increasing sales followed by periods of declining sales and vice versa.
During FY2012-FY2013, the sales of the company increased from ₹557 cr to ₹571 cr. However, over the
next two years (FY2014 and FY2015), the sales of the company declined to ₹519 cr. Thereafter, the sales
started increasing and over FY2016-FY2018, the sales increased to ₹978 cr. However, thereafter, over the
next two years (FY2019-FY2020), the sales of the company declined again and reached ₹812 cr. Recently,
the sales of the company have started increasing and have reached ₹1,043 cr in the 12-months ended June
30, 2021, i.e. during July 2020-June 2021.
Beekay Steel Industries Ltd has witnessed fluctuations in its profit margins as well. The operating profit
margin (OPM) of the company increased from 9% in FY2012 to 19% in FY2019. However, thereafter, the
OPM declined sharply to 15% in FY2021. Recently, the company has reported an OPM of 19% in the 12-
months ended June 30, 2021, i.e. during July 2020-June 2021.
Therefore, an investor would appreciate that Beekay Steel Industries Ltd has witnessed significant
fluctuations in its business over the last 10-years.
To understand the reasons for such cyclical patterns of alternating periods of increasing performance
followed by a declining performance for Beekay Steel Industries Ltd, an investor needs to read the publicly
available documents of the company like annual reports, credit rating reports, as well as its corporate
announcements.
influence the business of Beekay Steel Industries Ltd. An investor needs to keep these factors in her mind
1) Business of Beekay Steel Industries Ltd is cyclical:

An investor would appreciate that Beekay Steel Industries Ltd operates in the steel industry, which is
cyclical in nature i.e. it faces periods of good performance followed by periods of poor performance. The
company has continuously highlighted this aspect to its investors in the annual reports.

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The Company is conscious of the fact that steel is subject to cyclical risks
When an investor reads the rating methodology documents of various credit rating agencies for the steel
sector, then she understands the reasons for the cyclicity in the steel sector. For example, credit rating
agency, CARE, explained in its rating methodology for the steel sector in July 2019 (click here) that the
sector is cyclical because its end-user industries: construction, infrastructure, automobiles and capital goods
etc. are strongly dependent on the general economic situation in the country. When the economy is seeing
a growth cycle, then the demand in the industries like construction, infrastructure, automobiles and capital
goods increases. On the contrary, during an economic downturn, the demand for these industries declines.
Rating Methodology – Steel Sector, CARE, July 2019, page 2:
Steel is a cyclical industry, strongly correlated to economic cycles since its key users viz., construction,
infrastructure, automobiles and capital goods are heavily dependent on the state of the economy.
CARE highlighted large investment requirements and the long gestation period of steel plants as another
factor, which leads to frequent periods of demand and supply mismatches leading to cyclicity in the steel
sector. It means that when demand increases, then many steel manufacturers announce capacity expansions.
These plants take a long time to be completed. However, when this new capacity becomes operational, the
economic cycle has turned and the demand for steel declines. As a result, the sector faces oversupply and a
downturn resulting in cyclicity in the sector.
Apart from the cyclicality of the end-user industries, heavy capital investment and a gestation of period of
3-5 years for a new plant also contribute to the cyclicality in steel industry. This results in several steel
projects bunching-up and coming on stream simultaneously leading to demand supply mismatch.
From the above discussion, an investor would notice that the steel sector faces periods of high demand
where the entire industry is not able to produce enough steel to meet the demand of its end-use industries
like construction, infrastructure, automobiles and capital goods. As a result, the prices of steel increase and
the steel manufacturers announce new plants. These plants take a long time to be completed and when they
become operational by that time, the economic cycle takes a downturn and the demand for steel declines.
Therefore, the steel industry faces an oversupply leading to a decline in steel prices.
These alternate phases of economic cycles and periods of demand and supply mismatches lead to cyclicity
in the steel sector. It is visible in the trend of revenue of Beekay Steel Industries Ltd over the years when
sales of the company increased during FY2012-FY2013, declined during FY2014-FY2015, increased
during FY2016-FY2018, declined during FY2019-FY2020 and then again increased during the last 12
months ending June 2021 (July 2020-June 2021).
Specifically in FY2012, FY2014 and FY2015, when Beekay Steel Industries Ltd witnessed a decline in its
revenue, then it mentioned a fall in the demand from the automobile sector and engineering sectors, which
are the key consumers of steel products, as one of the reasons for lower sales.
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The recession in the Auto sector is likely to affect the operational performance of the Company in coming
years as substantial part of the Company’s deliveries are to the Auto-ancillary manufacturers
Political uncertainty, the restriction of power supply and lower demand in the automobile & engineering
sector were the main reasons of decline of sales turnover.
Political uncertainty, the restriction of power supply and lower demand in the automobile & engineering
sector, natural calamity, i.e. hud-hud cyclone were the main reasons of decline of sales turnover
Therefore, an investor would appreciate that like all steel companies, the business of Beekay Steel Industries
Ltd is exposed to the cyclicity of the steel industry.
2) Beekay Steel Industries Ltd is a price taker like all steel manufacturers:
While reading about the pricing dynamics in the steel industry, an investor realizes that the steel
manufacturers are not in control of the prices of steel. It is a commodity product where the consumers can
easily replace the steel of one manufacturer with the steel of another manufacturer. As a result, the
consumers of steel manufacturers enjoy a higher negotiating power.
The credit rating agency, ICRA, highlighted this aspect of the business of steel manufacturers in its Rating
Methodology for Ferrous Metal Entities, June 2021, page 4 (click here):
Steel players are largely price takers with their customers having a greater bargaining power
The credit rating agency, CRISIL, also highlighted in its ratings’ criteria for the materials sector, February
2021, page 22 (click here) that steel companies have no control over the prices of steel in the market.
Steel companies have little control over end prices.
The prices of steel in the Indian market are dependent on international prices and all the global events and
changes in global demand and supply, lead to changes in the prices. As a result, the steel manufacturers
have to accept whatever price is currently prevailing in the market.
Another credit rating agency, India Ratings, mentioned in its document Rating Indian Steel Producers,
September 2012, page 1 (click here) that steel companies are price takers.
Given that steel producers are price takers, they have to rely on cost competitiveness to remain profitable.
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The investor gets to know the reasons for the low bargaining power of steel manufacturers while reading
the rating methodology document of the steel industry by CARE. She notices that steel is a global
commodity, which is very standardized and a consumer of a particular grade of steel can easily replace it
with the same grade of steel made by another manufacturer. In addition, steel can be easily transported
across long distances including overseas. Therefore, consumers have the option of buying steel even from
other countries, if the domestic steel manufacturers quote a high price.
Steel is a globally traded commodity due to standardisation and ease of transportation of the products. As
a result, domestic prices of steel products generally move in tandem with international prices
As a result, an investor would appreciate that the steel manufacturers do not have pricing power and have
to sell steel at whatever price is prevalent in the market, which is influenced by all the international factors
of demand and supply. ICRA highlighted the competition steel manufacturers face from countries, which
have surplus steel production in its rating methodology document, page 3:
Domestic steel industry also faces significant competition in the form of low-cost imports from countries
having large surplus steel capacity. In a weak demand scenario, such imports trigger price cuts by
manufacturers, thereby exerting pressure on their margins.
Therefore, an investor would note that a steel manufacturer including Beekay Steel Industries Ltd does not
have the luxury of dictating pricing terms to its customers. Steel manufacturers have to sell their products
at the prevailing market price.
The following chart shows the historical steel prices at National Commodity & Derivatives Exchange
Limited (NCDEX), from 2007 to 2021.
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An investor can notice the wild fluctuation in the steel prices over 2007-2021:
 2007-2008: increase in steel prices

 2008-2009: decrease in steel prices
 2014-2016: decrease in steel prices
 2020: decrease in steel prices
 2021: increase in steel prices
If an investor looks at the above chart of movement in the steel prices and then analyses the trend of sales
of Beekay Steel Industries Ltd over the years, then she can identify the reasons for fluctuations in its sales.
For example, during FY2014-FY2016 when the sales of Beekay Steel Industries Ltd declined from ₹571 cr
in FY2013 to ₹519 cr in FY2016, then it was caused by a downturn in the steel industry as seen in the
decline in steel prices in the above chart. However, soon thereafter, the steel prices increased in FY2017-
FY2019 and the sales of Beekay Steel Industries Ltd recovered sharply and reached ₹965 cr in FY2019.
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In the year FY2019, despite a decrease in production volumes, the company reported a much higher profit
after tax (PAT), ₹99 cr in FY2019 against ₹71 cr in FY2018. Beekay Steel Industries Ltd intimated to its
shareholders that it is due to a very sharp increase in steel prices, which is not seen in the entire previous
decade.
The improvement was on account of a 30% upturn in steel product realisations between December 2017
and March 2018. This was one of the sharpest increases seen over the last decade.
This sharp increase in steel prices was due to the restrictions placed by China on the steel plants producing
steel by using polluting processes.
The sharp improvement in realisations and the health of the country’s steel sector was based on the decision
of the Chinese government to regulate its environment… Consequent decline in steel output in China helped
moderate the export of steel products from that country
Thereafter, the steel industry cycle turned and the prices started declining in FY2020 and the revenue of the
company declined to ₹812 cr in FY2020. However, then in 2021, the steel prices witnessed a sharp recovery
and the sales of the company increased to ₹1,043 cr in the 12-months ended June 30, 2021, i.e. during July
2020-June 2021.
From the above discussion, an investor would appreciate that the steel industry including Beekay Steel
Industries Ltd is a price taker. It does not have pricing power over its customers. As a result, steel
manufacturers have to sell their goods to their customers at the price, which is prevalent in the market. Their
products are a commodity in nature, which a customer can easily replace with the products of their
competitors or overseas steel producers.
Therefore, the cyclical changes in the steel prices have a significant impact on the business of steel
producers including Beekay Steel Industries Ltd. As a result, the revenue of Beekay Steel Industries Ltd
has witnessed frequent periods of declining sales over the last 10-years.
If an investor increases her analysis horizon beyond the last 10-years, then she notices that in the past,
Beekay Steel Industries Ltd had reported net losses when the steel industry faced a downturn in FY2002
and FY2003. As per the summary of the last 10-years performance (FY1997-FY2006) given in the FY2006
annual report, page 45, Beekay Steel Industries Ltd reported a net loss of (₹1.99) cr in FY2002 and a net
loss of (₹1.33) cr in FY2003.
The stage of facing losses in the business during the downturn in the steel industry arrives because; in the
steel industry, prices go through very wild fluctuations, which many times go below the cost of production.
For example, in FY2011, Beekay Steel Industries Ltd intimated to its shareholders that it is not possible to
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reduce prices further because many of the inputs like carbon steel are already being sold at the cost of
production.
Going forward, the slowdown in demand and rising costs may decrease profitability of steel producers.
Smaller steelmakers may have to resort to production cuts… There is no possibility of price cuts to improve
demand as carbon steel is already being produced at cost levels.
As a result, an investor should always keep the sensitivity of the business of Beekay Steel Industries Ltd to
the cyclical changes in the steel industry whenever she attempts to project the performance of the company
in the future.
3) Profit margins of Beekay Steel Industries Ltd:

While analysing the profit margins of the company, an investor notices two patterns in the company’s
performance over the last 10-years. First, the operating profit margin (OPM) of the company has shown
cyclical fluctuations where the OPM increased from 9% in FY2012 to 19% in FY2019. Thereafter, the
OPM declined to 15% in FY2020 and then increased to 19% in the 12 months ended June 2021 (i.e. July
2020-June 2021).
The second pattern in the OPM is the significant increase over the last 10-years from 9% in FY2012 to 19%
in the 12 months ended June 2021 (i.e. July 2020-June 2021).
An investor would appreciate that the cyclical fluctuations in the OPM are a result of the dependence of
Beekay Steel Industries Ltd on the market for the price it can charge to its customers. When the steel prices
in the market decline, Beekay Steel Industries Ltd has to sell its products at a lower price irrespective of its
costs. As a result, its profit margins decline.
For example, in FY2020 when the OPM of Beekay Steel Industries Ltd declined sharply to 15% from 19%
in FY2019, then the company intimated to its shareholders that it was due to a decline in steel prices.
EBIDTA margin is also down by 3% from Rs. 182.30 crores in previous year to Rs.125.94 crores due to
lower net realization rate.
Similarly, an investor would notice that in FY2019, when the company witnessed a sharp increase in its
OPM to 19% from 15% in FY2018, then it was due to better steel prices prevailing in the market.
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When an investor tries to analyse the reasons for the improvement in the OPM of Beekay Steel Industries
Ltd, from 9% in FY2012 to 19% in the 12 months ended June 2021 (i.e. July 2020-June 2021), then she
comes across a few key aspects of it business.
The first thing an investor notices is that Beekay Steel Industries Ltd does not produce steel from raw
materials like iron ore, coal etc. Instead, it sources one form of steel from primary steel producers like Tata
Steel Ltd, Steel Authority of India Ltd (SAIL), Rashtriya Ispat Nigam Limited (RINL) etc. and coverts it
into another form, which can be used by the end-users of steel. It is, basically, a converter.
For example, Beekay Steel Industries Ltd sources steel in the form of billets from primary steel producers
(Tata Steel, SAIL, RINL etc.) and coverts it into TMT bars etc., which can be used in construction,
infrastructure etc. Such players in the steel industry are called secondary steel producers, which are different
from primary steel producers who produce steel from raw materials like iron ore, coal etc.
Secondary steel producers have a benefit in their business model. It is that their raw material (e.g. billets),
as well as their final product (e.g. TMT bars) both, are a form of steel. Therefore, the prices of both, their
raw material as well as their final product move with each other depending upon the prevailing market price
of steel.
As a result, their profit margins are relatively stable when compared to primary steel producers whose raw
material prices (iron ore, coal etc.) are determined by the miners who are large enterprises like (NMDC,
Vale, BHP Billiton etc.), which may not follow the price of steel.
Therefore, an investor would notice that the profit margins of Beekay Steel Industries Ltd are relatively less
volatile than the profit margins of any primary steel producer. An investor may note in the following table
comparing the OPM of Beekay Steel Industries Ltd, a secondary steel producer, with the OPM of Steel
Authority of India Ltd (SAIL) and Tata Steel Ltd, both of whom are primary steel producers.
In the above table, an investor would notice that the operating profit margin (OPM) of Beekay Steel
Industries Ltd is comparatively less volatile than the OPM of primary steel producers. In FY2016 when due
to a sharp decline in the steel prices, both SAIL and Tata Steel Ltd reported almost 0% OPM, Beekay Steel
Industries Ltd reported an OPM of 13%.
Moreover, another aspect of the business of secondary steel producers is that they may act as an outsourced
player for the large primary integrated steel players. In such an arrangement, the large steel players like
Tata Steel Ltd, SAIL, and RINL etc. give one form of steel like billets to secondary steel producers like
Beekay Steel Industries Ltd. In turn, the secondary steel players covert this one form of steel (billets) into
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another like TMT bars and supply it back to the large steel player who sells it in the market under its own
brand.
Beekay Steel Industries Ltd has such arrangements with Tata Steel Ltd for its Jamshedpur plant, which
supplies TMT bars to Tata Steel Ltd.
At Jamshedpur unit TMT is the single product being manufactured on behalf of TATA Steel.
In addition, Beekay Steel Industries Ltd has tied up with SAIL and RINL to supply TMT bars from its unit
in Parwada, Andhra Pradesh.
Credit rating report by India Ratings, March 2017:
BSIL entered into job work contracts with the Steel Authority of India Limited (‘IND AA’/Negative) and
Rashtriya Ispat Nigam Limited (‘IND A’/Negative) during FY17 for manufacturing TMT bars for around
60% of its capacity.
In such a business arrangement, secondary steel producers like Beekay Steel Industries Ltd earn a fixed
conversion fee, which may be fixed irrespective of the price of steel prevailing in the market.
Credit rating report by India Ratings, January 2019:
company’s conversion business offers consistent margins due to a free supply of raw material from the
principals, thereby mitigating risk of price volatility
BSIL’s manufacturing business is exposed to volatility in raw material and finished goods prices as
compared to its conversion business (contributes around 20% of revenue), which receives fixed conversion
charges, despite price volatility.
The credit rating agency, CRISIL, highlighted this aspect of secondary steel producers in its rating
guidelines for the material industry in February 2021, page 21 (click here):
There are many small and mid-sized steel companies and quite a few of these are not primary producers of
steel, but engaged in re-rolling of flat and long products. These entities cater to the customised
requirements of their end-users and operate on fixed conversion margins.
Therefore, on one hand, the presence of conversion business offers a consistent profit margin. On the other
hand, the profit margin in the conversion business is higher when compared to selling products in its own
brand name to end-users.
The credit rating agency, India Ratings, highlighted it in its report for the company in November 2019:
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company’s EBITDA margin improved to 18.26% in FY19 (FY18: 13.64%) due to higher sales from the
conversion segment, which offers higher margins.
Therefore, an investor notices that the business of Beekay Steel Industries Ltd has multiple features, which
enable it to have a comparatively less volatile profit margin when compared to primary steel producers:
 Its raw material, as well as the final product, are a form of steel; therefore, their prices move along
with each other.
 Its conversion business for large integrated primary steel producers offers fixed profits without
price volatility.
 Its conversion business for large integrated primary steel producers has a higher profit margin than
its business of selling products directly to consumers.
As a result, an investor notices that Beekay Steel Industries Ltd has less volatility in its profit margins than
primary steel producers. Nevertheless, it is not immune to a decline in steel prices. As a result, when steel
prices decline sharply, then it does face a decline in its profit margins like in FY2020.
When an investor notices the share of business in which it converts one form of steel into another e.g. billets
into TMT bars, then it notices that this is one of the major business segments of Beekay Steel Industries
Ltd.
In FY2021, about two-thirds of the total manufacturing capacity of 760,000 TPA of Beekay Steel Industries
Ltd was dedicated to the production of TMT bars i.e. 500,000 TPA, which is a comparatively high margin
business.
Beekay Steel scaled its total production capacity in Rolled Bars to 232,000 TPA, bright bar production
capacity of 28,000 TPA and TMT bar production capacity of 500,000 TPA as of March 31, 2021.
When an investor compares it with the manufacturing capacity of the company in FY2012 where about
300,000 TPA out of the total capacity of 510,000 TPA (FY2012 annual report, page 19), then she notices
that most of the capacity expansion over the years has taken place in the segment of production of TMT
bars.
From the above discussion, an investor would appreciate that conversion of steel billets into TMT bars is a
comparatively high-profit margin segment. Therefore, it seems that the decision of Beekay Steel Industries
Ltd to increase its capacity in this segment might have contributed to the consistent increase in OPM over
the years.
Another key factor of increasing profit margins of Beekay Steel Industries Ltd over the years is the focus
of the company on fuel expenses.
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4) Energy-intensive operations of Beekay Steel Industries Ltd:

While reading about the business of Beekay Steel Industries Ltd, an investor gets to know that the
manufacturing operations of the company are highly energy-consuming. As a result, power & fuel cost is
one of the major expenses for the company and any changes in the cost of fuel has a significant impact on
the profitability of the company.
In the past, Beekay Steel Industries Ltd used to rely on furnace oil as a source of energy in its plants to
produce steel. The prices of furnace oil are linked to crude oil prices. As a result, the company suffered
when the cost of crude oil and therefore, furnace oil increased.
For example, in FY2008 and in FY2012, the profit margins of the company suffered when furnace oil prices
increased significantly.
The profitability has come under pressure due to increased Furnace Oil costs on account of continuously
strengthening of crude oil prices
the cost of Furnace Oil (which is a major consumable for Furnace Heating) has gone up drastically by
31% over the previous year level and this along with increasing Power tariff continues to adversely affect
the margins.
As a result, the company took steps to shift away from the usage of furnace oil and, in turn, reduced its fuel
cost expenses by shifting to coal-fired furnaces.
BSIL has also completed the conversion of its oil fired furnace to a coal fire furnace resulting in savings of
around INR400 per ton in FY14 and in improved EBITDA margins of 10.8% (FY13: 9.1%, FY12: 9.5%).
Company invested in coal pulverisers, strengthening the Company’s transition from the consumption of
furnace oil to coal… The pulverisers resulted in a superior combustion of coal for billet heating and the
result was that fuel costs per tonne of manufactured steel declined during the year, resulting in a notional
saving of ₹12 Crores.
It looks that the steps taken by the company to control its power & fuel costs have also contributed to the
increase in profit margins of the company from 9% in FY2012 to 19% in the 12-months ended June 30,
2021, i.e. during July 2020-June 2021.
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An investor gets to see another instance of the importance of power in the operations of Beekay Steel
Industries Ltd when she notices that during FY2012 to FY2014, for almost 3 consecutive years, there was
a power crisis in Andhra Pradesh and Tamil Nadu and during this period, the operations of the company
were significantly affected.
The power crisis during this period was so intense that the state govt. had to impose power holidays when
the power was rationed and was supplied to the industries was supplied only for limited days.
due to power-crisis in Andhra Pradesh and Tamilnadu leading to imposition of Power-holidays for
manufacturing sector, the operational days of the units are largely affected throughout the year.
In the FY2013 annual report, Beekay Steel Industries Ltd intimated to its shareholders that due to power
holidays in these states, the manufacturing plants are allowed to run only on 60% of the days i.e. the capacity
utilization of the units is capped at 60% by govt.
Owing to imposition of Power-holidays by State Electricity Boards in Andhra Pradesh and Tamilnadu, the
capacity utilization has been restricted to 60% for manufacturing sector in both these states.
The forced lower capacity utilization imposed by the govt. affected the profitability of the company, as the
fixed costs had to be absorbed only by a small amount of production volume. Beekay Steel Industries Ltd
highlighted the power crisis as one of the threats to its shareholders.
The grim power situation in Tamilnadu and Andhra Pradesh also prevents the offsetting of higher
production costs by increasing production volumes.
In FY2014, the company continued to face the power crisis in Andhra Pradesh and Tamil Nadu and as a
result, it mentioned that it lost about 15% of its production volume.
Production had been adversely affected in the last year because of political uncertainty in Andhra Pradesh
and the imposition of Power-holidays by State Electricity Boards in Andhra Pradesh & Tamil Nadu. It
resulted in a decline of 15% in our production volume in both these two states.
Therefore, an investor would note that the heavy dependence of the company on power puts it into a
precarious situation where any disruption in the power supply or increase in the fuel costs can have a
significant impact on its profit margins.
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As a result, it does not come as a surprise to the investor that in the steel industry, the companies with
captive-assured sources of power like self-owned power plants are always better placed when compared to
the companies without the captive-assured sources of power.
The credit rating agency, CARE, highlighted this aspect of the business of steel manufacturers in its Rating
Methodology document, July 2019, page 4:
CARE Ratings views steel manufacturers who have captive power plants (CPP) as superior to other
manufacturers not having such CPP on account of stable supply source & relatively lower cost, especially
where the technology used is power -intensive.
From the above discussion on the business of Beekay Steel Industries Ltd, an investor would note that the
company is a price taker and does not have the freedom of asking for a higher than market price for its
products. It is affected by the cyclicity of the steel industry; therefore, it faces periods of declining prices
and demand alternating with periods of rising prices and demand. The profit margins of the company have
increased over the years; however, they are still affected by the cyclical nature of the steel industry.
Therefore, whenever, an investor extrapolates the current performance of Beekay Steel Industries Ltd in
the future, then she should keep these aspects of its business in her mind, which should always caution the
investor that the business of the company is cyclical where periods of declining performance usually follow
the periods of good performance.
An investor should keep a close watch on the growth of the volume of steel sold by the company as well as
its profit margins going ahead to assess whether the business of the company is improving on the ground.
While analysing the tax payout ratio of Beekay Steel Industries Ltd., an investor notices that for most of
the years, the tax payout ratio of the company has been in line with the standard corporate tax rate prevalent
in India.
The tax payout ratio in FY2020 is 16%, which seems lower than the standard tax rate; however, it seems
the impact of transition from the old tax rate of 30% to the new tax rate of 22%. As a result, most of the
companies adjusted their deferred tax assets and liabilities to the new tax rate.
Impact of tax rate change: The Company elected to exercise the option permitted under section 115BAA
of the Income Tax Act, 1961 as introduced by the Taxation Laws (Amendment) Ordinance, 2019.
Accordingly, the Company has re-measured Deferred Tax Assets basis the rate prescribed in the said
section.
Due to these adjustments, in FY2020, most of the companies reported very low tax payout ratios. Thereafter,
in FY2021 as well as the 12-months ended June 2021 (i.e. July 2020-June 2021), Beekay Steel Industries
Ltd has reported tax payout ratios in line with the standard corporate tax rate in India.
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Operating Efficiency Analysis of Beekay Steel Industries Ltd:
a) Net fixed asset turnover (NFAT) of Beekay Steel Industries Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Beekay Steel Industries Ltd in the past
years (FY2013-21), then she notices that the NFAT of the company has stayed in the range of 3.5 to 4.5.
The NFAT of the company has declined, primarily, in two periods: FY2015-FY2016 and FY2020. Both
these periods are associated with a decline in the revenue of the company due to a downturn in the steel
industry and a decline in steel prices.
In addition, these were the periods when Beekay Steel Industries Ltd had just completed its capacity
expansion projects, which took some time to stabilize in production.
In FY2014, the company completed its TMT bars unit of 200,000 TPA at Parwada (Andhra Pradesh).
The Company has successfully completed 2,00,000 MTPA TMT manufacturing unit at Parwada,
Vishakhapatnam and started trial rolling of TMT Bars from 8 mm to 40 mm in Sep, 2013.
The company witnessed a fall in NFAT because it could not utilize this unit properly. In FY2015, the
company could not utilize this unit even at 10% utilization levels.
Credit rating report by India Ratings, February 2016:
The ratings however continue to be constrained by the delays in stabilisation of BSIL’s rolling mill plant
in Parwada. The company declared achievement of commercial date of operations in September 2013
however, the production commenced in April 2015. Also, the unit was operating below 10% capacity
utilisation during 1HFY16 due to weak demand.
However, soon, in FY2017, the NFAT of the company witnessed a recovery as the steel industry witnessed
an upcycle and the utilization levels at Parwada (Andhra Pradesh) unit increased to about 50%.
The upgrade reflects ramping up of production and sales volume at BSIL’s new unit in Parwada in FY17
and achievement of 51% of capacity utilisation in 9MFY17
Finally, Beekay Steel Industries Ltd could achieve 100% utilization of its TMT units at Parwada and
Jamshedpur only in FY2020.
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During the year under review, the company has achieved 100% utilization in TMT bars production capacity
with scale of 5,00,000 MPTA in its Jamshedpur and TMT bar division at Parwada.
Going ahead, an investor should keep a close watch on the utilization levels of the manufacturing capacity
at different units of the company.
b) Inventory turnover ratio of Beekay Steel Industries Ltd:

While analysing the efficiency of inventory utilization by Beekay Steel Industries Ltd, an investor notices
that over the last 10 years, the consolidated inventory turnover ratio (ITR) of the company has declined
from 5.6 in FY2013 to 3.7 in FY2021.
The decline in the ITR indicates that the business operations of the company are becoming more working
capital intensive.
The company had intimated to its shareholders that it has to produce many different products as per the
requirements of its customers. The decision of the company to manufacture many different products forces
it to carry inventory for each of these different types of products forcing it to carry a large amount of
inventory.
In the FY2008 annual report, it highlighted its compulsion to maintain high inventory due to a wide range
of products being manufactured by it.
The wider range of the products requires huge inventory build-up for meeting requirements from different
category of customers, thus entailing substantial blockage of working capital and internal accruals.
Once again, in FY2012, Beekay Steel Industries Ltd highlighted to its investors that its manufacturing units
attempt to produce many different types of products instead of one single type of product manufactured by
other similar steel manufacturers. As a result, an investor may appreciate that Beekay Steel Industries Ltd
would have to maintain a large amount of inventory for each of these different products.
Unlike most of the rolling mills, where single product (like TMT or Angles) is manufactured continuously,
your Company is manufacturing rolled products like rounds, squares, flats, hexagonals and special profiles
of various sizes, shapes and dimensions at Visakhapatnam and Chennai Units.
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The strategy of the company to produce goods of various sizes, shapes and dimensions also affects its
business, as it is not able to achieve a higher capacity utilization of its manufacturing units. The company
highlighted this constraint to its shareholders in FY2012.
This process of manufacturing multi-sections results in frequent change of Rolls in the mills as per the
production requirements and has inherent limitation of relatively lower capacity utilization.
In addition, in FY2018, Beekay Steel Industries Ltd highlighted to its investors that it has a strategy of
accumulating a lot of inventory by buying raw materials when the steel prices are low.
The Company buys raw materials at low prices and maintains inventory levels, which helps it to avoid
buying at high prices.
An investor would appreciate that such a strategy would result in a comparatively higher amount of
inventory in the stores of the company. One of the downfalls of the strategy to carry a large inventory in
cyclical industries like steel is that at times, the prices may decline substantially, even more than what the
company may imagine. As a result, the company may face inventory losses when the raw material prices
fall significantly.
Beekay Steel Industries Ltd had faced inventory losses in the past. For example, in FY2009, the company
faced an inventory loss of about ₹4 cr, which was substantial when compared to its size. The company had
a profit after tax (PAT) of ₹5.3 cr in FY2009.
The high production costs together with steep fall in sales prices in the 3rd quarter caused the inventory
value loss of Rs 403.05 lacs.
Nevertheless, the changes in the inventory valuation due to fluctuations in the steel prices is a two-way
affair. It means that when steel prices increase significantly, then the companies report inventory gains as
well. For example, Beekay Steel Industries Ltd reported one-off inventory gains in FY2018.
The EBIDTA margin improved to 13.6% in FY18 (FY17:11.7%) because of a one-off stock valuation gain
Going ahead, an investor should keep a close watch on the inventory utilization efficiency as well as the
inventory levels of Beekay Steel Industries Ltd so that she may be aware of the sign of excess inventory as
well as any future instance of inventory losses.
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c) Analysis of receivables days of Beekay Steel Industries Ltd:

Over the last 10 years, the receivables days of Beekay Steel Industries Ltd have consistently been in the
range of 40-50 days. This seems a result of a substantial portion of its sales to large primary steel players
like Tata Steel Ltd, RINL and SAIL, which are financially strong companies.
However, when an investor notices the trend of receivables days in the last few years, then she observes
that during FY2018-FY2021, the receivables days of the company have consistently increased from 40 days
in FY2018 to 53 days in FY2021.
While analysing the business decisions of the company, an investor notices that for the last few years,
Beekay Steel Industries Ltd has attempted to enter into the selling to consumers (B2C) segment. The
company has developed its sales channel and marketing teams for the same. It has started brand building
by way of spending money on advertising.
BSIL started selling thermo-mechanically treated (TMT) bars under its own brand by setting up a
distribution network.
In FY2020, the company bought out the business of its sole distributor and took direct control over its
distribution channel.
The Company has strengthened its retail marketing by taking over the entire business from its sole-selling
distributors in Coimbatore, Bangalore, Hyderabad, Mumbai & Pune with effect from 1st February, 2020
to increase the market penetration of all products on pan India basis.
At the same time, the company has started spending resources on creating a brand in the minds of retail
customers by way of advertising.
Brand awareness: The Company enlarged its TMT bar business around the ‘Beekay Turbo TMT’ brand.
The Company promoted its brand across various places in Andhra Pradesh through hoardings, radio, bus
advertisements, TV tickers and wall paintings. The Company initiated extensive branding to enhance
revenue share from TMT bars within the sales mix.
In FY2020, the company intimated to its shareholders that direct sales to retail customers are now
contributing about 69% to its overall revenue.
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During the year under review, 69% of the Company’s revenue was derived from B2C segments.
From the above discussion, an investor would appreciate that from FY2017 onwards, the company has
increased its focus on the B2C segment. It has invested money in building marketing and distribution
channels and on the advertisement to build a brand.
An investor would also appreciate that in B2C sales, the distribution channel acts as an intermediary, which
results in delays in converting the finished goods into sales and cash inflow.
It might the one of the reasons for an increase in the receivables days of Beekay Steel Industries Ltd in
recent years.
Going ahead, an investor needs to keep a close watch on the receivables position of the company. She
should monitor its disclosures for checking write-offs of receivables etc. to assess the true financial position
of the company.
operations (cCFO) of Beekay Steel Industries Ltd for FY2012-21 then over the last 10-years (FY2012-
FY2021), the company has reported a positive cash flow from operations.
Over FY2012-21, Beekay Steel Industries Ltd reported a total net profit after tax (cPAT) of ₹454 cr. During
the same period, it reported cumulative cash flow from operations (cCFO) of ₹533 cr.
Further advised reading: Understanding Cash Flow from Operations (CFO)
Learning from the article on CFO will indicate to an investor that the cCFO of Beekay Steel Industries Ltd

The Margin of Safety in the Business of Beekay Steel Industries Ltd:
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target growth.
Where,

While analysing the SSGR of Beekay Steel Industries Ltd, an investor would notice that initially, the
company had a low SSGR of 1%-4%; however, since FY2018, when the company benefited from the
increasing steel prices, its SSGR has increased to almost 30%. An investor would notice that over the last
10-years, the company has grown its sales at a CAGR of about 5%.
In the initial period, up to FY2017, when the company did not have a high SSGR, then it needed additional
capital both in the form of additional debt as well as equity. The total debt of the company increased from
₹137 cr in FY2012 to ₹186 cr in FY2017.
In FY2012, the shortage of funds faced by the company was acute and it had to raise money at a very high
cost.
On one hand the cost of existing working capital escalated, while on the other, high cost external
borrowings had to be arranged to temporarily cushion the late sanction of regular working capital limits.
An investor notices that, in FY2012, even the high-cost debt was not sufficient for the company in meeting
its funds’ requirements. As a result, in FY2012, the company had to raise money by way of equity dilution
(preferential issue of shares) to meet its funds’ requirements.
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PREFERENTIAL ISSUE OF SHARES: For the purpose of meeting the working capital requirements
and part finance the ongoing projects, the Company has raised funds of Rs.20.00 crores by way of
Preferential Issue
In the previous years also, e.g. in FY2008, the company had to rely heavily on debt to meet its funds’
requirements.
Company has also geared up infusion of working capital into operations in the year under review by
substantially increasing the borrowings from its existing as well as new bankers.
Such kind of pressure on Beekay Steel Industries Ltd to meet its requirements of working capital seems
natural for steel manufacturing companies because the sector is capital intensive both for creating and
maintaining the plants as well as for working capital needs.
The credit rating agency, CARE, has highlighted this aspect of steel companies in its rating methodology
document for the industry in July 2019, page 2:
industry is fragmented and highly capital intensive both from the perspective of fixed capital and working
capital.
The credit rating agency, CRISIL, highlighted this aspect of steel producers in its rating guidelines for the
material industry in February 2021, page 23 (click here):
The steel industry requires regular, large capex to maintain modern and efficient facilities.
In the FY2020 annual report, page 42, the company also acknowledged the capital-intensive nature of
business as a threat.
Threats: Industry by nature is capital intensive and requires high capital
As a result, during FY2012-FY2017, Beekay Steel Industries Ltd had to raise money by way of both
additional debt as well as equity dilution to meet its funds’ requirements.
Nevertheless, from FY2018, the steel industry witnessed an upcycle and the prices of steel started
increasing. As a result, the profitability of steel companies started increasing significantly.
The improvement was on account of a 30% upturn in steel product realisations between December 2017
and March 2018. This was one of the sharpest increases seen over the last decade.
Because of the increased profitability, the company could reduce its debt over FY2018-FY2020 and the
total debt of the company declined from ₹186 cr in FY2017 to ₹86 cr in FY2020.
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In FY2021, the company has raised a debt of about ₹66 cr; however, the entire money seems to be held in
the form of cash & investments, which increased by ₹67 cr in FY2021.
An investor would appreciate that due to wild fluctuations in the cyclical phases of the steel industry, all
the companies go through phases of liquidity stress during the downturn and surplus liquidity during the
upcycle.
The credit rating agency, India Ratings, in its rating methodology document for the steel industry in
September 2012 (click here), at page 1, highlighted that when faced with high profitability and liquidity,
the low-cost producers of steel go for expansions/acquisitions whereas the high-cost producers can manage
only debt reduction or maintenance of their facilities.
Costs and Flexibility: The higher profitability/cash flows of lower-cost producers means that they have
more funds to expand/strengthen their operational profile through acquisitions or plant modernization…
In contrast, higher-cost producers will often use periods of strong prices to reduce debt levels and will not
typically be able to significantly expand their operations, with the focus being more on the maintenance or
refurbishment of existing operations.
An investor arrives at a similar conclusion when she analyses the free cash flow (FCF) position of Beekay
Steel Industries Ltd.
b) Free Cash Flow (FCF) Analysis of Beekay Steel Industries Ltd:

While looking at the cash flow performance of Beekay Steel Industries Ltd, an investor notices that during
Therefore, during this period (FY2012-2021), Beekay Steel Industries Ltd had a free cash flow (FCF) of
₹306 cr (=533 – 227).
of ₹171 cr. As a result, the company had a total free cash flow of ₹166 cr (= 306 + 31 – 171). Please note
While looking at the overall cash-flow position of Beekay Steel Industries Ltd over the last 10 years
manner:
 Cash & investments: ₹105 cr as the cash & investments of the company have increased from ₹4 cr
in FY2012 to ₹109 cr in FY2021 (109 – 4 = 105)
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Going ahead, an investor should keep a close watch on the free cash flow generation by Beekay Steel
Industries Ltd to understand whether the company continues to generate surplus cash from its operations.
Additional aspects of Beekay Steel Industries Ltd:

On analysing Beekay Steel Industries Ltd and after reading annual reports, DRHP, its credit rating reports
1) Management Succession of Beekay Steel Industries Ltd:

Beekay Steel Industries Ltd is a part of the Beekay group of industries and is run by the promoter Bansal
family. Currently, two brothers: Mr Suresh Chand Bansal (age 72 years), executive chairman, and his
brother Mr Mukesh Chand Bansal (age 65 years), managing director, run the company.
They are assisted by the members of their next-generation: Mr. Manav Bansal (age 46 years), a whole-time
director (WTD) & chief financial officer (CFO) and Mr Vikas Bansal (age 50 years), an executive director
who are sons of Mr Suresh Chand Bansal. Son of Mr Mukesh Chand Bansal, Mr Gautam Bansal (age 40
years) is also working in the company as a WTD.
September 29, 2020 AGM notice, page 8:
Mr. Manav Bansal: (Name of relationships): Mr. Suresh Chand Bansal – Father, Mr. Mukesh Chand
Bansal- Father’s Brother, Mr. Vikas Bansal – Brother & Mr. Gautam Bansal – Son of Mr. Mukesh Chand
Bansal
to understand whether any ownership issues arise between brothers Mr Suresh Bansal and Mr Mukesh
Bansal or between their next generation. An investor may contact the company directly for any
clarifications in this regard.
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2) Issues in the CFO calculation by Beekay Steel Industries Ltd:

While analysing the financial statements of Beekay Steel Industries Ltd, an investor notices that the
company has shown the changes (inflows as well as outflows) related to short-term debt i.e. working capital
loans in the cash flow from operations (CFO). An investor would appreciate that as a general practice,
companies show changes in the working capital under cash flow from financing activities (CFF).
For example, in FY2021, Beekay Steel Industries Ltd included an increase of ₹67.5 cr in its short-term-
borrowings as an inflow under cash flow from operating activities (CFO).
An investor would appreciate that this inflow of ₹67.5 cr should have been an inflow under cash flow from
financing activities (CFF). Including it under CFO may lead an investor to believe that the company has a
much higher cash flow from operations than it actually has. In the above example, in FY2021, the CFO of
the company seems higher by about ₹67.5 cr.
After analysing each of the annual reports of Beekay Steel Industries Ltd, an investor notices that the
company started this practice of including change in short-term-borrowings in CFO from FY2018 annual
report in which it edited the data for FY2017 as well for reference to the previous year. Before that, Beekay
Steel Industries Ltd used to show changes of both the long-term as well as short-term borrowings in the
cash flow from financing activities.
The following table calculates the cash flow from operations (CFO) of Beekay Steel Industries Ltd after
adjusting for the impact of the inclusion of short-term-borrowings for FY2017 to FY2021.
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An investor notices that overall, from FY2017 to FY2021, the CFO was shown higher by about ₹18 cr by
Beekay Steel Industries Ltd by way of inclusion of short-term borrowings.
It is advised that whenever an investor comes across such instances where companies have used
assumptions in the preparation of financial statements, which are different from generally accepted
principles, then she should make her adjustments to assess the correct financial picture of the company.
An investor may contact the company directly to understand the reasons for including short-term-
borrowings in CFO instead of including them in CFF.
3) Project execution by Beekay Steel Industries Ltd:

When an investor reads the annual reports of Beekay Steel Industries Ltd to analyse its project execution
capabilities, then she comes across many initiatives of capacity expansion undertaken by the company.
3.1) Cost overruns:
She notices that on many occasions, the company could not complete the projects on time. Because of the
delay in project completion, Beekay Steel Industries Ltd faced cost overruns.
In FY2009, Beekay Steel Industries Ltd started expansion of its TMT bars unit at Jamshedpur when it
received a big order from Tata Steel Ltd. The company started expansion of this unit by 100,000 TPA for
a cost of ₹17 cr and expected to complete it by July 2010.
The Company has bagged a major conversion order for 1,80,000 MTPA from Tata Steels Ltd. in the month
of October, 2008 involving manufacturing of TMT Bars from Billets for a period of three years at the
Company’s existing manufacturing unit at Jamshedpur… Company is expanding the capacity at its adjacent
land with 1,00,000 MTPA for TMT manufacturing with a capital outlay of Rs.1,698 lacs at Jamshedpur…
The commercial production under the expansion is expected to be commenced from July 2010
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On reading further annual reports, an investor notices that the company had a slight delay in the completion
of this plant, which was completed in September 2010; however, there was a substantial cost overrun in the
project. The company could complete it by spending ₹23 cr against original plans of ₹17 cr; a cost overrun
of about 35% (= 23 / 17 = 1.35)
TMT expansion unit at Jamshedpur with installed capacity of 1,00,000 MTPA has been successfully
completed in September, 2010 with a capital outlay of Rs.2,300 lacs
On another occasion, in FY2010, Beekay Steel Industries Ltd started work on a TMT rolling mill project
of 200,000 TPA at Parwada, Andhra Pradesh. The cost of the project was expected to be ₹56.3 cr and it
was expected to be complete in October 2011.
setting up a new TMT Rolling Mill.. with installed capacity of 2,00,000 MTPA at Parwada in Andhra
Pradesh… The total cost of the project is envisaged at Rs. 5,630.90 lakhs excluding margin money for
working capital… The Company has started the project work from April 2010 and the same is expected to
be completed by September, 2011 including the commissioning of plant. The commercial production will
commence in October, 2011.
However, instead of completing the project in October 2011, the company could complete the project in
FY2014. Because of the delay, the cost of the project had increased to ₹67.9 cr, an increase of about 20%.
The Company has successfully completed 2,00,000 MTPA TMT manufacturing unit at Parwada,
Vishakhapatnam and started trial rolling of TMT Bars from 8 mm to 40 mm in Sep, 2013. The total
investment of the unit amounted to Rs. 67.90 crores up to 31st March 2014
Therefore, the TMT plant at Parwada, Andhra Pradesh represents another instance where Beekay Steel
Industries Ltd faced delays in the project completion and as a result, it had to face cost overruns.
The delay in implementation of projects by Beekay Steel Industries Ltd is not restricted to the
manufacturing projects alone. In the case of technological projects like enterprise resource planning (ERP)
also, the company faced delays in completing the projects.
In FY2009, the company intimated to its shareholders that it has successfully implemented ERP in its
Kolkata and Jamshedpur units. The company promised that it would complete the ERP implementation in
its remaining units at Visakhapatnam and Chennai by the middle of FY2011 i.e. by September 2010.
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Company has successfully implemented ERP at its Jamshedpur and Kolkata Locations in April 2009. The
system will subsequently bring other units at Vizag and Chennai within its ambit by the middle of the year
2010-11.
However, as per the FY2012 annual report, the Chengalpet, Chennai (Tamil Nadu) unit was yet to be
brought under ERP. The company indicated that ERP might be implemented there by FY2013 i.e. a delay
of about 2.5 years from the earlier anticipated date of September 2010.
The successful roll-out of ERP system at Jamshedpur unit and four units at Visakhapatnam facilitates online
and transparent information flow… The Chengalpet (Tamilnadu) unit of the Company is also going to be
covered under ERP in the year 2012-13.
An investor would appreciate that any time delays in the implementation of projects are invariably
associated with cost overruns.
3.2) Completed within cost but reduced the project size:
While analysing the project execution by Beekay Steel Industries Ltd, an investor comes across instances
when the projects were seemingly completed within prior estimated costs. However, on deeper analysis,
she notices that the company could restrict the costs within prior estimates because; it had reduced the scope
of the projects.
For example, in FY2006, Beekay Steel Industries Ltd announced capacity expansion plans for two
locations: Autonagar and Vellanki at Visakhapatnam. At Autonagar, the company had planned to put up
60,000 TPA of Hot Rolled Steel Bars & Rods and 54,000 MTPA of M.S. Ingot plants. At Vellanki, it had
planned to put up a Bar Mill of 40,000 TPA. The company expected to complete these plants by FY2008
at a cost of about ₹38 cr.
The Company is setting up a Structure mill and Steel Smelting shop at Autonagar, Visakhapatnam with a
production capacity of 60,000 MTPA of Hot Rolled Steel Bars & Rods and 54,000 MTPA of M.S. Ingot and
a Bar Mill at Vellanki, Vishakapatnam with a capacity of 40,000 MTPA of Special Steel Sections. The
estimated cost of the project is Rs 3.794.12 lacs against… The benefits of this enhanced capacity will be
figured in the financial results of the Company in 2007-08 onwards.
By FY2008, Beekay Steel Industries Ltd had completed two units out of the above with slight adjustments
in the final capacities and at a total cost of about ₹29 cr. It seems that the company did not complete the
M.S. Ingot facility at Autonagar and reduced the capacity of the Bar Mill from earlier planned 40,000 TPA
to 30,000 TPA.
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The company has expanded capacity by setting-up two new Units at Visakhapatnam– one structural unit
named Beekay Structural Steels with a capex of Rs.2,267 lacs and another Re-Rolling mill named Beekay
Special Steels with a capex of Rs.624 lacs for making specially tailored Sections at Visakhapatnam.
Beekay Structural Steels manufacturing units have an installed capacity of 60,000 MTPA for manufacturing
heavy structural steel products at Autonagar, Vishakhapatnam,
Beekay Special Steels manufacturing unit with a production capacity of 30,000 MTPA has already
commenced its commercial production of Hot Rolled Sections catering to the demand from auto sector.
3.3) Taking on an economically unviable project:
While analysing the project execution by Beekay Steel Industries Ltd, an investor also comes across
instances where the project once initiated by the company could not be completed even with delays of about
3-years. Moreover, even after 3-years and spending crores of rupees, there were question marks about the
economic viability of the project.
For example, in FY2010, Beekay Steel Industries Ltd started a project to establish a Transmission Line
Tower manufacturing unit of 24,000 TPA at Pydibhimavaram in Visakhapatnam for ₹26 cr. The unit was
originally expected to be complete by April 2011.
your Company is now moving into forward integration and is setting up 24,000 MTPA Transmission Line
Tower manufacturing unit at Pydibhimavaram in Visakhapatnam… The total cost of the project is
envisaged at Rs. 2600.00 lakhs… The commercial production under the proposed expansion is expected to
be commenced from April 2011
However, the project witnessed significant delays and it was not completed even by the end of FY2014,
which is almost 3-years since the original envisaged date of completion.
TLT (Transmission Line Tower) Manufacturing at Pydibhimavaram, (Andhra Pradesh): Against the
estimated project cost of Rs.26.00 crores (being funded solely from internal accruals), the Company has
already made project investment of Rs.21.85 crores till 31st March, 2014. At the moment the power sectors
are not performing well and the unit will start production once the said sector will be considered
economically viable.
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It looks like the company was stuck with investment in the transmission-line tower (TLT) project as the
cyclical changes in the steel industry led to the project becoming financially unviable. As a result, the
company’s investment of about ₹22 cr in the TLT project was stuck without producing any returns.
In the subsequent annual reports, the company stopped giving any updates about the progress of this project.
In the FY2021 annual report, the TLT project at Pydibhimavaram, (Andhra Pradesh) does not appear in the
list of manufacturing units of Beekay Steel Industries Ltd.
WORKS:
 Jamshedpur (Jharkhand)
 Chennai (Tamil Nadu)
 Visakhapatnam (Andhra Pradesh) (a. Autonagar b. Bheemlipatnam c. Vellanki d. Parwada)
 Howrah (West Bengal)
An investor may contact the company directly to understand the fate of this project. Whether the project
was finally completed and started production or the amount of ₹22 cr invested in the TLT project is dead
or the project is reoriented for producing some other project. Assessment of the TLT project would provide
an insight into the capital allocation skills of the management.
3.4) Losses due to inability to meet the conditions of a project:
While assessing the project execution, an investor also comes across instances where the company made
grand plans for ambitious manufacturing projects; however, despite many years of waiting by shareholders,
it could not meet the conditions set up by the govt. authorities and in the end, it had to write-off the money
spent on the project. Therefore, the shareholders had to take a loss.
To illustrate, in FY2010, the company intimated to its shareholders its plans to go for backward integration
by establishing a 300,000 TPA integrated steel plant in Bobbili (Vizianagaram) in Andhra Pradesh to be
completed by FY2013. The plant was to be completed in phases and the cost of the first phase was estimated
to be ₹250 cr. The company intimated that it has already acquired 250 acres of land for the project at the
cost of ₹7.42 cr.
Company proposes to set up an Integrated Steel Plant at Bobbili (Vizianagaram), Andhra Pradesh to
produce 3,00,000 MT of Steel per annum… by 2012-13.
During the 1st phase of the project, the Company proposes to complete SMS (2,50,000 MTPA) and Rolling
Mill (1,50,000 MTPA)… and a 30 MW Captive Power Plant… Company has already acquired 250 Acres
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of land… at a total cost of Rs.742.00 lacs. The estimated cost of the 1st phase of the project (Rs. 25,000.00
lacs)
However, an investor notices that the company could not make any progress on the project. In fact, it could
not meet the conditions put by the land-owning govt. authority, Andhra Pradesh Industrial Infrastructural
Corporation Limited (APIIC). As a result, in FY2019, the company had to recognize a loss of ₹1.54 cr.
During the Financial Year the Company have written off ₹1.54 Crores due to dis-embarkment of Bobbili
Project of the Company because of non fulfilment of terms & conditions set by Andhra Pradesh Industrial
Infrastructural Corporation Limited (APIIC).
An investor may contact the company directly to understand the challenges faced by it in this project, why
the company could not go ahead with the project. She may seek clarifications about the conditions set by
APIIC, which it could not fulfil and the shareholders had to suffer a loss of ₹1.54 cr.
3.5) Prior projects, which are no longer included in current projects:
During analysis of project execution history, an investor comes across a project, which was once highlighted
as an ambitious project being executed by the company; however, soon thereafter, the name of the project
was removed from the annual report as if it was not a project being executed by Beekay Steel Industries
Ltd at all.
In the FY2005 annual report, Beekay Steel Industries Ltd intimated to its shareholders about one of its
ongoing projects at Barbil, Odisha. As per the company, some parts of this integrated project became
operational in 2004 and the remaining parts were to become operational in 2005 and 2006.
Recently, the Beekay group has established a green-field project: an integrated steel project at Barbil,
Orissa. It is a backward integration project, which has successfully been producing sponge iron / DRI since
September 2004. Subsequent phases i.e. steel making and captive power generation are scheduled to go
on-stream by end of 2005 and 2006 respectively.
However, the subsequent annual reports are silent on this project. The company stopped providing further
details and the status of this project. Upon a search on Google, an investor comes across the following
webpage, which has the following key details about the project of Beekay group at Barbil, Odisha (Click
here)
 The project seems to be now under the company: Beekay Steel & Power Ltd (BSPL)
 At some point in time, Passary group joined with the Beekay group in this project.
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 40MW power project at the site was expected to become operational in November 2012. The
current status is unknown.
 Shyam Steel Industries of Kolkata had announced to takeover Beekay Steel (i.e. the company
owning this project).
While analysing the annual reports of Beekay Steel Industries Ltd, an investor notices that in FY2006, its
investment in Beekay Steel & Power Ltd (BSPL) declined significantly when its shareholding reduced from
494,750 shares in FY2005 to 107,500 shares in FY2006 (FY2006 annual report, page 27).
Beekay Steel Industries Ltd carried its investment in Beekay Steel & Power Ltd (BSPL) until FY2012 when
this investment disappeared from its list of investments due to either sale or write-off.
An investor may contact the company directly to understand more about the project at Barbil, Odisha. She
may seek clarifications about the investment done by Beekay Steel Industries Ltd in this project, whether
it could make any money/returns on this investment. She may ask whether the company made any losses
on this investment, whether the project is still with Beekay group or it has been sold off as mentioned on
the above-cited webpage.
3.6) Delays in current projects:
In FY2019, Beekay Steel Industries Ltd announced capital expenditure to create a new greenfield expansion
in Kalinganagar, Odisha by spending ₹150 cr and an expansion of the unit at Visakhapatnam for a cost of
₹60 cr. The Odisha plant was expected to complete by FY2022 and the Visakhapatnam plant was expected
to be completed by FY2021.
 ₹150 Crores in greenfield expansion in three years in Odisha (commissioning 2021-22)

 ₹ 60 Crores in greenfield TMT plant in Vizag (2 Lakh MTPA, commissioning in 2020-21)
However, as per the FY2021 annual report, both these projects are running behind schedule.
FY2021 annual report, pages 9 – 10:
embarked on a project to process hot rolled coils into cold rolled strips, likely to be located in
Kalinganagar… project is expected to be commissioned by 2022-23.
Company proposed an increase in its capacity by 50,000 TPA in special steel mill at Vishakhapatnam. But
due to lower demand in the automobile sector and negative effects of the Covid-19 pandemic, the capacity
expansion was stopped.
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Going ahead, an investor should keep a close watch on the progress of these projects. She should monitor
whether the company faces any cost overruns due to delay in executing these projects.
4) Related party transactions of Beekay Steel Industries Ltd:

While assessing the business of the company, an investor notices that Beekay Steel Industries Ltd is a part
of the Beekay promoter group, which has many other companies, which are operating in a similar line of
business.
Let us see a few of such transactions between the company and the promoter-group-entities, which had the
potential of shifting the economic benefits from the minority/public shareholders to the promoters.
4.1) Amalgamation of promoter-group-entities in Beekay Steel Industries Ltd:
In FY2006, Beekay Steel Industries Ltd merged two promoter group entities, M/s. Radice Ispat (India) Ltd.
(RIIL) and M/s. Venkatesh Steel & Alloys Pvt. Ltd. (VSAL) with the Company.
These companies own small steel producing units. As per the FY2010 annual report, page 25, RIIL has an
annual production capacity of 30,000 MT has of hot-rolled sections and VSAL has an installed capacity of
producing 10,000 MT of bright bars.
Beekay group had acquired these companies in the past. For instance, as per the FY2019 annual report,
page 5, the group had acquired RIIL in 1981 and had commenced production in VSAL in 2003.
Thereafter in FY2006, the promoters sold their shareholding in these companies (RIIL and VSAL) to
Beekay Steel Industries Ltd in exchange for shares.
In case of RIIL:
 To Equity Shareholders – two equity shares of Rs. 10/- each of the Company against every three
equity shares of Rs. 10/- each held by them.
 To Preference Shareholders- one preference share of Rs. 100/- each against every one preference
share of Rs. 100/- each held by them.
In case of VSAL:
 To Equity Shareholders – one equity share of Rs. 10/- each of the Company against every six equity
shares of Rs. 10/- each held by them.
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Such transactions where the promoters sell the stake owned by them in the group entities to the listed
company provide opportunities for shifting of economic benefits from the minority/public shareholders to
the promoters. Therefore, the investor should always do deeper due diligence for such transactions.
In addition, the example of Beekay Steels & Power Ltd (BSPL) discussed in the above section comes in
handy now because, originally, the company highlighted the integrated steel project of BSPL in Barbil,
Odisha as if it was one of its own. At that point in time, it has made significant investments in the shares of
BSPL. However, later on, the company stopped mentioning the project in its annual report and sold its stake
in BSPL over the years.
An investor is not certain about the investment done by the company in the project, who were the other
shareholders, and to whom it was sold. Whether it was to the promoters or outside parties. Whether the
company made any profit on its investment in the project.
4.2) Sale and purchase of goods by Beekay Steel Industries Ltd from promoter-group
entities:
While analysing the related party transactions of Beekay Steel Industries Ltd, an investor comes across an
entity, AKC Steel Industries Ltd (ASIL), which had frequently had a large sale and purchase transactions
with the company.
ASIL has the same address as the registered address of (click here): Lansdowne Towers, 4th Floor, 2/1A,
Sarat Bose Road, Kolkata – 700 020, West Bengal
In addition, as per the corporate directory, Zaubacorp, ASIL has the following directors who are common
with Beekay Steel Industries Ltd (click here):
 Mukesh Chand Bansal

 Manav Bansal
 Bhal Chandra Khaitan
 Shyanthi Dasgupta
 Bharat Kumar Nadhani
In addition, Beekay Steel Industries Ltd owns a 27.95% stake in ASIL (FY2021 annual report, page 38).
The transactions of Beekay Steel Industries Ltd with ASIL were significantly large until FY2016 and
thereafter, the size of transactions has declined sharply. The below table highlights the sale and purchase
transactions between Beekay Steel Industries Ltd and ASIL during FY2006-FY2016.
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From the above table, an investor would notice that during FY2006-FY2016, Beekay Steel Industries Ltd
had sold goods for about ₹250 cr to ASIL and had purchased goods of about ₹500 cr from it.
An investor would appreciate that the size of these transactions had been significant when compared to the
size of operations of Beekay Steel Industries Ltd.
All these sale/purchase transactions between the listed entity and the promoter owned entities provide
opportunities for shifting economic benefits from the minority/public shareholders to the promoters. If the
listed entity sells goods to the promoter-entity at a price lesser than the market price or buys goods at a price
higher than the market price, then effectively, these transactions may benefit promoters at the cost of
If an investor attempts to ascertain whether Beekay Steel Industries Ltd and in turn its shareholders have
benefited from the investment done by them in ASIL, then in the FY2017 annual report, page 6, the
company highlighted to the shareholder that ASIL has not passed on any profits to the company.
The Revenue and the profit earned by the Associate Company have not directly contributed since they have
not passed on any profit to the Company earned by them
4.3) Unsecured loans taken by Beekay Steel Industries Ltd from directors and other
corporate bodies:
While analysing the debt of Beekay Steel Industries Ltd, an investor notices that the company has
consistently had a large amount of unsecured loans from many corporates and directors.
The below table provides a glimpse of the loans outstanding at the end of each year from FY2006 to
FY2021, which are taken by the company from directors and corporate bodies.
An investor may notice that consistently, the amount of these loans is between ₹25 cr to ₹50 cr.
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Moreover, the annual reports of the company do not disclose the interest rate applicable on these loans.
Therefore, an investor is under uncertainty regarding the benefits of these loans to the company.
An investor may contact the company directly to know the interest rate that Beekay Steel Industries Ltd is
paying on these loans. If the interest rate is higher than the rate at which Beekay Steel Industries Ltd can
get loans from other lenders like banks/NBFCs, then it may be tantamount to shifting economic benefits
from public/minority shareholders to the directors/owners to bodies corporate who have given these loans.
While reading the credit rating report by India Ratings for the company in February 2021, an investor gets
to know that the company aims to repay these unsecured loans in the next 2-3 years.
The management has stated that it will repay the unsecured loans over the next two-to-three years.
Going ahead, an investor should keep a close watch on the amount of unsecured loans taken by the company
from directors and others. She should contact the company to know the interest rate payable on these loans.
5) Errors in the annual reports of Beekay Steel Industries Ltd:

While analysing the annual reports of Beekay Steel Industries Ltd, an investor notices that some sections
of the financial statements contain information, which does not seem to be correct. These might be
typographical errors or some other mistakes.
Let us see a few such instances.
5.1) Income tax reconciliation table does not reconcile the income tax:
While assessing the FY2020 and FY2021 annual reports, an investor notices that the income tax
reconciliation tables, which are supposed to reconcile the differences in the standard corporate income tax
and the tax payout rate in the profit and loss statement, do not reconcile it.
Ideally, the income tax reconciliation table will start with the profit before tax. It will then calculate what
would have been the tax payout at the standard corporate tax rate. Thereafter, the company provides details
of all the adjustments to the tax payout in the form of tax incentives, income to be taxed at different rates,
prior period items etc. and then show the calculations to arrive at the actual tax payout shown by the
company in the profit and loss statement.
This is the purpose of the income tax reconciliation table in the annual report.
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Let us now see the income tax reconciliation table in the FY2021 annual report, pages 140-141, which
contains the calculation for both FY2020 and FY2021 and observe whether the table reconciles the tax
calculations with the actual tax payout shown by Beekay Steel Industries Ltd in its profit and loss statement.
From the above table, an investor would notice that the income tax reconciliation table does not reconcile
the tax payout for both, FY2020 and FY2021.
For FY2020, the income tax reconciliation table calculates an income tax payout of ₹24.57 cr whereas, in
the profit and loss statement, Beekay Steel Industries Ltd had shown an income tax payout of ₹14.51 cr,
which is a big difference.
For FY2021 as well the data does not reconcile. The income tax reconciliation table calculates an income
tax payout of ₹27.21 cr whereas, in the profit and loss statement, Beekay Steel Industries Ltd had shown
an income tax payout of ₹27.92 cr.
An investor may contact the company directly to understand the income tax reconciliation calculations and
seek clarifications about the data presented in the annual report. She may get clarity whether these are
typographical errors or some data is missing in the annual report, which the company should have provided
but missed.
5.2) Typographical error in the FY2007 annual report of Beekay Steel Industries Ltd:
In the FY2007 annual report, an investor notices a typographical error in the directors’ report segment
where the company has elaborated its financial performance for the year to its shareholders.
As per the FY2007 annual report, page 6, the company reported a sales turnover of ₹330.67 cr in FY2007
against a sales turnover of ₹328.88 cr in FY2006. Therefore, in FY2007, the company achieved a higher
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turnover. However, while describing the financial performance, it described that it reported a lower
turnover.
PERFORMANCE REVIEW: Your Company has achieved a lower turnover of Rs.33,067.95 lacs against
Rs.32,888.65 lacs during the previous.
On another occasion, in the FY2012 annual report, while providing the status of the TMT rolling mill
project at Parwada, the company mentioned that its trial runs would commence in the third quarter of
FY2012 (2011-12). However, an investor would note that reading this information in the FY2012 annual
report means that FY2012 is already over.
The constructions of factory sheds and other civil structures like boundary wall, office building, canteen,
staff room, security room, stores etc. have already been completed by incurring Rs.22.61 crores till 31-03-
2012 and trial run will commence by the end of 3rd quarter of 2011-12.
Similarly, while providing details of disputed and undisputed statutory dues in the audit report, the company
seems to have mixed up whether the pending dues are disputed or undisputed. The same dues, which are
pending for a few years, are initially shown as undisputed but then described as disputed.
If an investor reads the audit reports, then she notices that section of FY2016 and FY2017, the income tax
dues relating to FY2011 amounting to ₹1,156,430/- are shown as undisputed in FY2016 and FY2017 annual
reports. Similarly, the income tax dues relating to FY2014 for ₹267,322/- are shown as undisputed until the
FY2017 annual report.
According to the information and explanations given to us, there were undisputed amount payable in
respect of Income Tax relating to F.Y. 2010-11 amounting Rs. 11,56,430/- and Rs. 2,67,322/- relating to
F.Y 2013-14 which have remained outstanding as at 31st March, 2017 for a period of more than six months
from the date they become payable.
However, from the FY2018 annual report onwards, these dues are shown as disputed.
According to the information and explanations given to us, there were disputed amount payable in respect
of Income Tax relating to F.Y. 2010-11 amounting ₹11,56,430/- and ₹2,67,322/- relating to F.Y 2013-14
which have remained outstanding as at 31st March, 2018 for a period of more than six months from the
date they become payable.
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As per the FY2021 annual report, page 86, these dues have stayed unpaid until FY2021.
An investor may contact the company directly to understand whether the above-mentioned dues are
disputed or undisputed. If these are disputed, then why were they mentioned as undisputed until FY2017?
Moreover, if they are undisputed, then why are they unpaid until FY2021.
The Margin of Safety in the market price of Beekay Steel Industries Ltd:
Currently (October 24, 2021), Beekay Steel Industries Ltd is available at a price to earnings (PE) ratio of
about 5.9 based on consolidated earnings of the last 12-months (July 2020-June 2021). An investor would
appreciate that a PE ratio of 5.9 offers a margin of safety in the purchase price as described by Benjamin
Analysis Summary
Overall, Beekay Steel Industries Ltd seems a company, which has grown its sales at a growth rate of 5%
year on year for the last 10 years. However, this growth journey has not been smooth for the company. It
has witnessed periods of declining sales and profit margins indicating the impact of cyclicity of the steel
industry. The company is a price taker who has to sell its products at the market price and does not have
pricing power. As a result, the company has attempted to improve its profit margins by way of reducing its
operating costs like power & fuel costs.
Beekay Steel Industries Ltd is a secondary steel producer and both its raw material costs as well as final
product prices move together. In addition, it works as a contractor for large steel producers where it takes
steel billets from them and converts the billets into TMT bars etc. for them. For its work, it gets fixed
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conversion margins. As a result, Beekay Steel Industries Ltd has reported less volatile profit margins than
primary steel producers.
The company’s operations are working capital intensive as it produces many different types of products for
its customers and has to keep an inventory for all of them. In addition, it follows a strategy of buying raw
materials when prices are low. As a result, it carries significant inventory, which exposes it to the risk of
losses on inventory valuations when steel prices decline.
In recent years, the company has focused on expanding sales, which are to the retail consumers by
establishing a marketing team, distribution channel, creating a brand and spending on advertising. Because
of the intermediary distribution channel, it seems that more money is being stuck in the working capital.
The business of the company generally requires a lot of funds in working capital and in the past, the
company had to rely on higher borrowings, equity dilution, unsecured loans from its directors and other
related parties to meet its needs. It is only recently when the steel industry has turned into upcycle that the
company has started producing a lot of surplus cash and has reduced its debt significantly.
The company’s project execution history leaves scope for improvement because many of its projects saw
delays in completion and cost overruns. At times, when the company was about to complete a project, then
it realized that it has become financially unviable and had to stop the project. At times, it could not meet
the conditions put by govt. authorities and suffered losses.
The company’s promoters seem to have put in place a succession plan where the next generation of
promoters is actively involved in the management of the company. The promoters also have many related
party transactions with the company. There have been instances where they sold their stake in the group
entities to Beekay Steel Industries Ltd. At times, the company entered into a large sale and purchase
transactions with promoter-group entities. In addition, there have been many financial lending transactions
between the promoters and the company. All these transactions increase the risk for the public/minority
shareholders.
The annual reports of the company, at times, have certain information, which seems erroneous like the tax
payout reconciliation table that does not reconcile the tax payout. It has included the changes in the short-
term borrowings into cash flow from operating activities (CFO), which should ideally be included in cash
flow from financing activities (CFF). An investor may seek clarifications from the company about the same.
Going ahead, the investor may focus on the sales growth and profit margins of the company to assess the
impact of the cyclicity of the steel industry. She may focus on the inventory and receivables of the company
to assess whether the company is managing its operations efficiently. She may focus on the progress of the
capacity expansion projects being executed by the company to monitor time and cost overruns. She may
focus on the related party transactions of the company with its promoters so that she can analyse the
instances where economic benefit may be transferred from the minority shareholders to the promoters.
These are our views on Beekay Steel Industries Ltd. However, investors should do their own analysis before
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P.S.

Videos
Analysis Excel
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How to Use Screener.in "Export to Excel" Tool

Screener.in is one of the best resources available to equity investors in Indian markets. It is a website, which
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The most important part of the “Export to Excel” feature is that it allows the investor to customize the Excel
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The ability to get the financial data of any company in our customized format with our key ratios and
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 What is the source of the data that screener.in provides to its users?
 How to customize the “Export to Excel” file?
 How to upload the customized file in one’s account at screener.in
We have been replying to such queries based on our understanding of screener.in, which we have gained
by using the website for multiple years and based on our learning by listening to the founders of screener.in
(Ayush Mittal and Pratyush Mittal) in June 2016 at the Moneylife event in Mumbai.
In June 2016, Moneylife arranged a session, “How to Effectively Use screener.in” by Ayush and Pratyush
at BSE, Mumbai in which Ayush and Pratyush explained the features of screener.in in great detail. This
session was recorded by Moneylife and has been made available as a premium feature on their private
YouTube channel.
The recorded session can be accessed at the following link, which would require the viewers to pay to view
it:
https://advisor.moneylife.in/icvideos/
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(Disclaimer: we do not receive any referral fee from Moneylife or Screener.in to recommend the above
video link to the session by Ayush and Pratyush. For any further information about the video, investors
may contact Moneylife directly)
As mentioned earlier that we have been replying to investors’ queries related to the “Export to Excel”
feature on the “Ask Your Queries” section of our website. However, in light of repeated queries from
different investors, we have decided to write this article, which addresses key aspects of “Export to Excel”
feature of screener.in.
The current article contains explanations about:
 The financial data provided by screener.in in its “Export to Excel” file and its reconciliation with
the annual report of companies
 Steps to customize the “Export to Excel” template by investors
 Steps to upload the customized Excel file on screener.in so that in future whenever any investor
downloads the “Export to Excel” file of any company, then it would have the data in the customized
preferred format of the investor.
Financial Data
The “Export to Excel” file of screener.in contains a “Data Sheet”, which contains the financial data of the
company, which in turn is used to calculate all the ratios and do in-depth analysis. As informed by Ayush
and Pratyush in the Moneylife session, screener.in sources its data from capitaline.com, which is a
renowned source of financial data in India.
The data sheet contains the data of the balance sheet, profit & loss, quarterly results, cash flow statement
etc. about the company.
We have taken the example of a company Omkar Speciality Chemicals Limited (FY2016: standalone
financials) to illustrate the reconciliation of the data provided by screener.in in its “Export to Excel” file
and data presented in the annual report.
Read: Analysis: Omkar Speciality Chemicals Limited
Let’s now understand the data about any company, which is provided by screener.in.
Balance Sheet:
This is the section, where investors get most of the queries as screener.in groups the annual report items
differently while presenting the data to investors. Let’s understand the data in the balance sheet section of
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the “Data Sheet” of the “Export to Excel” file taking the example of FY2016 data of Omkar Speciality
Chemicals Limited:
Balance Sheet Screener.in "Data Sheet"
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Balance Sheet (Annual Report FY2016)
 Equity Share Capital: It represents the paid-up share capital taken directly from the balance sheet
(₹20.58 cr.).
 Reserves: It represents the Reserves & Surplus taken directly from the balance sheet (₹160.87 cr.).
 Borrowings: It represents the entire debt outstanding for the company on March 31, 2016 (₹185.76
cr.). It comprises the following components:
o Long-Term Borrowings: ₹79.23 cr taken directly from the balance sheet.
o Short-Term Borrowings: ₹95.49 cr. taken directly from the balance sheet.
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o Current Liabilities of long-term borrowings: ₹11.04 cr. taken from the notes to the
financial statements. This data is included as part of “Other Current Liabilities” of ₹15.89
cr. under “Current Liabilities” in the summary balance sheet. In the annual report of Omkar
Speciality Chemicals Limited, “Current Liabilities of long-term borrowings” can be found
in Note No. 7 on page 89 of the FY2016 annual report.
o Sum of these three items: 79.23 + 95.49 + 11.04 = ₹185.76 cr. Investors might find a small
difference for various companies, which might be due to rounding off.
 Other Liabilities: It represents the sum of the rest of the liabilities (₹79.52 cr.) like:
o Deferred Tax Liabilities: ₹8.04 cr. taken directly from the balance sheet
o Long-Term provisions: ₹2.42 cr. taken directly from the balance sheet
o Trade Payables: ₹50.52 cr. taken directly from the balance sheet
o Other Current Liabilities net of “Current Maturity of Long-Term Debt”: ₹15.89 - ₹11.04
= ₹4.85 cr. is considered in this section.
o Short-Term Provisions: ₹13.69 cr. taken directly from the balance sheet
o Sum of these items: 8.04 + 2.42 + 50.52 + 4.85 + 13.69 = ₹79.52 cr. Investors might find
a small difference for various companies, which might be due to rounding off.
 Net Block: It represents the sum of Tangible Assets (₹ 77.75 cr) and Intangible Assets (0.15 cr.)
taken directly from the balance sheet. The total netblock in the “Data Sheet” is ₹77.90 cr, which is
the sum of the tangible and intangible assets.
 Capital Work in Progress: It represents the paid-up Capital Work in Progress taken directly from
the balance sheet (₹112.67 cr.).
 Investments: It is the sum of both the Current Investments and the Non-Current Investments
presented on the balance sheet. The Current Investments are shown under “Current Assets” in the
balance sheet whereas the Non-Current Investments are shown under “Non-Current Assets” on the
balance sheet.
o In the case of Omkar Speciality Chemicals Limited, there are no current investments,
therefore, the “Investments” (₹13.91 cr.) in the “Data Sheet” of “Export to Excel” file is
equal to the Non-Current Investments in the balance sheet (₹13.91 cr.)
 Other Assets: It represents (₹242.25 cr.) the sum of rest of the assets:
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o Long-term Loans and Advances: ₹26.53 cr. taken directly from the balance sheet
o Inventories: ₹61.78 cr. taken directly from the balance sheet
o Trade Receivables: ₹102.26 cr. taken directly from the balance sheet
o Cash and Cash Equivalents: ₹6.63 cr. taken directly from the balance sheet
o Short-term Loans and Advances: ₹44.14 cr. taken directly from the balance sheet
o Other Current Assets: ₹0.89 cr. taken directly from the balance sheet
o Sum of these items: 26.53 + 61.78 + 102.26 + 6.63 + 44.14 + 0.89 = ₹242.23 cr. The
difference of ₹0.02 cr. in this sum and the figure in the “Data Sheet” of ₹242.25 cr. is due
rounding off.
It is important to note that certain additional items, if present in the balance sheet, are usually shown by
screener.in as part of “Other Liabilities” or “Other Assets” depending upon their nature (Liability/Assets).
E.g. “Money Received Against Share Warrants” is shown as a part of “Other Liabilities” in the “Data Sheet”
in the “Export to Excel” file.
Profit and Loss:

Let us now study the reconciliation of the profit and loss data of the company provided by screener.in in
the "Data Sheet" of "Export to Excel" and the annual report:
Profit & Loss Statement Screener.in "Data Sheet"
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Profit & Loss Statement Annual Report FY2016
 Sales: It represents only the “Revenue from Operation” of ₹300.02 cr. taken directly from the P&L
statement.
 Raw Material Cost: It represents the sum of Cost of Material Consumed (₹167.09 cr) and Purchase
of stock in trade (₹73.42 cr.) taken directly from the P&L statement.
o Sum of these two items: 167.09 + 73.42 = ₹240.51 cr. Investors might find a small
difference for various companies, which might be due to rounding off. In the case of Omkar
Speciality Chemicals Limited, the difference is ₹0.01 cr.
 Change in Inventory: ₹12.93 cr. taken directly from the P&L statement: “Changes in Inventories
of Finished Goods, Work in progress and Stock in Trade”.
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o It is to be noted that if the inventories have increased during the period, then this figure
would be negative and if the inventories have decreased during the period, then this figure
would be positive.
o A negative figure (increase in inventory) indicates that some material was purchased whose
cost is included in the Raw Material Cost, but this material is yet to be sold as finished
goods because this material is still lying in inventory. That’s why this cost is not the cost
for this period and thus deducted from the expenses of this period.
o A positive figure (reduction in inventory) indicates that some amount of finished goods
sold in this period were created from the raw material purchased in previous periods.
Therefore, the raw material cost of the current period does not include the cost of these
goods whereas the sales of this period include the revenue from these sales. That’s why the
cost is added to the expense of this period.
 Power and Fuel, Other Mfr. Exp, Selling and admin, Other Expenses: together constitute the
“Other Expenses” item of the P&L statement. The breakup of “Other Expenses” is present in the
notes to financial statements in the annual report.
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o Sum of these four items in the “Data Sheet”: 1.45 + 4.74 + 4.08 + 5.87 = ₹16.14 cr. is equal
to the “Other Expenses” figure in the P&L statement. Any small difference might be due
to rounding off.
o Many times, there are 10-30 items, which come under “Other Expenses” in the annual
report and it becomes difficult for investors to segregate, which of these items are grouped
by screener under “Other Mfr. Exp” or under “Other Expenses” or under “Selling and
admin” etc. E.g. in the case of Omkar Speciality Chemicals Limited, the Power and Fuel
costs of ₹1.45 cr. seem to include both the “Factory Electricity charge” of ₹1.28 cr. and
“Water Charges” of ₹0.17 cr.
o Therefore, an investor would need to put some extra effort into the analysis in case the
“Other Expenses” item is a large number.
 Employee Cost: ₹12.93 cr. taken directly from the P&L statement
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 Other Income: ₹8.89 cr. taken directly from the P&L statement. For some companies, it might be
shown as non-operating income in the P&L statement.
 Depreciation: ₹4.28 cr. taken directly from the P&L statement.
 Interest: ₹16.52 cr. taken directly from the P&L statement.
 Profit before tax: ₹33.37cr. taken directly from the P&L statement.
 Tax: It represents the sum total of all the tax-related entries in the P&L statement including all
credits, debits and previous year adjustments. E.g. for Omkar Speciality Chemical Limited, the tax
for FY2016 (₹11.16 cr.) represents the sum of:
o Previous year adjustments of ₹0.50 cr.
o Current Tax of ₹6.99 cr.
o Deferred Tax of ₹5.81 cr.
o MAT Credit Entitlement of negative ₹2.14 cr. This effectively adds to the profit of the
company for the period.
o Total of all these entries: 0.50 + 6.99 + 5.81 – 2.14 = ₹11.16 cr. is equal to the “Tax” in
“Data Sheet” in screener.in. Investors might find a small difference for various companies,
which might be due to rounding off.
 Net profit: ₹22.21 cr. taken directly from the P&L statement.
 Dividend Amount: It represents the entire dividend paid/declared/proposed for the financial
year without considering the dividend distribution tax. We may get to know about this figure
from the Reserves & Surplus section of the annual report. E.g. for Omkar Speciality Chemical
Limited, the dividend amount (₹3.09 cr.) in the “Data Sheet” of screener.in has been taken from
the reserves & surplus section of the annual report on page 88:
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Cash Flow:
 The data for three key constituents of the cash flow statement i.e. Cash from Operating Activity
(CFO), Cash from Investing Activity (CFI) and Cash from Financing Activity (CFF) are taken
directly from the cash flow statement in the annual report
 Net Cash Flow is the sum of CFO, CFI and CFF for the financial year.
 Sometimes, investors may find small differences in the data, which might be due to rounding off.
Cash Flow Statement Screener.in "Data Sheet"
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Cash Flow Statement Annual Report FY2016
Quarterly Results:
Quarterly Results Screener.in "Data Sheet"
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Quarterly Results March 2017, Company Filings to Stock Exchange
 Sales: it represents the revenue from operations from the quarterly results filing of the company.
E.g. for Omkar Speciality Chemical Limited, the sales of ₹91.56 cr. in the March 2017 quarter
represents the revenue from operations from the March 2017 results of the company.
 Expenses: it represents all the expenses from the quarterly results filing except finance cost and
depreciation. “Expenses” in the “Data Sheet” of screener.in includes the exceptional items if any
disclosed by the companies in their results. E.g. for Omkar Speciality Chemical Limited, the
“Expenses” in the data sheet of the amount of ₹135.84 cr. is the sum of:
o Cost of material consumed: ₹50.09 cr.
o Purchase of stock in trade: Nil
o Changes in Inventories of Finished Goods, Stock in Trade, Work in progress and Stock in
Trade: ₹12.75 cr.
o Employee benefits expense: ₹2.11 cr.
o Other expenses: ₹7.68 cr.
o Exceptional Items: ₹63.21 cr.
o Total of all these entries: 50.09 + 12.75 + 2.11 + 7.68 + 63.21 = ₹135.84 cr. is equal to the
“Expenses” in “Data Sheet” in screener.in. Investors might find a small difference for
various companies, which might be due to rounding off
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 Other Income: (₹5.47 cr.) taken directly from the quarterly Statement. For some companies, it
might be shown as non-operating income in the quarterly statement.
 Depreciation and Interest: are directly taken from the “Depreciation and Amortization Expense”
of ₹0.99 cr. and “Finance Costs” of ₹5.14 cr. in the quarterly statement.
 Profit before tax: Loss of ₹55.89cr. taken directly from the quarterly statement.
 Tax: It represents the sum total of all the tax-related entries in the quarterly statement including all
credits, debits and previous year adjustments. E.g. for Omkar Speciality Chemical Limited, the tax
for the March 2017 quarter (positive change of ₹11.59 cr.) represents the sum of:
o Current Tax of negative ₹5.37 cr. This effectively adds to the profit of the company for
the period.
o Previous year adjustments of negative ₹6.75 cr. This also effectively adds to the profit
of the company for the period.
o MAT Credit Entitlement of ₹1.14 cr. This also effectively adds to the profit of the
company for the period.
o Deferred Tax of ₹1.67 cr.
o Total of all these entries: -5.37 – 6.75 – 1.14 + 1.67 = - ₹11.59 cr. is equal to the “Tax” in
“Data Sheet” in screener.in. The negative tax effectively adds to the profit of the company
for the period.
o Investors might find a small difference for various companies, which might be due to
rounding off.
 Net profit: Loss of ₹44.29cr. taken directly from the quarterly statement.
 Operating Profit: represents sales – expenses (as calculated in the description above). E.g. for
Omkar Speciality Chemical Limited, the operating profit for March 2017 quarter (loss of ₹44.28
cr.) represents the impact of:
o Sales of ₹91.56 cr. less Expenses of ₹135.84 cr. = Loss of ₹44.28 cr.
With this, we have come to the end of the current section of this article, which elaborated the reconciliation
of the data presented by screener.in with the annual report and quarterly filings of the companies. Now we
would elaborate on the steps to customize the default “Export to Excel” template sheet provided by
screener.in.
Customizing the Default “Export to Excel” Sheet

Customizing the “Export to Excel” template and uploading it on screener.in in the account of an investor is
the feature, which differentiates screener.in from all the other data sources that we have come across.
We have used premium data sources like CMIE Prowess, Capitaline during educational and professional
assignments in the past as part of the subscription of MBA college and the employer. These premium
sources as well as other free sources like Moneycontrol etc. provide the functionality of data export to excel.
However, the exporting features of these websites are primitive, which provide the data present on the
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screen to the investor in an Excel or CSV file on which the investor then needs to separately apply the
formulas etc. to do the analysis, which is very time-consuming.
Screener.in is better than the above-mentioned sources in terms that it allows investors to customize the
Excel template and upload it on the website. The next time any investor downloads the data of any company
from the screener.in website, the downloaded file has the data of the company along with all the formulas
put in by the investor auto-calculated, which saves a lot of time for the investor in doing in-depth data
analysis.
Steps to customize:
Once the investor downloads the data of any company by clicking the “Export to Excel” button from the
screener.in website, then she gets the data of the company in the default Excel template of screener.in.
The default Excel template contains the following six sheets:
 Profit & Loss

 Quarters
 Balance Sheet
 Cash flows
 Customization and
 Data Sheet
The “Data Sheet” contains the base financial data of the company, which has been described in detail in the
above section of this article. It is not advised to make any change to this sheet otherwise all the data
calculations might become erroneous.
"Customization” sheet contains the steps to upload the customized sheet on the screener website in an
investor’s account. We will discuss these steps in details later in this article.
Rest of the sheets: Profit & Loss, Quarters, Balance Sheet and Cash Flows contain the default ratios along
with formulas etc. provided by the screener.in team for the investors.
An investor may change all the sheets except the Data Sheet in any manner she wishes. She may delete all
these sheets, change formulas of all the ratios, put in her own ratios, create entirely new sheets and create
her own preferred ratios and formulas in the new sheets by creating direct linkages for these new formulas
from the base data in the “Data Sheet”. The investor may do any amount of changes to the excel sheet until
she does not tinker with the Data Sheet.
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Given below is the screenshot of the “Profit & Loss” sheet of the default “Export to Excel” template
provided by screener.in
Given below are the changes that we have done to the “Export to Excel” template to customize it as per our
preferences by creating a new sheet: “Dr Vijay Malik Analysis”
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(For large resolution image of this sheet: Click Here)
Further Reading: Stock Analysis Excel Template (Screener.in): Premium Service
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The above-customized template helps us to do a very quick assessment of any company on the checklist of
parameters that we use for stock analysis. This is because this customized template provides us with our
preferred ratios etc. in one snapshot like a dashboard, which makes decision making very quick and easy.
Readers would be aware that we use a checklist of parameters, which contains factors from Financial
Analysis, Business Analysis, Valuation Analysis, Management Analysis and Margin of Safety calculations.
The customized template screenshot shared above allows us to analyse the following parameters out of the
checklist in a single view:
Financial Analysis:
 Sales growth
 Profitability
 Tax payout
 Interest coverage
 Debt to Equity ratio
 Cash flow
 Cumulative PAT vs. CFO
Valuation Analysis:
 P/E ratio
 P/B ratio
 Dividend Yield (DY)
Business Analysis:
 Conversion of sales growth into profits

 Conversion of profits into cash
 Creation of value for shareholders from the profits retained: Increase in Mcap in last 10 yrs. >
Retained profits in last 10 yrs.
Management Analysis:
 Consistent increase in dividend payments

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

 Receivables Days
 Inventory Turnover Ratio
The ability to see the above multiple parameters in one snapshot for any company for which we download
the “Export to Excel” file, allows us to have a quick opinion about any company that we wish to analyse.
It saves a lot of time for the investors as she can easily determine, which companies have the requisite
strength that is worth spending more time on them.
We believe that to fully benefit from the great resources available to the investors today, it is essential that
investors should use screener.in to the fullest and therefore must customize their own “Export to Excel”
templates as per their preference and upload it to their accounts at the screener.in website.
Uploading the Customized “Export to Excel” Sheet on Screener.in Website

The “Customization” sheet of the default “Export to Excel” template file provided by screener.in contains
the steps to upload the customized Excel file on the screener.in website. We have described these steps
along with the relevant screenshots below for the ease of understanding:
 Once the investors have customized the excel file as per their preference, then they should rename
it for further reference. The excel file that we have used for illustration below is our customized
excel template, which is named: “Dr Vijay Malik Screener Excel Template Version 3”
 Once the investor has saved her customized excel file with the desired name, then she should visit
the following link in the web-browser: https://www.screener.in/excel/. She would reach the
following screen:
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 It is required that the investor is logged in the screener.in website before she visits the above
link. Otherwise, the browser will direct her to the login/registration page like below:
o If the investor is directed to the above page to register and she does not have an account
on screener.in website, then she should create her new account by providing her details
on the above page and clicking “Register”
o However, if she already has an account on screener.in, then she should click on the
button “Login here”. In the next page, the investor would be asked to provide her
email and password to log in and after successfully logging in, the website will take
her to the Dashboard/home page of screener.in
o Now the investor would have to again visit the page: http://www.screener.in/excel/ to
upload the customized Excel. To avoid this duplication, it is advised that the investors
should visit the page: http://www.screener.in/excel/ after they have already logged in
the screener.in the website.
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 Once the investor is at the Excel upload page, then she should click the button: “Choose File”
 Upon clicking on the button “Choose File”, a new pop-up window will open. In the newly opened
window, the investor should browse to the folder where she had saved her customized excel sheet
and select it:
 Upon selecting the customized Excel file of the investor, in our case the file “Dr Vijay Malik
Screener Excel Template Version 1.6 (Unlocked)”, the investor should click on the button “Open”
in this pop-up window.
 Upon clicking the button “Open”, the pop-up window will close and the investor would see that
on the web page, there is a summary of the name of her customized excel file near the “Choose
File” button.
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 The presence of the file name summary indicates that the correct file has been selected by the
investor for the upload.
 Now, click on the button “Upload” on the webpage.
 Clicking on the “Upload” button will upload the excel file customized by the investor in her
account on the screener.in website and take her to the homepage/dashboard of the screener.in
website.
From now on whenever the investor downloads the data of any company from screener.in by clicking the
button “Export to Excel”, then she would get the data in the format prepared by her in her customized Excel
file containing all her custom ratios and formulas, formatting and the layout as selected by her.
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This concludes all the steps, which are to be taken by an investor while uploading her customized excel file
on the screener.in website.
Updating/Changing the already uploaded customized sheet:
 In future, if the investor wishes to make more changes to the excel file, then she can simply do all
the changes in the Excel file without making any changes to the “Data Sheet’ and save it.
 She should then repeat the above steps to upload the new excel file in her account on the screener.in.
 Uploading the new file will overwrite the existing template and henceforth, screener.in will provide
her with the data in her new Excel file format upon clicking the “Export to Excel” button for any
company.
Removing the customizations:
 However, in future, if the investor wants to delete her customized excel file and go back to the
original default excel template of screener, then she again would need to visit the following
link: http://www.screener.in/excel/ and click on the button “Reset Customization”
 Upon clicking the button “Reset Customization”, the web page will ask “Are you sure you want to
reset your Excel customizations?”
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 If the customer is sure about deleting her customized excel file, then she should click on the button
“Confirm Excel Reset” on the web page.
 Clicking the “Confirm Excel Reset” button will delete the customized Excel file from the
investor’s account and reset the excel file to the default Excel template file of screener described
above.
 From now onwards, whenever the investor downloads the data of any company from screener.in
by clicking the button “Export to Excel”, then she would get the data in the default Excel format of
screener.in.
There is no limit on the number of times an investor can upload her customized excel file or change it or
delete it by resetting the customization. Therefore, an investor may do as many changes and iterations as
she wants until she gets her preferred excel sheet prepared, which would help her a lot in her stock analysis.
With this, we have come to an end of this article, which focussed on the key feature of the screener.in
“Export to Excel”, the reconciliation of the financial data in the “Data Sheet” with the annual report,
quarterly results file etc. and the steps to customize the Excel file and upload the customized Excel file in
the investor’s account on screener.in.
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Premium Services
At www.drvijaymalik.com, we provide the following premium services to our readers:
1. Dr Vijay Malik’s Recommended Stocks

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

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

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

 Any separate detailed voluminous research report will not be provided for stocks. The short
investment rationale and updates present on the “Recommended Stocks” page will be the only
reading material available to the subscribers.
 Any target price for the recommended stocks will not be provided. This is because we believe in a
long-term investment horizon stretching over decades throughout boom and bust phases of markets
and the economy and do not believe in selling stocks over short-term price or business performance
changes. We do not provide any return expectations. Good stocks are expected to provide good
returns over a long period of time. We continuously monitor the stocks and usually sell when the
fundamentals of the company deteriorate. Whenever any stock deserves selling, then we will update
the same on the page and send an email update to the subscribers.
 Regular quarterly or annual reviews of stocks after results will not be provided. This is because
instead of quarterly/annual reviews, we monitor stocks continuously and will update the subscribers
whenever our views about the company change. If our views about the company stay the same,
then we may not provide any updated review about the company even for many quarters. On the
contrary, if our views about the company change, then we will immediately update the subscribers
and not wait for the quarterly or annual results declaration by the company. The aim is to
communicate with subscribers only when there is something necessitating a change in our views
and not inundate the subscribers with regular reviews etc.
 Reviews based on every corporate action, event etc. will not be done. Most of the events/corporate
actions may not change our views about the companies; therefore, we do not provide any
updates/reviews based on very corporate actions/events. However, please rest assured that we
continuously monitor the companies and in case there is any significant event/action, then we will
provide a review/update.
 No on-demand/on-request updates on the recommendations would be provided. We would update
the recommendations on our own when our views change.
 One-to-one discussion about the “Recommended Stocks” with subscribers will not be done.
 Replies to subscribers’ queries about the “Recommended Stocks” will not be provided. If there is
any development about the stock where we believe that an update needs to be provided, then we
will provide it on our own.
 Any advice about allocation to the stocks in the list will not be provided. Subscribers need to take
this decision on their own.
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Instructions to subscribers:
 It is a subscription service. The access to “Recommended Stocks” will expire after the subscription
period gets over unless a renewal is done.
 Please note that once this premium service is availed, then there is no provision of any refund of
fee or cancellation of service during the period of subscription.
Frequently Asked Questions
Q: How many stocks are currently there in the “Recommended Stocks” list?
On June 11, 2022, the list contains 7 stocks. The latest information about the number of stocks and
recommendations is available only to subscribers.
Q: Do you advise any minimum capital for investment in “Recommended Stocks”?
We do not provide any guidance about any minimum capital for investment. An investor needs to make
this decision on her own.
Q: How often do you add new stocks or remove existing stocks from the recommended stocks list?
Adding new stocks: We follow a very stringent stock-selection process. Only when a stock clears our
parameters, then we add it to the recommended list. My experience shows that usually, I add one new stock
in a year. This is the pattern for the last many years. However, it may or may not stay the same in the future.
Nevertheless, as the stock prices are very volatile; therefore, buying opportunities keep on arising within
the existing stocks in the recommended stocks’ list. We will monitor the stocks continuously and update
the recommendation whenever our views about the stocks change.
Selling existing stocks: We follow a very long-term investment horizon, which extends into decades.
Therefore, we keep very strict stock selection criteria. As a result, for most of the stocks we select, we do
not need to sell them and the stocks will continue to be in the recommended stocks until they stay
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fundamentally good. Only when any stock loses our confidence, then we remove it from the list. Our
experience indicates that we may remove a stock every 2-3 years; however, it may or may not stay the same
in the future.
Q: Do you prefer any sector or market capitalization segment etc. while making stock
recommendations?
We prefer to find stocks, which show growth opportunities with good profit margins where the companies
can finance the growth from their profits without raising a lot of debt or equity. In this process, we do not
differentiate stocks based on any market cap. Whenever we find any good stock meeting our stringent
selection process, then we add it to the recommended list irrespective of its market cap. It has been our
experience that most of the time, such stocks belong to the mid or small-cap segment. However, it is not an
intentional focus on mid or small caps and we tend to focus on the fundamental qualities of the stocks
without ignoring any market cap segment.
We follow a bottom-up approach for stock selection. Therefore, we do not prefer any sector when we make
a stock selection.
Regards,
Dr Vijay Malik
P.S. Please note that the information received through this premium service is for the sole use of the
subscriber and is not to be shared with anyone else.
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2) Peaceful Investing - Workshop Videos
This service allows access to the videos of full-day fundamental investing workshop elaborating our stock
analysis approach “Peaceful Investing”.
The workshop covers all the aspects of stock investing like how to shortlist and analyse stocks in detail,
which stocks to buy, what price to pay, how many stocks to buy, how to monitor the stocks, when to
sell a stock etc. The workshop focuses on key concepts needed for stock analysis both for a beginner and
seasoned stock investor using live companies as examples.
Peaceful Investing - Workshop Videos has been launched primarily with two objectives:
1. To allow the investors across the world to watch the complete full-day “Peaceful Investing”
workshop ONLINE on their laptop/mobile phone at any time & place of their convenience at their
own pace, as many times as they can, during the period of subscription.
2. To allow an opportunity for past participants of “Peaceful Investing” workshops to revise the
workshop and refresh the learning.
You can watch a FREE Sample Video (16 min) of the workshop where we have discussed the basics of
balance sheet along with fund flow analysis on the following link:
Peaceful Investing - Workshop Videos
Subscription to this service provides access to the videos of the full-day workshop having a total duration
of about 9hr:30m.
These videos are divided into the following subsections for easy access and revision:
1. The Foundation:
 A) Introduction to Peaceful Investing (24m:31s)
 B) Demonstration of Screener.in website and its Export to Excel Feature (28m:56s)
 C) Using Credit Rating Reports for Stock Analysis (38m:11s)
2. Financial Analysis:
 A) Analysis of Profit & Loss Statement (1h:12m:37s)
 B) Analysis of Balance Sheet (27m:14s)
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 C) Analysis of Cash Flow Statement (27m:24s)

 D) Combining Different Financial Statements (22m:40s)
3. Business & Industry Analysis (21m:55s)
4. Valuation Analysis (20m:17s)
5. Margin of Safety Assessment: Deciding what price to pay for a stock (1h:08m:03s)
6. Management Analysis (1h:15m:07s)
7. Portfolio Management: (How to monitor the stocks, How many stocks to own, When to sell, Stocks
which are ideal for Part-Time investors) (51m:54s)
8. Q&A (1h:24m:38s)
We believe that a person does not need to have an educational background in finance to be a good stock
investor and the workshop has been designed keeping this in mind. The workshop explains the financial
concepts in a simple manner, which are easily understood by investors from a non-finance background.
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3) Stock Analysis Excel Template (compatible with Screener.in)

We use a customized excel template to analyse stocks as per our preferred parameters by using the data
downloaded from the screener.in website. The template acts as a dashboard of key analysis parameters,
which help us in making an opinion about any stock within a short amount of time (sometimes within a few
minutes). We have used this excel template and the analysis output in many stock analysis articles published
on this website.
You may read about various stock analysis articles written by analyzing companies using the excel template
in the "Author's Response" segments on the following link: Stock Analysis Articles
In the past, many readers/investors have asked us to provide a copy of this excel file. However, until now,
we have not put the excel template in the public domain for download. We have always advised investors
to customize the standard screener excel template as per their own preferences and their learning about
stock analysis from different sources. Customization of excel template on her own can be a very good
learning exercise for any investor.
However, due to repeated requests for sharing the excel template, we have decided to make the customized
excel stock analysis template, which is compatible with screener.in and provides stock data as a dashboard,
as a paid download feature.
Investors who wish to get the customized excel stock analysis template may download it from the following
link:
The structure and sample screenshots of the stock analysis excel template file are as below:
1) Analysis sheet:
This sheet presents values of more than 40 key parameters in the form of a dashboard. These parameters
cover analysis of profitability, capital structure, valuation, margin of safety, cash flow, creation of wealth,
sources of funds, growth rates, return ratios, operating efficiency etc.
Having a quick look at these parameters in the form of the dashboard helps in a quick assessment of the
company, its historical performance and its current state of affairs.
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Screenshot of large resolution output of the Analysis Sheet: Click Here
2) Instructions sheet:
This sheet contains details about the steps by step approach to getting started with this sheet on the
screener.in website, change in settings for Microsoft Excel to resolve common issues and other instructions
for the buyers.
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Screenshot of the Instructions Sheet: Click Here
See the step by step guide for uploading the excel sheet on Screener.in with screenshots: How to Use
Screener.in Export to Excel tool
3) Version history:
This sheet contains details about the changes/updates made in each of the new versions of the sheet.
Users'/Investors' Feedback about this Stock Analysis Excel Template:

The stock analysis excel template was initially made available for download on July 11, 2016. Hundreds of
investors have downloaded the same and quite a few of them have provided their inputs about the excel
template. Here are some of the responses sent by the users of this template:
“This is a great tool for getting down to the heart of a company's financials.
When I was doing my MBA at NYU I had a valuation professor who encouraged everyone in the class of
60 to make their own customized sheet similar to what you've made. I was a fan of Buffett so I remember
keeping some of his metrics in view and creating a sheet! Of course, yours is head and shoulders above
anything else I've seen - kudos!”
- Uday (via email)
The excel template is quite useful. It makes things easy for us in not doing the hard labour and calculating
all vital data for each company separately.
- Ashish
“Thank you Dr. Malik. The tool is indeed very useful and super-fast to use. God bless you for creating it!
Please use this as part of your training to perform financial analyses of different types of companies in
different performance contexts across industries. I am sure others will also love it.”
- Harsh (via email)
"Dear Sir, I have downloaded the excel. It's simply AMAZING, EFFORTLESS and AWESOME. Kudos
to you and your team for wonderful creation.”
- Vikram (via email)
“Very good tool created for Stock analysis. Very helpful. Thank you sir”
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- Jiten (via email)
For further details please read this article:
Stock Analysis Excel Template (Screener.in)
P.S: Please read all the instructions on the payment page, carefully before making the purchase of the excel
template.
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4) e-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock

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

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

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

These ebooks contain guidelines to do business analysis of companies belonging to different industries.
After reading these ebooks, an investor will learn which factors influence the business of companies in
these industries. You will learn to identify what makes a company stronger than others in these industries.
This knowledge will help you in selecting fundamentally strong companies for investment.
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6) “Peaceful Investing” Workshops

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

Registration Status with SEBI:
I am registered with SEBI as a Research Analyst.
Details of Financial Interest in the Subject Company:
Currently, on the date of publishing of this book, February 03, 2022, 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 one-off opinion snapshots at the date of the article. We do not plan to
have continuous coverage of these companies by updating the articles or the book after future quarterly or
annual results.
Therefore, we would not update the articles or the book based on the future results declared by the
companies.
Therefore, we recommend that the book and the articles should be taken as an illustration of the practical
application of our stock analysis approach “Peaceful Investing” and NOT as a research report on the
companies mentioned here.
The articles and the book should be used by the readers to improve their understanding of our stock analysis
approach “Peaceful Investing” and NOT as an investment recommendation to buy or sell stocks of these
companies.
All the best for your investing journey!
Regards,
Dr Vijay Malik
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DrVijayMalik Company Analyses Vol 9

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Copyright © Dr Vijay Malik. All Rights Reserved.

Company Analyses (Vol. 9)

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 services of www.drvijaymalik.com

Printed in the Republic of India

Copyright © Dr Vijay Malik. All Rights Reserved.

Important: About the book

All the best for your investing journey!

Regd. with SEBI as a Research Analyst

Copyright © Dr Vijay Malik. All Rights Reserved.

Important: About The Book .......................................................................................................................... 4

Copyright © Dr Vijay Malik. All Rights Reserved.

1) Deepak Nitrite Ltd

Company website: Click Here

Financial data on Screener: Click Here

Copyright © Dr Vijay Malik. All Rights Reserved.

FY2014 annual report, page 94:

FY2015 annual report, page 33:

FY2015 annual report, page 44:

Copyright © Dr Vijay Malik. All Rights Reserved.

Copyright © Dr Vijay Malik. All Rights Reserved.

Financial and Business Analysis of Deepak Nitrite Ltd:

1) Dependence of raw material of Deepak Nitrite Ltd on crude oil prices:

Conference call, February 2021, page 11:

Copyright © Dr Vijay Malik. All Rights Reserved.

FY2016 annual report, page 37:

FY2010 annual report, page 23:

Conference call, May 2011, page 2:

Copyright © Dr Vijay Malik. All Rights Reserved.

FY2015 annual report, page 32:

Copyright © Dr Vijay Malik. All Rights Reserved.

Conference call, February 2011, page 5:

Conference call, October 2021, page 3:

Copyright © Dr Vijay Malik. All Rights Reserved.

Conference call, May 2011, page 2:

Conference call, May 2021, page 4:

FY2010 annual report, page 27:

Copyright © Dr Vijay Malik. All Rights Reserved.

FY2016 annual report, page 37:

3) Challenges in increasing prices to customers despite formula-linked

QIP prospectus, January 2018, page 38:

Q2-FY2022 press release, October 2021, page 2:

Copyright © Dr Vijay Malik. All Rights Reserved.

Conference call, May 2021, page 4:

FY2015 annual report, page 34:

Conference call, May 2012, page 3:

Copyright © Dr Vijay Malik. All Rights Reserved.

QIP prospectus, January 2018, page 44:

Conference call, February 2021, page 19:

Conference call, February 2021, page 3:

…challenges on international shipping, due to container and ship unavailability.

Conference call, August 2021, page 9:

Conference call, October 2021, page 6:

There were supply restriction bottlenecks due to container shortage…

Conference call, May 2021, page 10:

Copyright © Dr Vijay Malik. All Rights Reserved.

Conference call, May 2021, page 13:

Sanjay Upadhyay: In fact, today we are running at 130% capacity utilization

4) Lack of long-term contracts with customers and suppliers: