DrVijayMalik Company Analyses Vol 10

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com
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Copyright © Dr Vijay Malik. All Rights Reserved.

www.drvijaymalik.com
Company Analyses (Vol. 10)
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) Polycab India Ltd ................................................................................................................................... 6
2) Tata Elxsi Ltd........................................................................................................................................ 43
3) Laurus Labs Ltd ................................................................................................................................... 83
4) RHI Magnesita India Ltd................................................................................................................... 138
5) Lloyds Metals And Energy Ltd ......................................................................................................... 160
6) Asahi India Glass Ltd ......................................................................................................................... 206
7) Godfrey Phillips India Ltd ................................................................................................................. 252
8) Sharda Cropchem Ltd........................................................................................................................ 309
9) Safari Industries (India) Ltd.............................................................................................................. 346
10) Accelya Solutions India Ltd ............................................................................................................. 380
How To Use Screener.In "Export To Excel" Tool ............................................................................... 406
Premium Services.................................................................................................................................... 431
Disclaimer & Disclosures ....................................................................................................................... 447
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1) Polycab India Ltd

Polycab India Ltd is India’s largest manufacturer of cables and wires. The company also manufactures fans,
lights, switches, and optical fibre cables, as well as do engineering, procurement and construction (EPC)
work for electricity and data transmission projects..
Company website: Click Here
Financial data on Screener: Click Here
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Polycab India Ltd had come up with an initial public offer (IPO) in April 2019. Its red herring prospectus
(RHP, click here) contained financial information from FY2014 onwards. Therefore, financial databases
like Screener have financial data of Polycab India Ltd from FY2014 onwards on their websites.
While analysing the history of Polycab India Ltd, an investor notices that over the years, the company had
many subsidiaries and joint ventures both in India and overseas to conduct its business. As per the Q3-
FY2022 results announcement, pages 2-3, on December 31, 2021, Polycab India Ltd had eight subsidiaries
and one joint venture (JV) company after excluding Ryker Base Private Limited, which it sold to Hindalco
Industries Ltd during the quarter.
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. The consolidated financials of a company present such a picture.
Therefore, in the case of Polycab India Ltd, we have analysed consolidated financials from FY2014
onwards.
With this background, let us analyse the financial performance of Polycab India Ltd.
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Financial and Business Analysis of Polycab India Ltd:
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While analyzing the financials of Polycab India Ltd, an investor notices that the sales of the company have
grown at a pace of 12% year on year from ₹3,986 cr in FY2014 to ₹8,927cr in FY2021. Further, the sales
of the company have increased to ₹11,297 cr in the 12-months ended December 31, 2021, i.e. during Jan.
2021-Dec. 2021.
While analysing the sales growth of the company, an investor notices that the sales of the company
increased every year since FY2014.
On similar lines, while analysing the profitability of Polycab India Ltd, an investor notices that the operating
profit margin (OPM) of the company has also increased consistently from FY2014 until FY2021. The OPM
of Polycab India Ltd increased from 7.5% in FY2014 to 13.1% in FY2021. The OPM of the company
declined only on two occasions. First, during FY2017 when the OPM declined to 8.7% from 9.5% in
FY2016 and second, during the 12-months ended December 31, 2021, i.e. during Jan. 2021-Dec. 2021 when
the OPM declined to 10.7% from 13.1% in FY2021.
To understand the reasons for the financial performance of Polycab India Ltd, an investor needs to read the
publicly available documents of the company like annual reports, conference calls, credit rating reports, red
herring prospectus 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 profitability in
certain periods.
After going through the above-mentioned documents, an investor notices the following key factors, which
influence the business of Polycab India Ltd. An investor needs to keep these factors in her mind while she
makes any predictions about the performance of the company.
1) Intense competition with a continuous pricing pressure:

The cables and wires, as well as the electrical goods industry, are highly fragmented and competitive where
the unorganized sector constitutes a significant part of the industry. Almost 50% of the wires segment is
under unorganized players.
FY2020 annual report, page 41:
In segments like wires, where unorganised make nearly half of market.
Similarly, other segments of Polycab India Ltd. also have a significant presence of unorganized players as
well as other organized players. All these players create intense competition in the industry, which dilutes
the pricing power of companies.
Credit rating report for Polycab India Ltd. by CRISIL, July 2018, page 1:
Exposure to intense competition: The house wires and electrical cables segment is highly
fragmented with a large number of unorganised players, constraining the pricing power of organised sector
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players. Apart from unorganised sector, PWPL also faces competition from organised sector players such
as Havells India Ltd, Finolex Cables Ltd, and Kei Industries Ltd.
Polycab India Ltd acknowledged that for standardized/commoditised products, there is intense pricing
competition and the company has to sell goods at a cheaper price to gain business.
RHP, April 2019, page 519:
For our more commoditized products, we compete primarily on price and our profitability depends
on our ability to effectively manage our expenses, leverage economies of scale and secure large
order volumes.
The price competition is so intense in some of the product segments like lighting that there has been price
erosion over the last few years.
The lighting industry…is characterised as a very competitive market, particularly on the price
front, due to aggressive pricing by some large players and subsequent retaliation by others.
2) Very high dependence of Polycab India Ltd on basic commodities:

While analysing the financial performance of Polycab India Ltd, an investor notices that a major portion of
its raw materials is basic commodities like copper and aluminium. In addition, it uses polyvinyl chloride
(PVC), which is dependent upon crude oil.
The section “Details of Material Consumed” in the FY2021 annual report, page 199 shows that on a
consolidated basis, copper (61.5%), aluminium (15%) and PVC (13%) constitute about 90% of overall raw
material cost for Polycab India Ltd. Therefore, any change in the prices of these commodities puts a
significant challenge for the company.
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The prices of commodities like copper, aluminium as well as crude oil fluctuate significantly and follow a
cyclical pattern of a rise and fall.
The following chart of copper prices from 2005 to 2022, taken from Macrotrends, shows a very high degree
of cyclicity with prices fluctuating from $1.5 to $4.5 per pound.
Similarly, aluminium prices have also shown wide fluctuations from $1,500 to $3,500 per tonne from 2006
to 2022 (source: tradingeconomics).
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During the same period, crude oil prices, which affect PVC prices, fluctuated from $20 to $110 per barrel
while crossing $140 per barrel in 2008.
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Therefore, an investor would appreciate that the input cost of almost 90% of Polycab India Ltd.’s raw
material fluctuates wildly. Managing profitability with such sharply fluctuating input costs in an industry
with intense competition becomes a challenge for any company.
However, when an investor notices the operating profit margin (OPM) of Polycab India Ltd., then she
notices that the company has not only maintained its profitability; in fact, it has improved its OPM over the
years.
Let us see how the company has been able to maintain its profit margin in the face of fluctuating input costs.
3) Flexibility to fix prices of inventory up to 90-days after purchase:

Polycab India Ltd. gets a period of 90-days from its suppliers after the purchase of copper and aluminium
to fix the final price of purchase. This 90-day window/flexibility helps the company in reducing the impact
of volatile copper and aluminium prices.
Red herring prospectus (RHP) of Polycab India Ltd., April 2019, page 210:
Since the selling prices of our products are affected by the prices of our primary raw materials,
strong and rapid fluctuations in the prices of these raw materials and the inability to pass on the
cost increase to our customers could negatively affect our operating results. To manage such risks,
we have agreements with a majority of our suppliers, pursuant to which we typically have a 90-
day window to price our products from the time of raw material procurement, primarily relating
to our copper and aluminium products. This allows us to factor in the costs of the raw materials
when we enter into any sales contracts and accordingly pass on any increase in the prices of raw
materials to our customers.
Let us see how the flexibility window in pricing helps Polycab India Ltd.
For example, let us assume that Polycab India Ltd. buys copper on January 1 and the supplier ships the
copper to the company without fixing the final price of copper. If on January 1, the price of copper on the
LME (London Mercantile Exchange) is $3.00 per pound, then it becomes the provisional purchase price
for Polycab India Ltd.
Now, let us assume that the shipment of copper would take about 2-months to reach the company. In the
meanwhile, on February 20, Polycab India Ltd. gets an order from its customer when the price of copper
on LME is $2.50 per pound. Then due to the flexibility window of 90-days in pricing, Polycab India Ltd.
can fix the purchase price of copper at $2.50 per pound and use the same in determining the final price of
cables/wires to the customer on February 20th.
In this way, Polycab India Ltd. can enter into contracts with its customers based on current prices on the
date of the contract and change the price of its purchased raw materials. It helps Polycab India Ltd. maintain
its profit margins. Otherwise, if the final price of copper were fixed at $3.00 per pound for Polycab India
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Ltd. on January 1 whereas the customer contract is dated February 25 when the copper price is $2.50 per
pound, then the customer would be willing to pay a price according to the prevailing lower copper prices.
In such a case, Polycab India Ltd. would have to incur a loss of $0.50 per pound on the sale transaction.
However, Polycab India Ltd does not have such pricing arrangements with all of its suppliers. About 90%
of purchases are covered under such flexible pricing contracts.
Credit rating report of Polycab India Ltd by India Ratings, April 2016, page 1:
According to management, over 90% of its sales are via this mechanism, and it is hence protected
from commodity and forex volatilities to a large extent.
For the remaining purchases, it buys commodities only when it has received an order from the customer so
that the customer price as well as raw material buying prices, both represent current commodity prices and
the company makes its expected profit margin.
For most of our other suppliers with whom we do not have such pricing windows, we tend to
submit purchase orders for raw materials back-to-back at or around the same time as we receive
orders from customers, to help minimize our open raw material positions.
For engineering, procurement and construction (EPC) business, Polycab India Ltd generally keeps price
escalation clauses in the contracts, which protects it from raw material fluctuations after the project work
has commenced.
For our EPC business, in which we tend to have longer-term contracts to supply products to our
customers, we generally include price variation clauses in our contracts so that the sales price of
our products gets adjusted periodically based on a formula that takes into account changes in raw
material prices.
Therefore, in the case of large contracts where the company directly deals with the customers (B2B
business), it is able to mitigate the variations in the raw material prices by way of flexibility in the pricing
of purchased commodities whenever it enters into contracts with customers. For the remaining cases, it
buys raw materials back-to-back from customer orders and keeps price escalation clauses in EPC contracts.
Let us see, how the company deals with raw material fluctuations for its B2C segment (retail wire sales and
electronic goods), which constituted about 40% of its sales in FY2021.
Credit rating report of Polycab India Ltd by India Ratings, June 2021, page 1:
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B2C segment grew by around 700bp yoy to 39.4% in FY21, led by the 20% yoy growth in the
housing wires business
4) Ability to pass on the increase in raw material cost and foreign exchange
variations to customers:
Polycab India Ltd intimated to its shareholders that it has a practice of adjusting the prices to its customers
monthly where it passes on all the changes in the commodity prices as well as changes in the foreign
exchange.
Conference call, October 2020, page 21:
Gandharv Tongia: Prashant, our business, in our case, it is a simple pass-through generally
speaking. So whatever is the increase in copper, copper LME side as well as change in the foreign
exchange rate in USD/INR, it generally passed on a monthly basis and that is what we have
followed in this quarter as well.
When the changes in the raw material prices are sharp, then it changes the prices to the customers within a
month as well.
When the fluctuation in prices of raw materials goes beyond a certain level during the period
concerned, list prices of products are revised as and when required. In this way, any increase or
decrease in the prices is passed on to end-customers by adjusting the percentage of discount or
list prices with a maximum lag of one month.
Therefore, Polycab India Ltd could maintain its profit margins by regularly passing on the changes in the
input costs to its customers. However, an investor notices that the OPM of the company has increased over
the years.
One of the reasons for the increase in the OPM is that though the company increased its prices whenever
its input costs increased; however when the costs declined, then it did not pass on all the benefits and instead
retained some of the benefits, which led to an increase in profit margins.
For example, Polycab India Ltd retained some of the benefits of lower commodity prices in FY2019 due to
which, its OPM increased from 10.8% in FY2018 to 11.9% in FY2019.
Conference call, May 2019, page 14:
Ramakrishnan R:…we do not retain the risk of commodity prices within our business. We pass it
on. Sometimes it is quite likely for example in a period where commodity prices are coming down,
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it is possible that we may not pass on the benefit of the commodity price having come down
adequately
Therefore, Polycab India Ltd increases its product prices when its input costs increase; however, at times,
it did not decrease its prices enough when input costs declined. This practice has contributed to the increased
profit margins of the company over the years.
The company has started to give up low margin business, which has contributed to an improvement in
profitability.
Gandharv Tongia:…On the domestic side, distribution channel performed better than the institutional
business where we had to pass on some margin dilutive business.
In addition, in the electrical goods segment, the focus on the premium products in electrical goods, as well
as a phased increase in electrical goods prices to bring them in line with the industry has added to the
improved profitability. Initially, to gain a market share, Polycab India Ltd had offered its electrical goods
at a discount to its competitors. It is now reducing the pricing gap.
Gandharv Tongia: FMEG segment EBIT margin rose from 3.3% in Q2 FY2020 to 8% in the
previous quarter, led by calibrated pricing action, premiumization, productivity improvement
Conference call, June 2021, page 19:
Gandharv Tongia: In the mature product categories within the FMEG, we have already reached
to the industry level gross margin, which is give and take 2% points here and there around 30%
or thereabout and in the product category which are comparatively smaller within the FMEG
basket, there is some scope for improvement in margin.
Other factors leading to improving profit margins include improvement in the sales mix i.e. higher sales of
high-margin retail wires and increasing operating leverage where fixed costs are spread across a higher
volume of sales and in turn, increase profitability.
Gandharv Tongia: In the Cable and Wire business, the B2C business which is a retail wire is
more profitable than the regular B2B Cable Business
Credit rating report by India Ratings, September 2019:
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PIL’s margins excluding other income improved -83bp yoy to 11.6% in FY19 owing to improved
sales mix, expansion in contribution spread and growth in all segments.
From the above discussion, an investor may think that the pricing decisions are very easy for Polycab India
Ltd. It can easily increase prices when the input prices increase and it can choose not to pass on full benefits
when input prices decline. However, the cable and wires, as well as the electrical goods industry, are highly
competitive where many unorganized and organized players compete for business.
As a result, there are times when despite an increase in raw material costs, it could not pass on the cost
increase fully. This is because; the company could have lost business if it increased prices further. The
company faced such a situation in the second half of FY2021.
Conference call, January 2021, pages 6 and 10:
Gandharv Tongia: all the raw material prices increased very significantly in the last three
months, between September to December quarter. Copper and aluminium, both increased almost
by 15%, and PVC has increased almost by 50%. So, what we did is, we took a conscious call not
to pass on all the cost inflation, considering the market environment
The company confirmed that it could not increase prices due to high competition.
Aditya Bagul: I was just trying to link your comment earlier that you have not passed on the full
impact of higher input cost to the customer. So I was just trying to wonder whether it was linked
to a higher competitive intensity…hence, we have not passed on the input cost. Is there any truth
to that?
Gandharv Tongia: Yes, I think we can attribute a part of it to that.
Once again, in FY2022, the company could not increase prices to its customers for the fear of losing the
business.
Conference call, July 2021, page 6:
Gandharv Tongia: On a blended basis the raw material cost would have increased by in early
teens whereas the price hike which we have taken is just touching the double digit so there is a bit
of a negative delta there
The company accepted that if it increases the prices further, then its goods would become unaffordable for
the customer. In addition, there is pricing pressure from competitors; therefore, if it had to gain a market
share, then it would have to de-prioritize margin improvement.
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Gandharv Tongia: We are trying to cut a fine balance between managing profitability and
customer affordability, but overall for this year we believe our main priority will be aggressive
market share gains as against margin improvement
As a result, during the 12-months ended December 2021 (i.e. January 2021 to December 2021), the OPM
of Polycab India Ltd declined to 10.7% from 13.1 % in FY2021.
As per the company, its operating margins in the core cables & wires business tend to sustain in the range
of 11%-13%. An investor may keep the same in her mind while she projects its profit margins in the future.
Conference call, January 2020, page 3:
Gandharv Tongia: Historically, we have noted that our annualised sustainable margin in Wires
and Cable business typically tends to hover in the range of 11% to 13%
5) Shifting of business from the unorganized sector to the organized sector:

Polycab India Ltd has managed to increase its revenue every year since FY2014. This is despite intense
competition in the cable & wires as well as the electrical goods industry from the unorganized sector as
well as other organized players.
One of the main reasons for it has been a continuous shift of the business from the unorganized sector to
the organized sector.
Gandharv Tongia: Almost five years back as you know unorganised sector was almost 39% of
the total industry, last year it was almost 34% as per one independent study, and it appears that it
would be close to 26% by 2023.
Apart from the better quality of products and the service from organized players, other factors like
implementation of goods and services tax (GST) as well as policy measures like mandatory star rating of
appliances have also contributed to the shift of business from the unorganized sector to the organized sector.
During the year, growth in unorganised sector was muted. Implementation of GST and star rating
becoming mandatory further hampered the unorganised trade thereby reducing price pressure for
organised players.
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In addition, in recent times, the coronavirus pandemic has made it very difficult for the unorganized sector
to sustain its business, which has increased the shift of business to the organized sector.
Gandharv Tongia:…share of unorganized participant is reducing over the period and I think
the rate of reduction has hastened in last few years. It started with demonization and then the GST,
but particularly because of the pandemic, availability of capital, cost of capital and availability of
labour probably pushed the unorganized sector to a point where recovery is very difficult for them.
So that is where on the large players, including us, are gaining some market share.
As a result, Polycab India Ltd has seen its business increase in size over the years assisted by the shifting
of business from the unorganized segment to the organized segment.
From FY2014 to FY2021, the company has improved its business by increasing both its revenue as well as
its profitability. However, in recent times, it has faced challenges in maintaining its profit margins due to
very high competition. Going ahead, an investor should keep a close watch on the profit margins of the
company to assess whether the company continues to maintain its competitive advantages.
While analysing the tax payout ratio of Polycab India Ltd., an investor notices that from FY2014 to FY2020,
the tax payout ratio of the company has been in line with the standard corporate tax rate prevalent in India.
Until FY2019, it was above 30% and in FY2020; it was 24% in line with the reduced corporate tax rate in
India. However, in FY2021, the company reported a tax payout ratio of 17%, which is much lower than the
standard corporate tax rate.
The tax payout ratio in FY2021 is low because the company won a dispute against the Income Tax Dept.
for a total consideration of about ₹100 cr.
During the year, the Parent Company had received a favourable order from Honourable Income-
Tax Appellate Tribunal for AY 2012-13 to 2015-16 resulting into write back of income-tax
provision of ₹839.52 million and recognition of interest on income tax refund of ₹163.89 million.
Operating Efficiency Analysis of Polycab India Ltd:
a) Net fixed asset turnover (NFAT) of Polycab India Ltd:

Over FY2015-FY2021, the net fixed asset turnover (NFAT) of Polycab India Ltd has stayed in the range
of 5.2 to 6.5.
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When comparing the NFAT of Polycab India Ltd with its peers, KEI Industries Ltd and Finolex Cables Ltd,
an investor notices that the company’s NFAT is lower than its peers who have NFAT in the range of 7.0 to
9.5.
The key reason for a lower NFAT for Polycab India Ltd is the policy of the company to prefer to make
most of its products in-house instead of outsourcing them. The company believes that it can produce the
best quality of products when it makes them in-house.
Gandharv Tongia: We as a company firmly believe in in-house manufacturing. Over the last
few years, we have carried out several steps to ensure that we have adequate backward
integration in place…The mindset and the thought process of the company is to ensure that we get
the best quality
As per the company, field returns of its products i.e. the return of faulty products is the lowest in the
industry.
Gandharv Tongia:..third is in-house production which gives us confidence on the quality as

well as the value for money for our consumers. You will be pleased to note that our field returns
in fans are lowest in the industry because of the quality
As Polycab India Ltd prefers to manufacture its products in-house, it makes its operations relatively capital-
intensive than its peers who may follow an asset-light strategy and outsource the production of goods.
Therefore, Polycab India Ltd has a lower NFAT indicating a relatively asset-heavy business.
As a part of its in-house manufacturing strategy, Polycab India Ltd invested in a copper-rods manufacturing
plant as a joint venture with Trafigura, which had a production capacity over Polycab’s requirements.
Credit rating report of Polycab India Ltd by India Ratings, May 2020:
PIL would consume about half of Ryker’s production capacity to meet its copper requirement while
the balance would be sold through various tolling or partnership opportunities.
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However, soon after the completion of this plant, Trafigura exited this business and Polycab India Ltd
acquired its stake to own the whole plant.
Gandharv Tongia: However, post Trafigura’s recent global strategic decision to exit from value
added manufacturing businesses in India where it is a JV partner, their 50% stake was offered to
us and we decided to acquire it making Ryker a wholly owned subsidiary of our company.
However, Polycab India Ltd could not sell the excess copper-rods capacity in the market. As a result, it
became a pain point for the company because it was not able to run it to optimal capacity utilization resulting
in very low profitability of the copper-rods plant.
Gandharv Tongia: we have a small copper business which has significantly lesser contribution
margin
Gandharv Tongia: We are using broadly 1/3 of this total capacity and that is where this
particular capacity is underutilized. We are exploring ways and means to either improve the
capacity utilization by improving the internal consumption or looking for third party tie up through
job work or other arrangement to improve the margins and cost of operation there.
As a result, the company had to sell the copper-rods business to Hindalco Industries Ltd.
Therefore, going ahead, an investor should monitor the capital allocation projects where the company may
enter into projects where it may land up with a manufacturing capacity far more than its own consumption.
This is because even though, it could sell the copper-rods plant at a profit to Hindalco, it may not find a
profitable deal for the excess production.
b) Inventory turnover ratio of Polycab India Ltd:

The inventory turnover ratio (ITR) of Polycab India Ltd has declined from 6.3 in FY2015 to 4.6 in FY2021.
The ITR witnessed a sharp decline over FY2015-FY2017 when it reduced to 4.4 in FY2017. A declining
ITR indicates that the inventory utilization efficiency of the company is declining over the years.
After its IPO in 2019, the company received strong feedback from market participants that it needs to work
on improving its inventory utilization. The company acknowledged the same and even hired a consultant
to work on improving inventory efficiency.
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Gandharv Tongia: Having said that, inventory is a focused area, we want to reduce it. We have
started taking several management initiatives including hiring of the third-party management
consultant
The company aimed to reduce its overall inventory holding and also increase the number of items it kept
within that reduced inventory.
Gandharv Tongia: The objective was twofold, one is reducing the absolute amount of
inventory which we are carrying on our books so that we can reduce the working capital involved.
The second is, within that reduced amount, increase the number of SKU. So, you increase the
availability and you reduce the amount, so you get twin benefits. That project is progressing well.
We have already achieved a bit of success
Even though the company claimed to achieve success, if a person measures the inventory turnover ratio
(ITR), then she notices that the steps of the company are yet to produce a significant result.
One of the key reasons for a lower inventory turnover or maintaining a large amount of inventory by
Polycab India Ltd is that the company prides itself on the quickest delivery of goods to its customers.
Gandharv Tongia: The other thing is, generally speaking, we have ability to provide the
required material just in time or within a day or two and that is a significant differentiator between
us and our peers in the industry.
If a company has a very wide range of products and it aims to make quick delivery of goods, then it has to
maintain a large amount of inventory in its warehouses and distribution channel, which makes its operations
working capital intensive.
Credit rating report of Polycab Industries Ltd by CRISIL, April 2019:
Working capital intensity is higher than industry peers
The company has to balance the target of inventory reduction with ensuring quick availability of goods to
the market, which is its key competitive advantage. The company seems to prefer quick delivery as it
benefits the customers. Therefore, it may be a challenge for the company to sharply reduce the inventory
holding.
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Gandharv Tongia: But to answer your question that whether the inventory can be further
optimized or not I believe that yes certainly it can be further optimized but what we want to at the
same time ensure is that we increase the availability because that is the clear differentiator for
us at every market place. And the OTIF or on time in full delivery is generally between 95% and
98% as of now which has improved significantly I would say over the last three to four years and
we as a company would like to reach to 100%.
Going ahead, an investor should keep a close watch on the inventory utilization efficiency of Polycab India
Ltd to understand if it is able to bring any improvement in the same or if the cost of management consultants
is an added financial burden for the shareholders.
c) Analysis of receivables days of Polycab India Ltd:

Receivables days of Polycab India Ltd have improved significantly from 79 days in FY2015 to 59 days in
FY2021.
Polycab India Ltd has used channel financing to improve its receivables position in which it receives the
money from the bank within 3 working days of supplying goods to the customers. In turn, the bank collects
the money from the customers when it is due as per the payment terms. Otherwise, previously in FY2014
and FY2013, the receivables days were even higher at 86 days and 104 days respectively.
Credit rating report of Polycab India Ltd by India Ratings, January 2015:
Sustained Improvement in Working Capital: PWPL has been able reduce its working
capital cycle significantly over the past three years…This is attributable to lower debtors
days (FY14:86 days, FY13: 104 days) on account of higher use of the channel financing facility
A sharp improvement in the receivables days during FY2016-FY2018 was also due to the higher use of
channel financing.
Our Debtor Days has decreased from 89 days in Fiscal 2016 to 72 days in Fiscal 2018, primarily
due to our increased use of channel financing
Polycab India Ltd is encouraging its customers/dealers to opt for channel financing by giving incentives
like cash discounts.
we offer a cash discount of up to 3% of the total invoice amount if the relevant dealer or distributor
makes advance payment to us prior to dispatch or adopt channel financing.
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As a result, the share of channel financing in its receivables has been consistently on the rise. As per the
latest available data from the January 2022 conference call, channel financing has increased to about 70%
in the cable & wire business and about 50% in the electrical goods business. The company aims to improve
it further so that its working capital position becomes better.
Gandharv Tongia:…advance plus channel finances put together in cable and wire we would be
around 70% of our top line. In FMEG business, it has improved reasonably well and we are in
late 40s, almost just shy of 50%. Theoretically speaking, this number can go right up to 80s and
90s
Apart from the early receipt of money, Polycab India Ltd seems to prefer channel financing for another
important reason. Over the years, Polycab India Ltd seems to have faced challenges in collecting receivables
from its customers/dealers. At any point in time, about 10% of its overall receivables are credit impaired
i.e. there is a doubt that the company may not collect them.
In such a situation, the use of channel financing helps Polycab India Ltd avoid the credit risk associated
with the collection of receivables. This is because in channel financing, the credit risk i.e. risk of loss of
receivables is taken over by the bank.
we have increased our use of channel financing in recent years, whereby our customers enter into
arrangements with banks through which we receive payment directly from the banks, who in turn
take on credit risk and seek to collect outstanding dues from the customers. Channel
financing reduces our risk of non-payment
Therefore, channel financing helps Polycab India Ltd to receive money fast and prevents the risk of non-
payment by customers. As a result, the company is happy to provide cash discounts to any customer who
starts using channel financing.
Polycab India Ltd does not disclose the ageing schedule of receivables in its annual reports; therefore, an
investor is not able to ascertain the level of delays done by its customers in payments to the company.
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One business segment of the company, which has a history of delays in receivables is the engineering,
procurement and construction (EPC) segment. However, the company has stated that it does not want to
grow this business. Instead, it wants this segment to support its business of cable & wires as it bids only for
those EPC contracts, which have about 50% cable component.
Gandharv Tongia: We know for sure that we are not an EPC company and we do not want to
operate as such. The only thing is, we get operational advantage and leverage when we get into
EPC for our main Cable and Wire business
Ramakrishnan R.: What we try to do is pick up orders where the cable content is around 40%
or 50%.
Therefore, the company has clearly stated that it is not going to grow the EPC business significantly.
Ramakrishnan R.:…as a matter of our philosophy, EPC for us is a tactical business, we are not
aiming to take that business to Rs. 1000 Crores – Rs. 2000 Crores, I think we will be ballpark in
the vicinity of Rs. 200 Crores or thereabouts and that is where we will be.
Going ahead, an investor should keep a close watch on the credit-impaired receivables and the write-off of
bad debt to assess whether Polycab India Ltd is able to collect its money on time.
When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from
operations (cCFO) of Polycab India Ltd for FY2014-21, then she notices that over the years (FY2014-
FY2021), the company has converted its profit into cash flow from operations.
Over FY2014-21, Polycab India Ltd reported a total net profit after tax (cPAT) of ₹3,170 cr. During the
same period, it reported cumulative cash flow from operations (cCFO) of ₹4,052 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 Polycab India Ltd is higher
than the cPAT due to the following factors:
 Depreciation expense of ₹1,029 cr (a non-cash expense) over FY2014-FY2021, which is deducted

while calculating PAT but is added back while calculating CFO.
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 Interest expense of ₹729 cr (a non-operating expense) over FY2014-FY2021, which is deducted

The Margin of Safety in the Business of Polycab India 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
(For systematic algebraic calculation of SSGR formula: Click Here)
While analysing the SSGR of Polycab India Ltd, an investor would notice that over the years, the company
had an SSGR in the range of 12%-18%, which has increased further in recent years as its NPM has
improved. Over the years, the company has grown its sales at a rate of 10%-12%. Therefore, Polycab India
Ltd has grown its sales within its SSGR. As a result, the company has managed to grow its business without
raising a lot of external capital.
Polycab India Ltd came out with an initial public offer (IPO) in April 2019 and raised a total of about ₹1,345
crores. Out of it, ₹400 cr was a fresh issue of shares i.e. the money that was received by Polycab India Ltd
and the remaining about ₹945 cr was an offer for sale i.e. existing investors sold the shares and received
the money.
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On a previous occasion, during FY2010, the company had raised about ₹400 cr by selling a 15% stake in
the company by way of issuing equity shares and compulsory convertible debentures (CCDs). The CCDs
were converted into equity shares in FY2013 (RHP, April 2019, page 227).
Even though, Polycab India Ltd raised an additional capital as equity; however, over FY2014-FY2021, it
reduced its debt by ₹209 cr i.e. its total debt decreased from ₹458 cr to ₹249 cr (458 – 249 = 209). In
addition, the company has increased its cash & investments by about ₹1,116 cr as its cash position increased
from ₹50 cr in FY2014 to ₹1,166 cr in FY2021. Moreover, the company also paid out dividends (excluding
distribution tax) of ₹355 cr over FY2014-FY2022.
Therefore, even though the company raised equity of ₹400 cr from IPO; however, it seems that the company
did not need the money desperately and its business could generate sufficient cash to sustain its growth
aspirations.
An investor arrives at a similar conclusion when she analyses the free cash flow (FCF) position of Polycab
India Ltd.
b) Free Cash Flow (FCF) Analysis of Polycab India Ltd:

While looking at the cash flow performance of Polycab India Ltd, an investor notices that during FY2014-
2021, it generated cash flow from operations of ₹4,052 cr. During the same period, it did a capital
expenditure of about ₹2,265 cr.
Therefore, during this period (FY2014-2021), Polycab India Ltd had a free cash flow (FCF) of ₹1,787 cr
(=4,052 – 2,265).
In addition, during this period, the company had a non-operating income of ₹478 cr and an interest expense
of ₹729 cr. As a result, the company had a total free cash flow of ₹1,536 cr (= 1,787 + 478 – 729). Please
note that the capitalized interest is already factored in as a part of the capex deducted earlier.
Polycab India Ltd has used this money in payment of dividends as well as reduction of debt. Moreover, the
remaining money is available with the company as cash & investments of ₹1,166 cr at the end of FY2021.
Going ahead, an investor should keep a close watch on the free cash flow generation by Polycab India Ltd
to understand whether the company continues to generate surplus cash from its operations.
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 Polycab India Ltd:

On analysing Polycab India Ltd and after reading annual reports, RHP, 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 Polycab India Ltd:

Polycab India Ltd is a part of the Jaisinghani family where until recently, three brothers Inder T. Jaisinghani,
Ajay T. Jaisinghani and Ramesh T. Jaisinghani had been running the company.
Other than Inder T. Jaisinghani, Ajay T. Jaisinghani and Ramesh T. Jaisinghani being brothers,
there is no family relationship among our Directors.
As a part of succession planning, the sons of all the three promoters, Bharat A. Jaisinghani, Kunal I.
Jaisinghani and Nikhil R. Jaisinghani have joined the company in various positions.
Bharat A. Jaisinghani, Kunal I. Jaisinghani and Nikhil R. Jaisinghani are cousins, and sons of our
Promoters, namely Ajay T. Jaisinghani, Inder T. Jaisinghani and Ramesh T. Jaisinghani,
respectively.
In May 2021, two promoter brothers, Mr Ajay Jaisinghani and Mr Ramesh Jaisinghani resigned from the
board and their sons Mr Bharat Jaisinghani (age 38 years), Mr Nikhil Jaisinghani (age 36 years) took over
the board position.
Gandharv Tongia: On the Executive directors’ side Mr Ajay Jaisinghani, Mr Ramesh

Jaisinghani and Mr Shyam Lal Bajaj have stepped down from the board and Mr Bharat
Jaisinghani, Mr Nikhil Jaisinghani and Mr Rakesh Talati have been appointed as Executive
Directors…This change was a part of our larger succession planning. Bharat and Nikhil have
been working in different areas of sales, marketing, production, IT etc. for nearly a decade now.
The third promoter-brother, Mr Inder T. Jaisinghani (age 68 years) is currently serving as the chairman &
managing director of the company and his son Mr Kunal I. Jaisinghani is working as the head of agri-
products in the company (FY2021 annual report, page 43).
Apart from the promoter brother and their sons, other members of the family are also working in the
company like Mr Anil Hariani who is the nephew of the promoter brothers and is working as Director –
Commodities in the company (FY2021 annual report, page 42).
Anil H. Hariani is a nephew of our Promoters and is a cousin of Bharat A. Jaisinghani, Kunal I.
Jaisinghani and Nikhil R. Jaisinghani.
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Therefore, an investor would note that currently, the next generation of promoter-brothers has also joined
the company and been working for Polycab India Ltd for a significant amount of time.
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.
Going ahead, an investor may keep a close watch on the relationships among the promoter’s 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 Polycab India Ltd:

In its annual reports, the company does not provide details with respect to each expansion project under
execution in terms of the scope of the project, its total cost and expected time of completion. Instead, it only
provides a broad overview like next year, it is going to spend say ₹300 cr in capex, out of which about two-
third would be for cable & wires division and one-third would be for electrical goods division.
Gandharv Tongia: On the capex, we anticipate that we would incur about Rs.300 Crores odd
this fiscal, and around 35% will go for FMEG. This would include, say for example, new capex on
fan factory, TPW factory as well as factories for pipes and all that. So that is around 35%. Balance
would have a combination of a bit of a backward integration as well as cable and wire
facilities…There would be some slight maintenance costs and all that but overall the capex would
be around Rs.300 Crores thereabout.
Because of non-specific information, it is difficult for an investor to judge whether the company is
completing its expansion projects on time or there are delays.
One project, where an investor could get specific information in terms of expected cost and completion
time was the copper-rods manufacturing project established under a joint venture (JV) with Trafigura. An
investor may assess the execution of this project to have a view of the project execution of Polycab India
Ltd.
The company announced the project in the FY2017 annual report when it formed the JV in December 2016.
Ryker Base Pvt. LTD. (“Ryker”) a 50:50 Joint Venture between Trafigura PTE LTD. and Polycab
Wires Pvt. LTD w.e.f 22.12.2016. The Joint Venture will set up a 225,000 tons copper wire rod
plant with an investment of $25mln.
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In an interview in October 2017 (source), the company disclosed that it would spend ₹167 cr on the
project and commercialize it in Jan-March 2018 quarter.
total investment of about Rs 167 crore ($25 mn)…The manufacturing facility is expected to
start commercial production in the first quarter of CY 18.
Thereafter, the project witnessed delays and the credit rating agency India Ratings highlighted that the
project would be completed only in Q4-FY2019, indicating a delay of about one year.
Credit rating report by India Ratings, August 2018:
The JV expects the plant to become operational by 4QFY19.
However, the project was further delayed and in the RHP, the company said that it would complete the
project in FY2020.
We expect the Ryker Plant to commence operations in Fiscal 2020 and once fully operational, the
plant will have an annual capacity of 225,000 MT of copper wire rods
In the July 2019 conference call, while discussing the Q1-FY2020 results, Polycab India Ltd intimated to
its shareholders that the plant started commercial production in the quarter.
Ryker Plant has commenced production in the current quarter.
Moreover, the credit rating agency, India Ratings, highlighted that the project was completed with an
investment of ₹250 cr.
Credit rating report of Polycab India Ltd by India Ratings, May 2020:
Ryker commissioned a 225,000MTPA copper wire rods manufacturing plant in FY20 by

incurring capex of around INR2.5 billion which was funded by INR0.52 billion of equity and the
balance by debt
Therefore, Polycab India Ltd could complete the copper-rod manufacturing project with a delay of about
15-months and a cost overrun of about 50% (₹83 cr = ₹250 cr – ₹167 cr).
As per the capital work in progress (CWIP)-ageing schedule provided by Polycab India Ltd in its condensed
financial statements, the company has expenses lying in CWIP for more than 3-years. Such prolonged
continuation of CWIP may indicate time and cost overruns.
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Going ahead, an investor may ask the company-specific details about its expansion project in the terms of
scope of the project, its expected cost and completion timelines so that she may track whether it is
completing its projects within cost and time estimates.
3) History of weak internal controls and compliance:

There have been numerous instances in the past when auditors of Polycab India Ltd and other regulatory
authorities have highlighted weaknesses in its processes and decisions.
3.1) Auditor’s observations:
In FY2010, the auditor of the company highlighted that the company has not maintained proper cost records
and its internal control system needs strengthening.
(vii) The Company has an internal audit system, the scope and coverage of which, in our
opinion requires to be enlarged to be commensurate with the size and nature of its business.
(viii) The Company has not maintained the books of account required to be maintained by the
Company pursuant to the rules made by the Central Government for the maintenance of cost
records
In FY2015, the auditor of the company highlighted that the internal controls are weak and need
strengthening.
The internal control system for purchase of inventory is adequate except documentation of
quotation analysis for Engineering Procurement and Construction (EPC) Business and vendor
selection, which needs strengthening in the Company
In addition, the auditor also questioned the inventory records of its work-in-progress.
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The Company has maintained proper records of inventory except in respect of inventory of work-
in-progress
In FY2016, the auditor could not opine about the strength of internal financial control of Polycab India Ltd,
as the company could not provide enough documents/evidence to the auditor.
Since the company was not able to provide us with sufficient appropriate audit evidence on the
system of internal finance control… we are unable to express an opinion on the adequacy or
operating effectiveness of Internal Financial Controls over Financial Reporting as at March, 31,
2016.
In FY2017, the auditor could not confirm whether the revenue and receivables are accurate. Instead, the
auditor highlighted that internal financial controls were not working properly and there could be over or
under accrual of revenue and receivables.
The Company’s internal financial control over cut-off procedures for recognition of revenue at
the year-end and review of invoices raised for certain category of customers were not operating
effectively which could have potentially resulted in under or over accrual of revenue and
receivables in the financial statements.
In addition, there have been numerous instances where the company did not deposit undisputed statutory
dues like tax deducted at source, employee state insurance, professional tax, value-added tax and the
provident fund from FY2014 to FY2018 (RHP, April 2019, pages 524-525). Such delays in the deposit of
undisputed statutory dues were also present in FY2010 and FY2019.
3.2) Reserve Bank of India (RBI)’s observations:
In FY2017, RBI pointed it out to the company that it has not complied with FEMA guidelines in issuing
shares and compulsory convertible debentures (CCDs) in 2009, 2010 and 2016 by not filing forms FC-
GPRs. RBI cautioned the company in this regard and stressed that any future violations would be seen
seriously.
RHP, April 2019, pages 51-52:
The acknowledgement letter however noted that the Form FC-GPRs was not filed within the
stipulated period which is a contravention of 9(1) (B) of FEMA 20/2000-RB dated May 3, 2000
and further stated that any such failure by us in the future will be viewed seriously by the RBI and
the RBI will take appropriate action under FEMA.
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Later on, RBI highlighted violations of Overseas Direct Investment (ODI) regulations in the investment by
Polycab India Ltd in its Italian subsidiary.
on May 5, 2017, RBI issued a memorandum of compounding of contraventions to our Company in

respect of alleged violations of Regulation 16A(3) and 15(i) of the ODI Regulations in relation to
our Subsidiary, Polycab Wires Italy SRL
4) Huge burden of advertising costs on the electronic goods division:

In 2014, Polycab India Ltd entered the electrical goods business (named FMEG: fast-moving electrical
goods). In this segment, it competes with established players like Bajaj, Havells, V-Guard etc.
Electrical goods is a B2C business where the end-consumer directly buys goods in the shops. As a result,
creating a brand and acquiring customers’ mindshare is essential in the electrical goods segment.
Polycab India Ltd aspires to be a top player in the electrical goods segment like it is in its other business
divisions of cable and wires.
Gandharv Tongia: We were no one when we entered this business, but slowly and gradually we
became number one in cable business. Then in 1996, we started wires business, and now we are
number one in wires business. So our DNA and our thought process is very clear that if we are in
a particular business, we want to become number one
To create a brand in the electronic goods space, Polycab India Ltd has spent a significant amount of money
on advertisement & promotions (A&P). Before the start of the electrical goods business, it used to spend
about ₹5 cr to ₹10 cr on advertising; however, in recent years, it has to spend about ₹100 cr on advertising
every year. The company acknowledges that it has no option but to continue to spend on advertising and
that this spending will increase going ahead.
Conference call, October 2020, pages 16-17:
Gandharv Tongia: If I am not wrong, 6, 7 years where you used to spend only Rs.10 Crores on
advertisement or probably Rs.5 Crores, but last year we would have invested almost Rs.100
Crores. So that is where we are cautious that for a B2C-oriented business, we have no option but
to invest in A&P, and we will continue to do that. And this will only increase in terms of absolute
amount in the coming years because the B2C revenue will increase.
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However, despite being in this business for more than 7-8 years and spending significant money on
advertising & promotions, it is still earning low margins. In Q1-FY2022, the company reported operating
losses in the electrical goods division.
Gandharv Tongia: As I mentioned to the earlier participant, it is primarily because of increase

in fixed cost and that has also increase in the employee cost or the contractor cost…The second is
the A&P spend has slightly increased and A&P predominantly is for our B2C business…So these
are two major reasons because of which the EBIT margins have gone into negative trajectory
Going ahead, an investor should closely monitor the margins of the electrical goods division and its
spending on advertising to assess whether the spending on advertisement and promotions is leading to any
benefits for the business and shareholders.
5) Key risk to the business of Polycab India Ltd:
5.1) Labour unrest:
Manufacturing cables, wires and electrical goods is a labour-intensive process and as a result, cordial labour
relations are essential for the company. In the past, Polycab India Ltd had faced instances of labour strikes.
Our manufacturing processes are labor intensive in nature…In Fiscal 2017, workmen at our Halol
plant went on strike for a period of three weeks.
5.2) Workers’ safety:
The manufacturing process of Polycab India Ltd involves dangerous steps, where any lapses in security
measures can lead to loss of property and life. There have been instances where workers lost their lives due
to accidents in the factory of Polycab India Ltd.
we had an accident at one of our facilities at Daman, where the lid of an autoclave unhooked,
resulting in two fatalities and injuries to three of our staff.
5.3) Non-patented, trade secret technology:
Polycab India Ltd has not patented its design and product technology. It is keeping most of it as confidential
knowledge. As a result, it has to protect its knowledge on its own and does not have the institution of the
patent office to help it.
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The company is a large corporate and many employees have access to its confidential technology.
Employees keep on leaving the company due to regular attrition. Therefore, the risk of the company losing
its design and technology secrets to its competitors is high.
RHP April 2019, page 31:
Our technical knowledge is a significant independent asset, which may not be adequately protected
by intellectual property rights. Some of our technical knowledge is protected only by secrecy… A
significant number of our employees have access to confidential design and product
information and there can be no assurance that this information will remain confidential…The
potential damage from such disclosure is increased as many of our designs and products are not
patented, and thus we may have no recourse against copies of our products and designs that enter
the market subsequent to such leakages.
5.4) Environmental and pollution control regulations risk
The manufacturing processes of Polycab India Ltd involve steps, which are potentially damaging to the
environment. The company needs to comply with environmental and pollution control regulations. In the
past, the company has received notices for non-compliance with pollution control measures.
In August 2016, we received a notice from the Gujarat Pollution Control Board in relation to
the waste water management of one of our manufacturing facilities in Halol.
Going ahead, an investor needs to closely monitor the compliance of Polycab India Ltd with environmental
regulations because any such non-compliance may lead to closure orders from Govt. authorities.
A live example of the closure of a factory due to environmental regulations is the copper manufacturing
unit of Sterlite Copper at Thoothukudi, Tamil Nadu.
in May 2018, one of our copper suppliers was ordered by the Government of Tamil Nadu to seal
its copper smelter factory.
5.5) Lack of long-term agreements with suppliers:
Polycab India Ltd does not have long-term supply agreements with its suppliers. As a result, it runs the risk
of a shortage of raw material when there is a disruption of the supply chain.
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while we enter into general purchase agreements with our suppliers, we typically do not enter into
long-term agreements with our suppliers.
5.6) Land dealings with Govt. authorities:
In one of the instances, Karnataka Govt. allotted a parcel of land on which Polycab India Ltd has its factory,
to some other party. The issue is currently under dispute.
Our Company (“Petitioner”) filed a writ petition…The Petitioner had purchased the Land from a
private vendor and subsequently, constructed a part of its industry on the Land. Karnataka
Industrial Area Development Board (“KIADB”) has allotted 10 acres of Land including the three
acres of the Land purchased by the Petitioner, to Sreedevi Power Industries (“Sreedevi”)…The
matter is currently pending.
In another instance, the lease of the factory land at Daman has expired in 2012 and the Govt. authority had
not renewed the lease agreement even in 2019.
Daman and Diu for the lease of the Daman Land expired in the year 2012,…we paid an amount
of ₹ 8.01 million as lease rent for the period from June 14, 2012 to January 30, 2015, and further
requested the administration of Daman and Diu to grant lease to us. We also filed applications
dated January 11, 2013, January 16, 2018 and May 9, 2018…the application for grant and
renewal is pending
Moreover, title disputes of another land are under dispute and are pending resolution with Gujarat Govt.
title deeds of freehold land amounting to ₹10.48 million is in dispute and is pending resolution
with the government authority in Gujarat
An investor may contact the company directly to know the status of these land-related issues.
5.7) Potentially speculative derivative transactions:
As per the condensed financial statements, Q3-FY2022, page 25, Polycab India Ltd has entered into
derivative transactions, which are not hedging in nature.
The net value of such potentially speculative transactions was ₹269 cr in FY2021 and ₹32.3 cr on December
31, 2021.
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Speculative derivative transactions, which are not hedging in nature, can lead to large losses. Therefore,
usually, manufacturing organizations stay away from them.
Polycab India Ltd itself had suffered losses and defaulted against its obligations in a derivative transaction
with one of its lenders in 2007-2008.
during the years 2007 to 2008, there was a dispute with one of our lenders relating to derivatives
transaction which was considered as a default on derivative transaction and working capital
facility by the lender.
Going ahead, an investor should closely monitor the exposure of Polycab India Ltd to the derivative
instruments, which are not like hedging.
5.8) Contingent liability of commercial dispute:
In the past, Polycab India Ltd had entered into a contract manufacturing agreement with a supplier under
which the company had to buy a minimum quantity of switches from the supplier. However, later on, the
transaction went under dispute and the supplier sued Polycab India Ltd for an amount of ₹63.4 cr.
Sri Krishnashray (India) Private Limited…used the same designs for manufacturing switches
(“Switches”) for the Defendant under the brand ‘Cleta’ and ‘Selene’…to affix the name of
‘Polycab’ in consideration of the Defendant purchasing an assured amount of Switches and giving
a purchase guarantee of Switches. Subsequently, the Plaintiff filed a suit alleging non-purchase of
Switches by the Defendant and thereby praying, inter alia, reimbursement of expenses amounting
to an accrued amount of ₹634.21 million together with further interest of 18% per annum, in
respect of loss suffered by the Plaintiff.
The matter was under litigation in the High Court of Bombay; however, in the FY2021 annual report,
Polycab India Ltd removed this amount from its contingent liabilities stating that the possibility of an
adverse decision against the company is remote.
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A vendor filed a commercial suit against the Parent Company in relation to the alleged breach of
three product sourcing agreements entered between the parties. The matter is currently pending
in High Court of Bombay. During the current year, based on the legal evaluation, the likelihood
of any liability arising on the Company from the outcome of the suit is reassessed from ‘possible’
to ‘remote’.
However, an investor should keep this contingent liability in her assessment and contact the company
directly to know the status of the litigation.
6) Error in the annual report:

In its FY2019 annual report, Polycab India Ltd has made an error and disclosed a different number of
warehouses at different places in the annual report.
On page 27, the company stated that it has 29 warehouses as a part of its distribution network.
Polycab’s distribution network across India consists of 3,300 authorised dealers and distributors
and 29 warehouses across 20 states
Whereas on page 18, the company states that, it has 30 warehouses under its network.
It may be a simple typographical error on the part of the company or different people preparing different
sections of the annual report may have been provided with separate data points by the company.
Nevertheless, an investor may contact the company directly for any clarifications. This is because; such
errors question the quality of the data included in the annual report.
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7) Related party transactions of Polycab India Ltd:

At times, Polycab India Ltd has entered into financial transactions with its promoters and their group
companies. Some of the transactions are as below.
The company has taken on lease a few godowns from promoters and their entities.
rent agreement with our Promoter and Chairman and Managing Director, Inder T. Jaisinghani
for the purpose of renting out a godown, situated at Coimbatore: yearly rental income accruing
to ₹0.10 million.
rent agreement with A.K. Enterprises (“AK Rent Agreement”), a partnership firm, where our
Promoters, godown owned by it pay a monthly rent of ₹ 2.06 million
Similarly, the company has entered into transactions for the sale of assets with promoters and their relatives
including the son-in-law of promoters, Puneet Sehgal (FY2021 annual report, page 212).
In FY2021, the company paid commission to an Australian entity, EPMR Australia Pty. Ltd, owned by key
management personnel (KMP) (FY2021 annual report, page 210).
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.
The Margin of Safety in the market price of Polycab India Ltd:

Currently (April 22, 2022), Polycab India Ltd is available at a price to earnings (PE) ratio of about 48 based
on consolidated earnings of the last 12-months (January 2021 to December 2021). An investor would
appreciate that a PE ratio of 48 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 a sign 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.
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Analysis Summary
Overall, Polycab India Ltd seems a company, which has grown its sales at a moderate rate of 12% year on
year for the last 8 years. Moreover, sales growth has been associated with consistently improving profit
margins. This is a good achievement by the company in the light of the intense competition in the cable &
wires as well as electrical goods industry from unorganized and organized players. For most of the products,
players compete on pricing.
Polycab India Ltd has been able to consistently improve its profit margins despite depending on highly
volatile commodities like copper, aluminium and PVC (crude oil). It has done so as it has the flexibility to
price its raw materials up to 90-days after purchase when it enters into contracts with its customers. In
addition, the company regularly passes on any changes in its raw material costs and foreign exchange
changes to its customers.
At times, the company keeps the benefits of declining raw material prices with itself. In addition, the
company has worked on improving its sales mix to sell more high-margin retail wires and premium
electrical products. All these steps in addition to increasing operating leverage have led to an improvement
in its profitability over the years. Nevertheless, in recent times, due to intense competition, Polycab India
Ltd could not pass on the entire cost increase to its customers and its profit margins declined in the last 12-
months (January 2021-December 2021).
The trend of shifting business from the unorganized to the organized sector has helped Polycab India Ltd
grow its business continuously over the years.
The company believes in making most of its goods in-house to ensure the best quality. As a result, its
business is relatively capital-intensive than its peers. In one such attempt, the company installed a copper-
rod manufacturing plant for a higher capacity than what it could consume thinking that it would sell the
excess capacity in the market. However, when the responsibility of selling copper rods fell on its shoulders
after its JV partner, Trafigura, exited the project, then it could not do it successfully. As a result, it had to
sell the plant to Hindalco Industries Ltd.
Polycab India Ltd keeps a relatively higher amount of inventory in its warehouses because it prides itself
on quick delivery of goods to its customers. However, the inventory levels have increased to very high
levels and the company has been engaging external management consultants to bring efficiency to inventory
utilization. However, the financial data for the recent years do not indicate any major improvement in the
inventory turnover ratio.
The company used to face a lot of delayed collection and impairment of trade receivables. As a result, it
stressed that its customers use channel financing where it could receive the money quickly from the bank
and the risk of loss of receivables is taken over by the bank. It started offering cash discounts to customers
who opted for channel financing. With the increasing use of channel financing, now, its receivables days
have improved significantly.
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Polycab India Ltd is growing its sales within its sustainable growth rate. Therefore, it seems that the IPO
done by the company in 2019 was more an attempt to provide an exit to the financial investor IFC than a
desperate attempt to raise money for the business. Over the years, Polycab India Ltd has generated surplus
cash, which it has used to repay debt, pay dividends and has built cash & investments.
The company seems to have a succession plan in place where the second generation of promoters has joined
the company while the first generation is still active.
It is difficult to assess the project execution ability of the company, as it does not disclose granular details
of each capacity expansion project with specific costs and an estimated timeline of completion of each
project. Instead, it gives a broad overview of how much money would be spent in different business
divisions. From the only project where specific project costs and timelines were available in the public
domain, it turns out that the project, the copper-rod manufacturing project, witnessed significant cost and
time overruns. In addition, the presence of more than 3-year old expenses in CWIP might indicate that other
projects have also witnessed delays.
Polycab India Ltd has had a history of weak internal controls and compliance where the auditors of the
company have repeatedly highlighted the need for strengthening internal control processes. The company
has routinely delayed the deposit of undisputed statutory dues. On multiple occasions, RBI has pointed out
its non-compliance with various guidelines.
The company has ventured into the electrical goods business, which has taken a lot of investment in plants
and specifically in advertisement and promotions. However, despite significant investment, the division
still has low-profit margins and at times, it reports operating losses as well. The other business division of
EPC business is profitable but has long delays in realizing receivables. As a result, Polycab India Ltd has
decided to keep it a small division.
Polycab India Ltd faces multiple risks like labour unrest, accidents in the factory, the threat of stealing
confidential designs and technology, compliance with stringent environmental & pollution control
regulations etc. In addition, the lack of long-term supply agreements with its suppliers and difficult dealings
of land ownership with govt. bring in risk to its business.
The company indulged in derivative transactions in the past where it had defaulted with its lender. However,
now, again, the company seems to get into potential speculative non-hedging derivative transactions, which
looks like a risky step.
Polycab India Ltd had a commercial dispute where it refused to buy products from a contract manufacturer
despite giving a purchase guarantee of a minimum quantity. The dispute is under litigation in the High
Court of Bombay. However, in the FY2021 annual report, it had removed this liability from contingent
liabilities stating that the possibility of its payment is remote.
The company has entered into related party transactions with its promoters, their relatives and group
companies. An investor needs to analyse such transactions in depth.
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Going ahead, an investor should closely monitor the profit margins of the company to understand whether
it is able to maintain its competitive advantages. She should monitor its inventory turnover ratio, impairment
of trade receivables, and backward integration projects where it may create more capacity than what it can
consume in-house.
An investor should monitor the relationship among different members of the promoter family to see signs
of ownership related issues. She should check delays in its project execution, signs of weaknesses in internal
controls and compliances, excessive advertising without a return to shareholders, labour unrest etc. She
should contact the company to know the status of commercial and land disputes, and non-hedge derivative
transactions. She should monitor all the related party transactions of the company with its promoters.
These are our views on Polycab India Ltd. However, investors should do their own analysis before making
any investment-related decisions about the company.
P.S.
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2) Tata Elxsi Ltd

Tata Elxsi Ltd is a Tata group company focusing on information technology services. The company focuses
on engineering R&D and design services for sectors like automotive, media & communications, medical
etc as well as systems integration.
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While analysing the history of Tata Elxsi Ltd, an investor notices that in FY2008, the company had formed
a subsidiary named Tata Elxsi (Singapore) Pte. Ltd. However, it closed down this subsidiary in FY2016.
During the year under review the formalities for closure of company’s wholly owned subsidiary,
Tata Elxsi (Singapore) Pte. Ltd. has been completed. Presently the Company do not have any
subsidiary Company.
As a result, during FY2008-FY2015, the company published both standalone as well as consolidated
financials. Whereas before FY2008 and from FY2016, the company published only standalone financials.
Therefore, in the case of Tata Elxsi Ltd, during the last 10 years, we have analysed the consolidated
financials from FY2013-FY2015 and standalone financials from FY2016 onwards.
With this background, let us analyse the financial performance of Tata Elxsi Ltd.
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Financial and Business Analysis of Tata Elxsi Ltd:

Sales of Tata Elxsi Ltd have grown at a pace of 17% year on year from ₹622 cr in FY2013 to ₹2,471 cr in
FY2022. The sales of the company have increased every year since FY2013.
The operating profit margin (OPM) of the company has witnessed an increase from 12% in FY2013 to 31%
in FY2022. In FY2017 and FY2020, the OPM of the company declined from the previous year. In FY2017,
the OPM declined to 22% from 23% in FY2016 whereas, in FY2020, the OPM declined sharply to 21%
from 26% in FY2019. During FY2013-FY2022, the net profit margin (NPM) of Tata Elxsi Ltd increased
from 3% in FY2013 to 22% in FY2022.
To understand the reasons for the financial performance of Tata Elxsi Ltd, an investor needs to read the
publicly available documents of the company like its annual reports from FY1997 onwards, conference
calls, credit rating reports as well as its corporate announcements. Then she would understand the factors
leading to the near consistent increase in its revenue and profit margins along with the decline in operating
profitability in FY2017 and FY2020.
In addition, it would help an investor if she read the following article about the business analysis of IT
(information technology) services companies, which highlights the major factors influencing their business
like the mix of onsite-offshore business, time & material or fixed-price mix, employee utilization and
attrition levels, the share of the revenue from existing customers, foreign exchange movements, business
segment mix etc.
After going through the above-mentioned article and the documents, an investor notices the following key
factors, which have led to the significant improvement in the business of Tata Elxsi Ltd, which she needs
to keep in her mind before making any predictions about the performance of the company.
1) Strong focus on R&D by the company:

If an investor analyses the origins of Tata Elxsi Ltd, its primary focus was the systems solutions segment
where it used to install software & hardware solutions of MNCs companies in its customers’ operations.
Distribution, value-added reselling and provision of solutions built around products from Silicon
Graphics, USA, for domestic customers.
This was a low-value adding activity where the business was very volatile and the company hardly had any
pricing power. In FY1997, despite selling systems equal to the previous five years, its revenues did not
increase because the systems’ prices declined substantially.
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The sale of 562 systems referred above almost equalled the total number of systems sold so far by
the Company in the last 5 years…However, due to a significant drop in prices, in line with the
international trend, the turnover in the books did not register any increase.
During this period, the company made frequent losses and as per the earliest available annual report of
FY1997, it was carrying accumulated losses of more than ₹7 cr in FY1996, which was significant
considering its size at that point in time.
It took Tata Elxsi Ltd many years to overcome its accumulated losses, which it could only in 1999.
The company realized that in order to establish a strong business it would have to focus on research and
development (R&D). As a result, it spent a significant portion of its sales on R&D.
In FY1997, it spent about 6.7% of its sales on R&D (FY1997 annual report, page 5). Over the years, until
now, the company has been spending about 2.5% to 4.0% of its revenue on R&D.
Tata Elxsi Ltd has realized that investment in R&D, platforms and intellectual property (IP) is necessary
for its survival as well as sustainable growth.
Conference call, April 2018, page 11:
Madhukar Dev:…potentially IP is very, very important for us not just for augmenting our
margins but for survival itself. In the future we will not be winning business by demonstrating past
experience and capability. In future we will win business demonstrating our IP which can be
integrated into customer solutions and that is why the IP programs of the company are very
important.
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Nowadays, the focus of Tata Elxsi Ltd on R&D/IP is such that it keeps on further spending money on
platforms even though any specific platform may not give it immediate business. This is to highlight its
capabilities to its reputed and demanding customers.
Nitin Pai: The reality is platforms and products do require continuous investment. And in that
sense, at times, they can also be more difficult than the services business because services, you
will deliver when required while products you will have to keep enhancing, keep developing even
if there are no active customers…we are definitely and consciously doing is making sure that
the platforms are part of the value proposition that we take to customer.
As a result of the focus on R&D, it could develop intellectual properties (IP) resulting in the development
of many platforms, which have helped Tata Elxsi Ltd in gaining business from many prestigious customers.
At present Tata Elxsi Ltd has many platforms in its different business verticals like Autonomai, Automate,
Tether in automotive; QoEtient, TEplay, FalconEye in media; TEDREG for regulatory intelligence,
TEngage in healthcare etc. These platforms establish the capabilities of Tata Elxsi Ltd in front of its
customers and help it win deals from prestigious companies.
Credit rating report, April 2017, page 2:
The company’s customer profile includes global majors such as Jaguar-Land Rover (JLR),
Comcast, Time Warner Cable, Tata Motors, Broadcom and Qualcom among others.
A focus on R&D services-related business has helped Tata Elxsi Ltd get continuous (sticky) business from
its customers. This is because in R&D services choosing the lowest cost bidder does not prove to be a
successful strategy for the customers, which increases the switching costs for the customers resulting in
high-margin repeat business for Tata Elxsi Ltd.
Manoj Raghavan:…in the case of R&D services, it is also to do with the relationship that you
build to the customer over a long time. See, globally also it is known right, not all R&D succeeds.
So, if you have a partner with whom you have built a relationship and we have been delivering
value and success to that customer, it is a lot of risk for him to move away from us and go into
another relationship…it is relatively not easy to make that switch.
Due to the customer-relationship-based nature of R&D services, many times, attempts of organizations to
change suppliers/vendors have failed, which makes switching suppliers difficult.
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Manoj Raghavan:…some of these large organizations that go ahead and do a vendor

consolidation…But in every such case…especially in the engineering space, they have not really
been successful because though it is all pushed by the procurement or the finance guys, the
engineering guys feel that this is not the right way to move forward.
As a result, the transformation of Tata Elxsi Ltd from a reseller of systems/solutions into an IP-led
solution/R&D partner of customers has led the company to transition from an originaly loss-making
company into a profit-making company generating significant cash flows for its shareholders.
2) Continuous focus on high-margin segments:

Tata Elxsi Ltd realized that to earn a high-profit margin, it would have to focus on high-value-adding R&D
services. Therefore, over the years, it had continuously focused on high-value-adding R&D-oriented
services. It continuously tweaks its product and service offerings by getting out of areas, which are getting
commoditised and entering into new areas, which offer a higher value-addition. This strategy has allowed
the company to earn a higher profit margin than its competitors.
Niketh Shah: if you look at the existing competition in the listed space, they are not anywhere
close to your margins.
Madhukar Dev:…the minute we see any of our offering getting commoditized, we try and
exit that and we get into an area where the value-add is significant and therefore the premium that
we can command does not get diluted.
A continuous focus on the high-margin products & services and maintaining the premium is essential
because as per Tata Elxsi Ltd, it is very very difficult to get a price hike from any customer once a lower
price is agreed upon.
Conference call, January 2021, pages 19-20:
Manoj Raghavan: Most of the services that we offer are on the upper end of the spectrum, and
it is more value-selling. We rarely compete on pricing and so on and go down.
Ritesh Rathod:…Can you go back to a client and ask for a price hike?
Manoj Raghavan: Especially large customers, nobody will entertain a price hike, whatever you
say. So what is really essential is, you don’t end up signing a customer at a very low rate because
you know that it will be next to impossible to go back and get a rate hike…once we arrive at a
particular rate structure for customers, it is usually at least a 3-year sort of a rate structure that
we agree on.
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Let us see a few incidences where the company’s focus on the high-margin segment has helped it achieve
good business performance.
2.1) prioritizing medical as well as media & communications segments over automotive
division:
Tata Elxsi Ltd earns maximum profit margin in its medical business followed by media & communication
and then automotive business.
Manoj Raghavan: Our medical business continues to be on a higher side; the margins continue
to be on the higher side, followed closely by media, communication, and automotive.
In addition, the company found that the competition in medical as well as media segments is lower than in
the automotive segment. In medical and media segments, many times, Tata Elxsi Ltd is the sole supplier
seeking business whereas, in automotive, it is usually, 2-3 companies competing for the deal.
Manoj Raghavan: Competition is less in the media & communication and health care segments.
In many cases, both in media & communication and in the medical business, we are sort of their
single vendor…in the automotive scenario you have 2 or 3 companies bidding for some of these
opportunities.
Therefore, in order to achieve diversification from the automotive business and to earn a better profit
margin, Tata Elxsi Ltd is focusing more on medical and media & communication segments.
In the past, Tata Elxsi Ltd used to have 60% of revenue from the automotive segment, 30% from media &
communications and the remaining from medical and other smaller divisions.
Conference call, April 2018, pages 6, 9, and 10:
Madhukar Dev: About 60% is automotive.
Naveen Bothra:…how much is from media?
Madhukar Dev: About 30%.
Naveen Bothra: Healthcare, medical and all these things include 10%?
Madhukar Dev: Yes.
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The company decided that in the long-term, it would reduce the share of the automotive/transportation
segment from 60% to 40% whereas increase the share of media from 30% to 40% and increase the share of
medical from 10% to 20%.
Manoj Raghavan: In the long term, we definitely look at 40:40:20, 40 from transportation, 40
from media and communication, and 20 from medical.
As per the Q4-FY2022 earnings presentation, April 2022, page 18, in FY2022, Tata Elxsi Ltd had 41.2%
revenue from transportation, 44.5% revenue from media and 14.3% revenue from the medical segment.
Therefore, over the years, an increase in the share of medical and media from 40% (= 10% + 30%) to about
60% (= 14.3% + 44.5%) has contributed to an increase in the profit margins of Tata Elxsi Ltd.
2.2) Restructuring systems integration & support and other low-margin businesses:
The company has a history of taking such strategic decisions where it reduced its focus from low-margin
businesses. For example, in its systems integration business where it used to provide installation services
for software products of MNCs, it shifted its focus away from simple reselling/installing the software to
those deals, which involved consulting/solution-centric approach. As a result, it could improve profit
margins.
Systems Integration & Support: Due to the low margins on hardware products, the Segment
is focusing on a solutions centric approach which includes more of software and services and
reducing its dependence on pure hardware business.
In FY2014, when the OPM of Tata Elxsi Ltd increased to 18% from 12% in FY2013, the company
highlighted its focus of the company on solution-oriented business in the systems integration division as
one of the reasons for the improvement in profits.
During the year under review, Your Company’s concerted effort in growing its revenues from the
embedded and industrial design services, focussing on solutions and services in the systems
integration business, and containing costs of its animation and visual effects business, resulted
in improved top line and bottom line performance
Moreover, even in the case of software products, a continuous decline in the cost of IT products hampered
its annual maintenance contracts (AMC) business. This is because, the customers preferred to buy newer
products/versions, which came with warranty support and in turn, they avoided buying AMCs post-
warranty period and put strong pricing pressure on AMCs.
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Systems Integration and Support: The challenge here is to provide support services at price
levels which ensure a reasonable margin in the context of continually decreasing replacement
costs of IT products which obviate the need for annual maintenance support.
The customer support division also had a history of performing poorly due to the impact of extended
warranties offered during maintenance contracts.
Customer Support: Business marginally declined to Rs. 10.53 crores (including sale of product
upgrades) due to extended warranties being offered at the time of hardware sales in earlier years
which ate into current revenues from maintenance contracts.
The revenue performance of the systems integration business also was volatile because many large orders
were one time, which may not be repeated.
System integration: Due to the inherent nature of this business viz. value-added reselling and
maintenance revenues, there is a greater upward and downward volatility in this segment over the
years, driven by large customer orders in any year which may not repeat in the following year.
As a result, Tata Elxsi Ltd has continuously focused away from the systems integration business. In
FY2022, it contributed only 2.2% to the revenue (Q4-FY2022 earnings presentation, April 2022, page 16).
Even previously, during FY2002, the company decided to step away from govt. orders as well as other low-
margin orders in its Enterprise Computing and Networking Group.
Enterprise Computing and Networking Group: This business, which is largely

characterised by large value and low margin orders, has been consciously restructured over the
last few years in order to increase the profitability by keeping away from the low margin desktops
and government orders
The company also exited the semiconductor business when it could not generate satisfactory performance.
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Manoj Raghavan: No, I think about 3-4 years ago, we exited the semiconductor space. Even
though we have a few customers in the semiconductor space, but we are not actively pushing that
business. It is more legacy business that is continuing.
These business decisions have added to the profit margins of the company.
2.3) Cut down on Visual Computing Labs business:
In the visual computing labs (VCL) business, which focused on 2D, 3D visual effects and animations, Tata
Elxsi Ltd had been facing challenges. In India, it found limited opportunities for its skills whereas the
international/Hollywood business was proving challenging.
Visual Computing Labs:…the international markets pose a challenge, especially the US,
where often the remuneration for the services provided by this division is linked to the commercial
success of the project. Your Company has hitherto consciously stayed away from undertaking
assignments based on this model where the risks are not commensurate with the revenue
potential and is exploring ways of bridging this market requirement.
However, in FY2010, it decided to focus on the Hollywood business, established a studio in the area, and
hired local employees, which an investor would appreciate would be very expensive.
Visual Computing Labs: During the year, an overseas VFX studio was set up at Santa Monica
near Hollywood…and staffed with local industry veterans to address the VFX requirements of the
Hollywood industry. The studio represents a strategic move by the VCL Division…overcome the
constraint of having a remote studio located in India, which was perceived as an obstacle to
getting more business from the Hollywood industry.
In FY2013, Tata Elxsi Ltd faced significant losses in its visual computing labs (VCL) business. The division
had expanded the studio in Hollywood and had established a joint venture (A2E2) with M/s A Squared
Entertainment, LLC, USA; both of these initiatives failed and led to significant losses.
VCL undertook two significant initiatives to help scale its business. It expanded its studio in Los
Angeles in anticipation of a large volume of work from Hollywood and entered into a Joint
Venture to develop and produce its own IP. While both initiatives showed initial promise, the
outcomes were not up to expectations and impacted the bottom-line of the company significantly.
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Tata Elxsi Ltd had taken these business initiatives after an international management-consulting firm had
guided it. However, it suffered losses of about $4 million because of these business decisions, which would
be in addition to the fee paid to the management consultant for its advice.
Your Company had undertaken a set of strategic growth initiatives for VCL. These were based on
the recommendations of an international consulting firm and meant to accelerate the non-linear
growth. The initiatives did not deliver as per expectations and negatively impacted the bottom-
line of the overall company.
The losses of $4 million included $1 million in equity investment and $3 million in repayments to the
lenders of the JV (A2E2) when they enforced the guarantee provided by Tata Elxsi Ltd.
In the previous year, the Company remitted USD 1,000,001 as Share Application Money to A2E2
against which shares were yet to be allotted…Subsequently the company received a demand from
the Banker of A2E2 to whom the company had given a financial guarantee towards the outstanding
dues of Rs. 1,589.57 lakhs (USD 30.19 lakhs) due by A2E2 to its banker. The Company has settled
it’s obligation towards the bank guarantee
As a result, the company stopped these initiatives to prevent further losses.
After due consideration, these initiatives have been curtailed to ensure that the negative impacts
does not continue further.
The credit rating agency, ICRA, also highlighted the weak performance of the VCL division in its report of
October 2015, page 1:
ICRA also takes note of the weak performance under its visual computing labs division and limited
revenue visibility given relatively short term nature of the projects.
Later on, Tata Elxsi Ltd deprioritized this business and merged the VCL division with its Industrial Design
& Visualisation (IDV) division.
Credit rating report by ICRA, April 2017, page 2:
With the merger of erstwhile Visual Computing Labs (VCL) division with ID during the previous
fiscal, the company offers digital content creation including 3D computer graphics, animation and
special effects for corporate films and entertainment industry under IDV.
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Therefore, the steps taken by Tata Elxsi Ltd over the years to reduce business in low margin and loss-
making divisions have helped it to maintain and improve profit margins.
3) Focus on large and long-term contracts by Tata Elxsi Ltd:

Historically, Tata Elxsi Ltd used to engage in small and short-term projects with its customers where the
size of the contracts used to be less than USD 1 million and the duration of the contract used to be about 4-
6 months.
Madhukar Dev: Yes, okay. Traditionally, our engagements are short duration projects. And a
long engagement would be maybe nine months and the average would be four to six months.
Its dependence on short-term projects affected its business as it limited its growth potential.
Credit rating report by ICRA, April 2017, page 2:
Credit Weakness: Moderate revenue visibility on account of high proportion of project based
revenue which is of short duration.
The company also realized that due to short-term contracts, in order to show sustained growth, it has to
continuously run after fresh business. Therefore, it changed its strategy and started focusing on long-term
contracts.
Madhukar Dev: Yes. What we have been trying to do is to look at engagements which cross the
four quarter boundary, so if we can have a multiyear engagement…consequently, the contract
values are much larger than the shorter engagements. So instead of facing this challenge and
pressure of finding new engagements every few months, we are trying to see if we can build on the
credibility that we have in the market and look at longer duration engagements
By FY2021, Tata Elxsi Ltd had succeeded in gaining a significant portion of its business via long-term
contracts.
Manoj Raghavan: Earlier the average median about 2 years ago was about 6 months deals or
8 months deal. Now, it is definitely above a year or multi-year also. So yes, the average size of
projects has increased. The duration is increased; the average revenue is also increased per
customer
It was now closing deals of three to five-year durations.

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Manoj Raghavan: I would say at least the large deals that we have been closing are definitely
multi-year deals. We have closed three-year deals, five-year deals and so on.
Due to its focus on long-term contracts, the average deal size for Tata Elxsi Ltd increased significantly from
less than $1 million previously to now multi-million dollar deals.
Manoj Raghavan:…2, 3 years back, our deal sizes would be in the 100K to 500K sort of a range.
And for us, $1 million was a pretty good opportunity and good deal. Right now, we are looking at
opportunities in 10 million, 20 million sort of pipeline. In a few cases, above 50 million also.
In order to increase the average deal size, the company changed its assessment of the performance of its
sales team. It started focusing on the total contract value (TCV) of any deal while measuring the
performance of its sales team, which contributed to an increase in average deal size for the company.
Manoj Raghavan:…the total contract value has been growing significantly. What we have done
is, over the last couple of quarters we have sort of changed the way we measure and monitor our
sales team. Their incentives are based on the TCV booking that is done. So, we are actually pushing
the sales engine to really go after large deals.
During Covid times, the company benefited a lot due to long-term deals as it could continue to execute its
long-term deals instead of finding new short-term deals during lock-downs.
Manoj Raghavan:…into this COVID and post-COVID scenario, I would say it’s not as bad as
if we would have been with smaller projects and so on, as there would have been cancellations
immediately. And every quarter we would have had to hunt for new logos, new business and so on.
So, I would say you can safely say that a lot of that is in the past. So, we are happy to have a lot of
long-term customers and multi-year deals, which gives us the confidence.
Transition to long-term deals has led to a lot of stability in the business of Tata Elxsi Ltd.
Manoj Raghavan: I think the sort of consistency in revenue that you have seen quarter‐on‐
quarter is large because of the movement from project‐based engagements to annuity and long‐
term customer relationships.
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Previously, the business of Tata Elxsi Ltd used to show some seasonality with Q1 showing weakness and
Q4 showing strength in performance.
Madhukar Dev: Those of you who have been following this company will know that the Q1 has
historically been a weak quarter for us
Manoj Raghavan: And all of you who have been following our results for many years know
that Q4 is typically a good quarter for our SI business as our customers spend their residual
infrastructure budgets for the fiscal year and as it is also the year end for them.
However, in recent years, due to the transition of business towards high-value, long-term deals, the effect
of seasonality on the performance of Tata Elxsi Ltd has declined.
Conference call, April 2022, pages 17-18:
Manoj Raghavan: If you look at it, not just the last four quarters, but last seven quarters also
we have been consistently growing, so I think that is again due to all the efforts that we are putting
in. One is mining the accounts, and two is getting those new logos and getting those multi‐year
deals also…So as long as we continue to open new logos and get into these large multi‐year
deals and so on, I think the trajectory is good for us.
In addition to bringing stability in the revenue, the long-term deals with the customers have helped in the
improvement of profit margins of Tata Elxsi Ltd as well.
Manoj Raghavan: There are many levers for margin improvement…One is more long-term
projects, more long-term engagements and so on.
Nevertheless, an investor should not be carried away by the multi-year, multi-million dollar deals because,
at the end of the day, every company follows yearly budgets and if the business of the company faces a
slow-down, then it may go slow on the project and defer purchasing services of Tata Elxsi Ltd.
The company faced this challenge from its top client, Jaguar & Land Rover (JLR) when it cut down its
R&D budget during a slowdown in the automobile industry.
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Manoj Raghavan:…for example, our top client and what happened to them, even though we
have signed up a multiyear contract but when the business situation worsened, they did not cut the
IT budgets because they had to keep the company running, but they cut the R&D budgets. So even
if I say I won a $50 million deal, that doesn’t mean much, except for the yearly PO that we have.
Therefore, in the presence of long-term, multi-million dollar deals, an investor should be cautious that even
though these deals indicate a long-term commitment from the customer; still, the customer could back off
after finishing the scope of its current purchase order. These deals are not take-or-pay agreements like in
the case of manufacturing or mining organizations.
An investor should keep it in her mind while projecting the future performance of the company.
4) Improvement in the repeat business from its existing clients:

Over the years, Tata Elxsi Ltd has been able to get a higher share of its business from its existing clients.
In the past, for example, in the late nineties, it used to get about 60% of its business from repeat clients.
…a customer loyalty track record of 60 % of orders being repeat, TATA Elxsi looks all set to be a
key proponent in Engineering the Information Revolution.
The company realized the importance of repeat business from existing clients to such an extent that it
deprioritized new customer acquisition stating that it plans to reduce its total number of customers.
Madhukar Dev: No, in fact we are looking to reduce the number of clients and we want to deepen
the relationship with existing clients.
A focus on getting repeat business from existing clients increased the share of repeat business to more than
90% by FY2020.
Madhukar Dev:…very often customers who tried us before, trust us more than they believe
anybody else that is why more than 92-93% of our revenues in any period come from our existing
customers.
Repeat orders from existing customers have brought stability to the revenues of the company as well as
higher profit margins because it increases the stickiness of the customer by increasing the cost of switching
to new vendors.
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5) Offshore-onsite mix in the business of Tata Elxsi Ltd:

Offshore work allows the company to get the work done from its Indian offices with employees based in
India. On the other hand, onsite/onshore work requires the company to post employees on the customers’
premises in foreign countries for doing the work. As a result, the onsite work is expensive due to higher
wages in the foreign locations, travel costs of employees etc. whereas the same work can be completed at
a much lower cost if it is outsourced to India as offshore work.
Over the years, Tata Elxsi Ltd has witnessed significant movements in its business mix of offshore and
onsite. In FY2004, the company had about 80% of its business as offshore.
Company’s customers are spread out in various countries and the delivery model provides for
both offshore work (i.e. in India) and onsite (i.e. at the customer premises). Currently, this mix
is about 80:20.
However, over time, the share of offshore revenue continued to decline and by Q1-FY2019, it had declined
to 56%.
Madhukar Dev:…the offshore/onsite is about 56%/44%.
With the onset of the Coronavirus pandemic and travel restrictions, the share of offshore work in the
business mix increased. In FY2022, Tata Elxsi Ltd had about 74.5% of its revenue from the offshore
business. (Q4-FY2022 earnings presentation, April 2022, page 19).
The increasing share of offshore has contributed to the increased profit margins of Tata Elxsi Ltd. In
FY2021, when the OPM of the company increased to 29% from 21% in FY2020, the company stated that
an increase in the share of offshore business had contributed to it.
The onsite offshore revenue mix has also shifted this year, with the offshore share rising by 920
bps to 66.9%. Operating margins have also improved as a result of this.
However, the company has stated that with the relaxation of travel restrictions, the share of onsite work
would increase; though it would still not go to the pre-pandemic levels of about 50% offshore/onsite mix.
Manoj Raghavan:…we may not go back to the earlier situation; 50% of our revenues would
come from onsite or so. I would still guess there will be a few customers who want to have the
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comfort of engineers being near to their locations, so I would say we would be somewhere in
between.
Therefore, as the travel restrictions are lifted, the share of onsite business may increase and the profit
margins may come down.
6) Share of fixed-price contracts vs. time & material contracts in the business of
Tata Elxsi Ltd:
In fixed-price contracts, the customer assigns a fixed value and timeline to the work. Thereafter, Tata Elxsi
Ltd has to complete the work within the budget. In case, it is able to complete the work at a lower cost, then
it can earn good profit margins. On the contrary, if it faces a cost overrun, then it may make a loss as well
on the project. Therefore, fixed-price contracts are high-risk, high-return businesses.
Manoj Raghavan:…fixed price means we take a lot more risk in terms of ownership and
delivering value to our customers…If we take some wrong deals and if you take full ownership and
take it in a fixed price and so on and if you do not, if we underestimate or if the complexity of the
program goes up then rather than what we had estimated, then there is also the possibility of losing
money in those deals
On the other hand, in time & material contracts, the customer pays Tata Elxsi Ltd based on the amount of
time taken to complete the project and the amount of material (number of employees) used to complete the
project. Therefore, Tata Elxsi Ltd charges the customer based on the number of employee hours consumed
to complete the project and there is very little possibility of making a loss in time & material contracts.
Therefore, time & material contracts are a safe business with comparatively low-profit margins.
Manoj Raghavan:…time material is a steady margin as you guys know. Fixed bid depends on
each individual engagement and amount of risk that is taken and deliveries that we have to make
and so on.
In the past, the share of fixed-price contracts in the business of Tata Elxsi Ltd has been in the range of 45%-
46%. For example, in Q1-FY2020, the share of fixed-price contracts was 45.7% (Q2-FY2020, earnings
presentation, page 5). However, in recent years, the share of fixed-price contracts in the business of Tata
Elxsi Ltd has increased. In Q4-FY2022, the share of fixed-price contracts increased to 52.4%.
Thus, over time, Tata Elxsi Ltd has witnessed an increase in the share of fixed-price contracts, which has
improved its profit margins. However, improving margins due to fixed-price contracts come with increased
risk.
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Manoj Raghavan: Yes, fixed price over a period of time has been going up…yes, I would say
the fact that fixed‐price projects have increased have also helped to an extent with the margins,
but again it is a double‐edged sword.
7) Improving employee utilization levels:

Employee utilization level is an important productivity parameter of any IT services company. It is similar
to capacity utilization for manufacturing companies. A higher employee utilization level indicates that the
IT services company is able to generate higher revenue from its workforce.
During Q1-FY2020, the utilization level for Tata Elxsi Ltd had declined to 65%.
Madhukar Dev: The utilization dropped to about 65%
However, the company improved its efficiency level and increased the utilization level to more than 80%
in FY2022.
Gaurav Bajaj:…our utilization has been at an all‐time high. Earlier, we used to be in the band
of 73 to 75, now that utilization is almost 80% up, it is almost 83%.
Improving utilization level has consistently contributed to improving profit margins of Tata Elxsi Ltd. For
example, in FY2018, when the OPM of the company increased to 25% from 22% in FY2017, the improving
utilization level was one of the reasons.
Credit rating report, March 2018 by ICRA, page 1:
With higher employee utilization, margin-accretive contract wins and cost rationalization
measures, TEL’s operating margins expanded from 22.3% in FY2017 to 24.8% in 9M FY2018.
Similarly, in FY2021, when the OPM of the company increased to 29% from 21% in FY2020, then Tata
Elxsi Ltd highlighted improving utilization level as one of the major reasons.
Manoj Raghavan: The major lever that we have used is utilization – our utilization rates have
gone up. We have, of course, done hiring the quarter, but we are able to deploy our internal
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resources and up the utilization, and that is also another reason why you see a sharp uptick in our
profitability.
Looking at the current utilization level of 83%, an investor may think that the company still has a scope of
17% to increase utilization and thereby, profit margins. However, an IT services company needs a healthy
level of bench strength i.e. employees not tied up in any active project who can be deployed in projects at
a short notice. This is necessary for the smooth functioning of existing projects as well as the quick start of
new projects.
Tata Elxsi Ltd has also intimated to its shareholders that its optimal utilization level is about 75%. Beyond
this level, it may face challenges in onboarding new customers.
Manoj Raghavan:…we would definitely push the utilization to go up to around 75%. I think that
a company of our size and the various areas that we work in, 75% is an optimal point to
reach. Beyond that, I think we will struggle when we get a new customer and so on.
Manoj Raghavan:…we would definitely need a strong bench to be able to not only meet the
growth expectations of our customers but also new customer additions and so on. So, I would
say 75%, 76% is a good place to be in.
Therefore, an investor should keep it in her mind that the current employee utilization level of Tata Elxsi
Ltd of 83% is not sustainable in the future and the company is attempting to bring it down by hiring
aggressively in recent years.
8) Strong clarity of the company in its strategic business decisions:

The management of Tata Elxsi Ltd has shown clarity in what they want to do and what they do not want to
do in their business. There are many instances where the management clearly communicated it in their
vision whether it is related to producing the goods that it designs or becoming a full-fledged software
product company or while making acquisitions.
The strong clarity of vision helps the company avoid misallocation of capital.
In FY2019, the company stated that it has no intention of entering into the manufacturing of the products it
designs because it does not have skills in supply chain and inventory management etc.
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Madhukar Dev: No, we will only make prototypes or get them made. We will not get into
manufacturing because we do not have those skills to manage supply chains and plant efficiencies,
inventory, logistics and that is too much of a digression from our core area.
Similarly, the company clearly communicated that it does not plan to become a specialized software product
company because; then it may end up competing with its customers. It plans to stay primarily a software
services company.
Manoj Raghavan: We do not want to compete with our customers. If you start launching your
own product, sometimes in this industry, customers will start worrying whether is this the company
that we need to work with, they get worried about helping a competitor, right, build up capability.
So, we would never be a full-fledged product company.
Similarly, the company clearly stated that it does not have any plans of entering the two-wheeler space in
its transportation business.
Madhukar Dev: Right now, we do not have any plans to get into the two-wheeler market.
In the past, the company had consciously reduced its focus on govt. business in its Enterprise Computing
and Networking Group due to lower margins. Similarly, now the company has stated that it does not plan
to expand its aerospace business because most of it is govt. led programs; even though it had worked on the
Mangalyaan mission.
Nitin Pai: We had worked in space programs before, including the Mangalyaan mission…but we
also recognize that many are government-led programs. So to that extent, the conditions of
working and how you deliver, etc., are quite difficult. So we are not expecting to have any large
revenues out of space per se.
Another instance of the clarity of the management is visible in its approach toward acquisitions. Tata Elxsi
Ltd is carrying a significant cash balance for the last many years, which it wants to use to acquire companies
to improve its capabilities & value proposition to the customer. However, despite the long wait of multiple
years, the company had not jumped on to any acquisition because the opportunities that it is getting are
expensive.
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Manoj Raghavan: We are in discussion with different companies, but the only thing is the good
companies, valuations are very expensive even at this point in time. And those that we believe can
really add value to us comes at a premium.
As a result, the company has not yet done any acquisition, which has protected its capital. The company
paid out capital to the shareholders as increased dividends during Covid times to put money directly in the
hands of shareholders in the time of need.
Manoj Raghavan:…as a Tata group, we felt that we have to really give back to the society
especially in the tough year and that is the reason why the Board decided to give a special
dividend because people are struggling, people are suffering, it will help them. That is the only
logic where we decided that, okay, this year let us be liberal with the returning the money to the
stakeholders.
Therefore, the clarity in the strategic business vision of the company has helped it maintain good capital
allocation.
9) Competition coming from multiple directions:

Tata Elxsi Ltd is an IT services player focusing mainly on engineering R&D services for its customers. It
is a niche/specialized player; however, it faces competition from all the large IT services companies, most
of which have engineering R&D divisions. This competition has been growing for a very long time now.
There is a growing trend of existing IT and IT-enabled companies initiating services delivery in
outsourced R & D and product engineering with a view to expand their portfolio offerings and
accelerate growth, thereby adding to competition and pressure on skilled manpower availability
and wage bills.
Almost all the large IT services companies like Accenture, Capgemini, TCS, Wipro, and HCL are a
competitor for Tata Elxsi Ltd because each of these companies has an engineering R&D division.
Nitin Pai:…we do compete with everybody who is a scaled IT player, whether it is an Accenture,
Capgemini, TCS, Wipro, and HCL and so on. They have always been there, they have always
had some amount of engineering work, and we continue to compete with them.
Moreover, looking at the attractiveness of the engineering R&D services segment, many companies are
building capabilities by acquiring others and in turn, increasing competition for Tata Elxsi Ltd.
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Manoj Raghavan: You look at the global industry, I mean in the last three, four years, ER&D
segment has always been touted as a fastest growing segment and you know that companies like
Accenture or Capgemini, they have made a number of acquisitions to really strengthen the ER&D
phase.
For companies like Tata Elxsi Ltd which rely on outsourcing of research by MNCs, another source of
competition comes from the captive development centres opened by these MNCs in India, which shifts the
business away from IT services companies to these captive centres.
The new tendency of global customers to open software centers in India whilst leading to a
potential loss of business opportunity through business tending to get shifted to the global
customer’s captive India centre
The credit rating agency, ICRA has also classified this industry as highly competitive in its reports for Tata
Elxsi Ltd due to competition from large IT companies with higher bargaining powers.
Credit rating report by ICRA, March 2018, page 2:
Credit weaknesses: Competitive industry – The industry is characterised by intense

competition from players enjoying scale benefits and higher bargaining power. While the company
is well placed in terms of niche service offerings, multi disciplinary designing capabilities and
established presence, pricing environment remains challenging with presence of other players.
Credit rating report by ICRA, March 2019, page 1:
intense competition in the industry, characterised by the presence of large players who can offer
managed services.
Therefore, an investor should always consider the competition from multiple players while assessing the
future business potential of Tata Elxsi Ltd.
Going ahead, an investor should keep a close watch on the profit margins of the company to assess whether
it is able to maintain its profit margins. An investor needs to understand that the current operating profit
margin (OPM) of the company may not sustain itself going ahead. The company itself has acknowledged
it.
Manoj Raghavan: There are many levers for margin improvement…And definitely this year has
been very-very different primarily because of COVID and lot of expenses including travel, even
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normal expenses, employee related expenses, celebrations, none of that has actually happened.
So, it is a one-off sort of a situation. We don’t want to leave an impression that these margins will
continue.
Manoj Raghavan: From a margin perspective…I would like to reiterate that these are
extraordinary times and there will be expenses which will go up once travel and everything starts.
In FY2021, overseas travel expenses of Tata Elxsi Ltd declined sharply to about ₹27 cr from ₹68 cr in
FY2020 (Annual report for FY2021, page 95).
Therefore, an investor should be cautious while projecting the current profit margins of Tata Elxsi Ltd into
the future.
Over the years, the tax payout ratio of Tata Elxsi Ltd has been in line with the standard corporate tax rate.
Up to FY2019, the payout ratio is exceeding 30% and thereafter, it is exceeding 25%, which is in line with
the prevalent tax rates.
Operating Efficiency Analysis of Tata Elxsi Ltd:
a) Net fixed asset turnover (NFAT) of Tata Elxsi Ltd:

Tata Elxsi Ltd is primarily an information technology (IT) services company, which relies on human capital
i.e. its employees to generate value. Therefore, it does not depend on fixed assets like plants & machinery
to generate its sales.
In such a situation, the parameter of net fixed asset turnover (NFAT) is not highly relevant for assessing
the asset utilization efficiency of the company.
b) Inventory turnover ratio of Tata Elxsi Ltd:

The business of the company, which is an IT services company, does not require any inventory to produce
any manufacturing goods. The only business division of the company that required holding some inventory
is the systems integration and supports division, which buys specialized IT hardware for installation on
customers’ premises. However, nowadays, this division contributes only about 2% to the sales. Therefore,
the impact of inventory holding and efficiency in the inventory management of this division does not
significantly affect Tata Elxsi Ltd.
Therefore, on an overall basis, just like NFAT, the inventory turnover ratio (ITR) also does not provide any
meaningful insights into the analysis of Tata Elxsi Ltd.
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c) Analysis of receivables days of Tata Elxsi Ltd:

Over the years, receivables days of Tata Elxsi Ltd have deteriorated from 63 days in FY2016 to 79 days in
FY2022.
The receivables days had increased to the maximum of 85 days in FY2020; however, it was due to the
difficulties faced by its customers during the Covid lock-down when it had to extend a higher credit period
to them. Nevertheless, afterwards, the situation seems to be improving and in the last two years, the
receivables days are stable at 79 days.
Manoj Raghavan: Yes, during COVID, we have had some price pressures. We had to give some
temporary concessions, and you know credit terms and so on. But I think we are out of all of that
The company had to give liberal credit terms to its customers during Covid times because even before
Covid, in FY2020, many of its customers had started showing signs of a slowdown like delays in granting
or deferment of projects.
Conference call, July 2019, pages 5-6 and 22:
Madhukar Dev:…there was an engagement that we were hoping to start in April. We

were selected in March. We were told that you would start within 30-days with a reasonably
significant growth trajectory to follow. We are sitting in the middle of July. We have been selected.
The paperwork is in place. We are yet to start work.
Madhukar Dev:…there were about half a dozen such engagements which were to start during
the quarter, which has not begun till June 30th. So, the combined effect would be significant.
The trend of receivables days over the last 6-7 years indicates an increase in the efficiency of receivables
collection by Tata Elxsi Ltd has gone down. One of the key reasons for the same seems to be a decline in
the performance of the automobile industry, which directly affects JLR, which is one of its largest
customers.
Madhukar Dev:…there were a lot of challenges and trying to compensate for the loss of business
which was somewhat abrupt from Jaguar Land Rover.
In addition, the attempts by the company to grow its automotive/transportation business outside JLR may
also have an effect as the company might have granted a longer credit period to new customers.
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Madhukar Dev: See, more than two years ago, we embarked on a journey of growing business
in the auto sector, outside of JLR. And we have expanded it to almost double the size of our JLR
revenue now…Concerning JLR’s business situation, at present, yes, we all know that it is
a challenging environment in which they are operating. And there are bound to be some cuts in
both revenue and capital expenditure
As Tata Elxsi Ltd.’s business comes from the R&D and capital expenditure budget of its customers;
therefore, whenever, there is any problem with the main operating business of its customers, then the
business of Tata Elxsi Ltd also takes a hit. During downturns, most commonly, the customers cut down on
the R&D budgets and capital expenditure. They also defer the grant of projects as well as initiation of
already allotted projects to Tata Elxsi Ltd.
At times, customers also raise disputes about the payments demanded by Tata Elxsi Ltd for the work done.
On other occasions, Tata Elxsi Ltd is not able to recover its money because the customer would have already
filed for bankruptcy. Tata Elxsi Ltd faces such challenges in the collection of receivables, especially during
economic downturns.
For example, during the dot-com bubble at the start of this century, Tata Elxsi Ltd faced an increase in bad
debt when some of its customers filed for bankruptcy and some others disputed its claim of payments.
Remarks for the increase in bad debt: Due to certain customers filing for bankruptcy/
raising disputes not resolved
Similarly, during the global financial crisis in 2008-2009, Tata Elxsi Ltd once again faced increased
instances of disputes with its customers related to receivables.
Remarks for the increase in bad debt: Non-payment due to unresolved technical issues
During this period, many customers delayed payments and a few even filed for bankruptcy.
FY2009 annual report, pages 27-28, 32:
Several customers are facing recession in their respective industries, resulting in some of them
slowing down their engineering outsourcing, apart from indicating other signs of financial
pressures such as slowing down payments, pressing for price reductions in already negotiated and
current contracts and in some extreme cases, even filing for winding up.
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Remarks for an increase in Provision for doubtful debts and bad debts written off:
These represent irrecoverable amounts arising from customers calling off the project abruptly due
to the economic slowdown, customers refusal to pay owing to delivery issues etc
In FY2012, Tata Elxsi Ltd had to write off about ₹12 cr of receivables (FY2012 annual report, page 71). In
FY2014, it wrote off about ₹30 cr of receivables (FY2014 annual report, page 79). In FY2021, the company
wrote off about ₹7 cr of receivables (FY2021 annual report, page 95).
In FY2022, the company is carrying about ₹7.5 cr in its provisions for doubtful debt (FY2022 annual report,
page 161). In addition, on March 31, 2022, more than ₹15 cr of receivables are overdue for more than one
year from their payment date (FY2022 annual report, page 152).
Going ahead, an investor should monitor the trend of receivables days of Tata Elxsi Ltd to assess whether
it is able to bring them down to the levels of 63 days, which it used to have in FY2016.
operations (cCFO) of Tata Elxsi Ltd for FY2013-2022, then she notices that over the years (FY2013-
FY2022), the company is not able to convert its profit into cash flow from operations.
Over FY2013-22, Tata Elxsi Ltd reported a total net profit after tax (cPAT) of ₹2,229 cr. During the same
period, it reported cumulative cash flow from operations (cCFO) of ₹2,163 cr.
Learning from the article on CFO will indicate to an investor that the cCFO of Tata Elxsi Ltd is lower than
the cPAT primarily due to the following factors:
 ₹532 cr stuck in its receivables over FY2013-FY2022. The receivables of the company increased
from ₹141 cr in FY2013 to ₹673 cr in FY2022.
 Non-operating income of ₹264 cr over FY2013-FY2022, which is added in calculating PAT;
however, it is deducted while calculating CFO.
The Margin of Safety in the Business of Tata Elxsi Ltd:

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target growth.
Where,

SSGR estimation depends significantly on net fixed asset turnover (NFAT). However, in the case of Tata
Elxsi Ltd, which is an IT services company without any manufacturing facility, NFAT is not a very
significant parameter. Therefore, while analysing the business of Tata Elxsi Ltd, SSGR does not provide
best of the results.
Therefore, an investor should focus on the free cash flow (FCF) analysis of Tata Elxsi Ltd.
b) Free Cash Flow (FCF) Analysis of Tata Elxsi Ltd:

While looking at the cash flow performance of Tata Elxsi Ltd, an investor notices that during FY2013-
FY2022, it generated cash flow from operations of ₹2,163 cr. During the same period, it did a capital
expenditure of about ₹477 cr.
Therefore, during this period (FY2013-FY2022), Tata Elxsi Ltd had a free cash flow (FCF) of ₹1,686 cr
(=2,163 – 477).
of ₹34 cr. As a result, the company had a total free cash flow of ₹1,916 cr (= 1,686 + 264 – 34). Please note
that any capitalized interest is already factored in as a part of the capex deducted earlier.
Tata Elxsi Ltd has used this money primarily to pay dividends of about ₹990 cr (excluding dividend
distribution tax) to its shareholders.
The remaining money is available with the company as a cash & investment balance of about ₹965 cr on
March 31, 2022.
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To use the surplus cash, Tata Elxsi Ltd has been trying to acquire other companies for the last 4-5 years;
however, it has not found any suitable opportunity until now.
An investor may note that in the last 3 years, Tata Elxsi Ltd seems to have some debt on its books; however,
the majority of it is future lease liabilities shown under debt under the new Indian Accounting Standards
(IndAS).
Going ahead, an investor should keep a close watch on the free cash flow generation by Tata Elxsi Ltd to
understand whether the company continues to generate surplus cash from its operations.
Additional aspects of Tata Elxsi Ltd:

On analysing Tata Elxsi Ltd and after reading annual reports, RHP, 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 Tata Elxsi Ltd:

Tata Elxsi Ltd is a part of the Tata group of companies. The company is professionally managed where
long-term employees of the company have been appointed as its MD&CEO over the years. Mr Madhukar
Dev led the company for almost 20 years (from 1999 to 2019). Later on, another long-term employee of
the company, Mr Manoj Raghavan took over as the current MD&CEO.
Therefore, the company is not bound by the limitation of options for senior leadership positions, which is
faced by promoter-run companies relying on family members to occupy senior positions.
There have been many instances where Tata Elxsi Ltd changed its senior leadership to improve its business
performance. For example, in FY2019, the company brought in new people to head their American and
European businesses.
Madhukar Dev: In the last year, we brought in a new person to head our America business…And
before that, we have gotten a person to head our European business.
In FY2021, when the Industrial Design & Visualization (IDV) was underperforming, then the company
changed its leadership by bringing in a new person to head it and it redesigned its selling strategy by
restructuring its sales team.
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Manoj Raghavan:…industrial design business, yes, we have been underperforming for the last
many years. However, we did do a number of things, including change the leadership and so on.
As a result, being a professionally run company, it is able to manage its succession planning well.
2) Managing employees and attrition levels are one of the biggest challenges for
Tata Elxsi Ltd:
Over the years, the attrition level at Tata Elxsi Ltd has fluctuated significantly.
In FY2014, the attrition level of the company used to be about 18% indicating that almost one out of every
five employees would leave the company by the end of any year. The company realized the huge cost of a
high attrition rate and implemented many human resource initiatives, which led to a decline in the attrition
levels. By FY2018, the attrition level had declined to 12%.
Conference call, April 2018, pages 16, 17:
Madhukar Dev: On an annualized basis we are at 12% attrition.
Manish Bhandari: So, has the attrition level come down in last three years if you are to look at
it?
Madhukar Dev: Yes, if I recall four years ago it was 18% or something.
The continued errors by the management led to a further decline in attrition levels and in FY2021, the
attrition level declined to about 6%.
Manoj Raghavan: Attrition is slightly above 6%. So attrition is not a concern for us.
However, all the efforts of the company to contain attrition at a lower level failed when during the
coronavirus pandemic, the demand for employees in the information technology field increased, which
coupled with the “work from home” environment increased the attrition levels sharply.
In FY2022, the attrition level at Tata Elxsi Ltd increased to 20.8% from 7.4% in Q4-FY2021 (Earnings
presentation, Q4-FY2022, April 2022, page 17).
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One of the reasons for higher attrition in the niche R&D-focused companies like Tata Elxsi Ltd is the entry
of MNC product companies entering and establishing their own development centers in India. These
companies poach employees from existing players working in similar segments by paying high salaries.
Madhukar Dev:…product companies which have captives or setting up captives in India. They
look at service companies as a hunting ground because they do not have any P&L responsibilities,
their cost centres for their parent organization, they are able to throw a lot more money than a
service company can
As per Tata Elxsi Ltd, increased attrition during Covid times is due to the entry of many IT services
companies into the digital segment where they are aggressively hiring employees from existing companies
in the field like Tata Elxsi Ltd.
Manoj Raghavan: Those companies that have had a digital play were still able to continue their
operations, service their customers and deliver value to the customers. So we see a lot more of the
companies, even the traditional companies, are aggressively getting into the digital play. They
want to have a digital play and what that means is more demand for engineers who can help
them create that digital play, which has a spiraling effect on the entire industry.
During the Covid pandemic, due to the prevalence of work-from-home, Tata Elxsi Ltd faced situations of
new employees leaving without ever visiting any of its offices. The company hired them virtually and they
resigned virtually. This attrition was very high in the lower levels of the hierarchy.
Manoj Raghavan: Yes, so a lot of attrition is in the lower level…during this COVID time, a lot
of people have been working from home, and including the new hires that we have done, a lot of
them have not visited our office at all. We have hired them virtually, and we have lost them virtually
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Even though the company has been able to retain its senior management employees, still it is facing a
shortage of human resources to meet the growing demands of its business. There is a significant shortage
of
Manoj Raghavan:…we need a senior‐level project manager, subject matter expert, architect,
and so on. Hence, people who will actually hold those projects and who will be able to deliver
those projects, so the supply for those critical profiles is where there is a shortage. We are working
overtime to see how we can bring that sort of talent
In order to retain its employees and control the sharply rising attrition, the company gave a special one-
time bonus to all the employees in FY2022.
Manoj Raghavan:…an additional Rs.33 crores of employee expenses on account of the special
one-time bonus for all our employees
Going ahead, an investor should keep a close watch on the attrition level of Tata Elxsi Ltd to assess whether
it is able to retain its employees and benefit from the time & resources spent on training them to make them
project-ready.
This is especially important because, for companies like Tata Elxsi Ltd operating in niche areas, the
employee skills are not highly fungible i.e. an employee from one business division cannot be deployed in
another division easily. In addition, at the senior management levels, the fungibility is even less.
Manoj Raghavan:…if a person who is really working on EV, electric vehicles, you don’t want
to put that person into a media communication, OTT space, right? Because of all the training, all
the investments that we have made. So, that is the difference between IT companies and companies
like us, very difficult. There could be some amount of fungibility at the junior levels, but as they
specialize and as they grow becoming more senior their fungibility comes down.
Properly managing employee costs are important for Tata Elxsi Ltd because while offering it large
contracts, its customers start asking for volume discounts like the manufacturing industry whereas in the IT
services industry, if the size of the project increases, even then the cost of deploying incremental employees
is the same.
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Madhukar Dev:…large companies have purchase departments who purchase services as well
as components. They’re very used to demanding volume discounts. Now volume discounts do not
make sense in a services business, which is manpower intensive…And we spend a lot of time and
effort trying to explain that our incremental cost is the same whether it is the first unit or the
hundredth unit. And therefore, a volume discount is really not relevant.
Therefore, the demand for volume discounts from customers may directly affect the profit margins of the
company in case it does not manage its employee costs properly.
3) Uncertain pension liabilities of Tata Elxsi Ltd for its senior managers:
In FY2020, Tata Elxsi Ltd provided for a hefty pension liability of about ₹22 cr for the outgoing MD&CEO
Mr Madhukar Dev. This liability was previously not provided for during his decades-long service in the
company and was only determined by the board in FY2020.
During the year, the board has approved for special retiral benefits to the Managing Director who
retired in October 2019. Accordingly, the Company has made a provision of ₹2,163 lakhs towards
future pension and medical benefits by giving corresponding charge in the statement of profit and
loss under employee benefit expense.
The company stated that it has provided for this large pension liability because the company does not
provide any stock options (ESOP) to employees.
Manoj Raghavan:…a mandate from the Tata Group especially for long-serving CEOs of the
Tata Group and they have a policy for the CEO’s pension….Additionally, Tata Elxsi did not have
any stock options or any other schemes of really supporting the senior management.
This large pension liability was one of the major reasons for a sharp decline in the operating profit margin
of Tata Elxsi Ltd in FY2020 to 21% from 26% in FY2019.
Manoj Raghavan:…one important thing is our PBT margin for the quarter is 17.7%. But if you
have noticed, there is a one-time provision that we have provided for the accrued retirement
benefits for ex-MD. If you remove that one-time provision, margins is about 23.1%.
Therefore, going ahead, an investor should be ready to witness a large pension liability whenever any
MD&CEO who has worked for the company for a long time, retires. This is because; it seems that Tata
group companies have an issue in granting ESOPs to employees.
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Madhukar Dev: We do not have ESOPs. So there is no lock-in for any of our employees.
Manoj Raghavan:…typically Tata Group companies have an issue in issuing ESOP.
4) Exchange rate fluctuations and hedging activities of Tata Elxsi Ltd:

The company hedges about 50% of its overall exposure in foreign currencies. This is because as per the
company, almost 50% of revenue in any foreign currency is spent in the same currency by way of salaries,
purchase of software/hardware solutions for reselling etc.
Nitin Pai: Typically, what we do is, about 50% of the FOREX are expenses that we have to incur
in the same currency. So, whatever is the outstanding amount, typically we hedge about 50%
However, at times, this hedging policy has not proved efficient enough because, on certain occasions, the
company has faced significant adverse impacts due to exchange rate fluctuations.
One such period was FY2008 when the despite a nearly 33% increase in sales, the profits of the company
did not increase
Its profits did not increase because a sharp appreciation in India Rupee ate into its profitability despite its
hedging activities.
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One of the significant events during the year was the steep and sudden appreciation of the
rupee against various foreign currencies…The net effect of this has been to adversely impact your
Company’s turnover and value of receivables, in spite of the hedging activities undertaken during
this period
In FY2010, the company reported a significant decline in its revenues as well as profits. In addition, it
suffered a loss due to exchange fluctuations of about ₹8.5 cr (FY2010 annual report, page 61). This loss
was due to a sharp appreciation of the Indian Rupee against almost all foreign currencies.
The Rupee also strengthened during the year – against the dollar by 12%, the Pound by
7%, the Euro by 11% and the Yen by 7% – resulting in lower export realizations. These factors
contributed to the turnover dropping by 10%…and Profits after Tax dropping by 17.54%
In FY2015, the company suffered a loss of ₹6.3 cr due to foreign exchange fluctuations (FY2015 annual
report, page 82). In FY2017, the loss due to foreign exchange fluctuations increased to more than ₹21 cr
(FY2017 annual report, page 75), which was a key reason for the decline in the operating profit margins of
the company in FY2017 from the previous year.
The hedging policy of the company seems to leave room for improvement because it leads to a large
fluctuation in the impact of foreign exchange movements. For example, in FY2019, the impact of foreign
exchange fluctuations was about ₹26 cr. from a forex profit in Q2 to a forex loss in Q3.
Madhukar Dev: As shown in our published results, the impact is a Rs. 26 crores swing between
the positive of Q2 and the negative of Q3.
The credit rating agency, ICRA, has also highlighted foreign exchange fluctuations as one of the major
challenges for Tata Elxsi Ltd.
Credit rating report by ICRA, October 2015, page 1:
The ratings also take into account…the vulnerability of the Company’s revenues and margins
to adverse movements in foreign exchange rates.
Going ahead, an investor should monitor the forex gains and losses of Tata Elxsi Ltd to assess the efficiency
of its hedging policy. This is because, at times in the past, foreign exchange fluctuations have nullified the
benefits of the entire sales growth achieved by the company.
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5) Geopolitical and country-specific risks faced by Tata Elxsi Ltd:

Tata Elxsi Ltd earns a large part of its revenue via exports. In FY2022, about 84% of its revenue was from
foreign countries and only about 16% of its revenue was from India (Q4-FY2022 Earnings presentation,
April 2022, page 17).
Because of the high dependence on foreign countries, many times, the business performance of Tata Elxsi
Ltd is impacted by geopolitical factors.
For example, in FY1999, the business of the company was impacted when the USA imposed sanctions
against India after she conducted nuclear tests in May 1998. Due to sanctions, US companies were barred
from selling software/hardware to Indian companies. As a result, the Education and Research segment of
the company was impacted.
In the Education and Research segment, the imposition of sanctions by the U.S. Govt. in May ’98,
on supplies to certain Indian entities, considerably affected business expansion for the Company
in these accounts during the current year.
In FY2002, the business performance of the company suffered due to the attack by Al-Qaeda on the World
Trade Center and the subsequent US-Afghanistan war.
In the overseas markets, the already adverse economic conditions were aggravated by the terrorist
attack on 11th September, 2001 on the World Trade Centre towers in New York, the subsequent
anthrax scare in the US and the attack on Afghanistan, all of which combined to restrict expansion
of business.
Later on, the business of Tata Elxsi Ltd from one of its largest customers, JLR, was impacted when Britain
exited the European Union (Brexit).
The business of Tata Elxsi Ltd has continuously been affected by the tightening of visa policies by different
countries especially the USA and UK. It has repeatedly highlighted visa restrictions as one of the challenges
for its business.
Concern areas continue to be exchange risk and visa restrictions.
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challenges due to the changes in immigration policies in countries such as US and UK that
increases the cost of deploying resources in those regions
Therefore, an investor should always be vigilant that due to the global nature of the company’s business,
any adverse event in any part of the world may have affected the business of Tata Elxsi Ltd.
6) Instances of weaknesses in processes at Tata Elxsi Ltd:

An investor comes across certain instances where it becomes apparent that the business processes at Tata
Elxsi Ltd left room for improvement.
In FY2002, the company declared a dividend; however, it later had to reverse this decision when stock
exchanges intimated to Tata Elxsi Ltd that its dividend declaration did not meet the criteria mentioned in
the listing agreement.
This dividend was rescinded after the Company received a subsequent communication from some
Stock Exchanges on which it was listed to ensure compliance with the provisions of Clause 16 of
the Listing Agreement
In FY2010, Tata Elxsi Ltd did not deposit undisputed sales tax dues to govt. authorities in Canada within
time limits, as these were overdue for more than 6-months and were highlighted by the auditor of the
company in the annual report.
As at March 31, 2010, except for sales tax dues of Rs.915,106/- in Canada which were in arrears
for more than six months from the date they became payable
In the FY2003 annual report, Tata Elxsi Ltd for the first time reported its related party transactions with its
promoter Tata Sons Ltd. As per the company, it had started transacting with Tata Sons Ltd for the first time
in FY2003; because in FY2002, the value of sales as well as outstanding with Tata Sons Ltd was nil.
However, while analysing the said related party transactions, an investor is surprised to note that the
outstanding amount to be received from Tata Sons Ltd was higher than the sales & services done to Tata
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Sons Ltd. It might be due to an error in the annual report or there might be transactions other than sales &
services between the company and Tata Sons Ltd, which should have also been disclosed.
Moreover, in the subsequent years, while disclosing the related party transactions of the company, it did
not provide the details of counterparty company-wise transactions and outstanding i.e. it did not mention
the size of transactions with individual companies. Instead, Tata Elxsi Ltd clubbed all the transactions with
“Company with significant influence” as one. Similarly, it clubbed all the transactions with entities like
“Subsidiaries of Tata Sons Private Limited” or “Other related parties” as one.
Even though Tata Elxsi Ltd might have fulfilled the minimum disclosure criteria as per statutory
requirements by presenting the said “clubbed” data; however, it falls short of providing good insights to the
readers of the annual report in assessing the exposure that Tata Elxsi Ltd has to different Tata group
companies.
An investor may contact the company directly if she wishes to take a detailed counterparty-wise breakup
of its related party transactions.
The Margin of Safety in the market price of Tata Elxsi Ltd:

Currently (June 24, 2022), Tata Elxsi Ltd is available at a price-to-earnings (PE) ratio of about 88 based on
earnings of FY2022. An investor would appreciate that a PE ratio of 88 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, Tata Elxsi Ltd seems a company, which has grown its sales at a decent rate of 17% year on year
for the last 10 years. The growth has been associated with nearly consistent improving profit margins except
for FY2017 and FY2020. In FY2017, the profit margins declined due to forex losses whereas, in FY2020,
the profit margins declined due to a large pension liability of the outgoing MD&CEO.
Otherwise, over the last decade, the profit margins have improved due to consistent efforts of the company
to focus on high-margin R&D services business in addition to reducing the focus on low-margin or loss-
making business divisions. Over the years, Tata Elxsi Ltd has reduced its share of the revenue from the
automotive segment and increased the share from high-margin medical and media segments. It has
deprioritized the low-margin systems integration segment as well as the loss-making visual computing labs
division.
Strategic decisions like a focus on long-term and large-value deals, as well as a focus on getting repeat
business from existing clients instead of continuously chasing new customers, have also helped the
company in improving its profitability. Recent changes in the business mix like an increase in the share of
offshore revenue as well as fixed-price contracts and a simultaneous increase in the employee utilization
level have increased its profit margins.
A strong clarity of the business vision of the company for avoiding unnecessary diversifications and
unsuitable and expensive acquisitions has protected the capital of the company, which is essential in the
face of growing competition from large IT services companies.
In recent years, Tata Elxsi Ltd has faced an increase in its receivables days due to its attempts to generate
new business in the automotive division outside JLR as well as the support extended to customers during
Covid times. Nevertheless, the company has generated a significant surplus cash flow; about half of which
it has distributed to the shareholders as dividends.
Tata Elxsi Ltd is a professionally managed company, which has seen only two MD&CEOs in the last 25
years. It has promoted long-time company veterans as MD&CEO. Its employee retention policies seemed
to bear good results when its attrition levels had declined from 18% in FY2014 to about 6% in FY2021.
However, in recent years, it has seen strong poaching attempts on its employees and its attrition rate has
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increased to 20% in FY2022. It has attempted to retain employees with a special one-time bonus in FY2022
and has increased the pace of hiring.
The business of Tata Elxsi Ltd is exposed to geopolitical, country-specific developments as well as foreign
exchange fluctuations. Its business was impacted during US sanctions on India after nuclear tests, the US-
Afghanistan war after the 9/11 attacks, and Brexit apart from phases like the dot-com bubble of 2000, and
the global financial meltdown of 2008-09. Phases of appreciation of the Indian Rupee against major foreign
currencies have affected the profitability of Tata Elxsi Ltd.
Going ahead, an investor should keep a close watch on the profit margins of the company including factors
like the share of offshore as well as fixed-price business. She should monitor the employee utilization levels
as well as the attrition level. She should monitor the receivables days of the company to assess its collection
efficiency as well as analyse any acquisition if announced by the company. The investor should monitor
the forex losses suffered by the company to assess the suitability of its hedging policy.
These are our views on Tata Elxsi Ltd. However, investors should do their own analysis before making any
investment-related decisions about the company.
P.S.

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3) Laurus Labs Ltd

Laurus Labs Ltd is an Indian pharmaceutical company focusing on the production of APIs, formulations as
well as the custom synthesis of drugs in antiretroviral (HIV), Oncology, Hepatitis-C, Diabetes,
Cardiovascular diseases etc.
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While analysing the history of Laurus Labs Ltd, an investor notices that in 2014, it had purchased a 100%
stake in Viziphar Biosciences Private Limited to make it a wholly-owned subsidiary. As a result, in its red-
herring prospectus (RHP) before its initial public offer (IPO) in December 2016, it disclosed consolidated
financial statements from FY2014 onwards.
Thereafter, Laurus Labs Ltd has established many Indian and overseas direct subsidiaries, step-down
subsidiaries, associates etc. As per the FY2022 annual report, page 52, on March 31, 2022, Laurus Labs
Ltd had 7 subsidiary companies including 5 wholly-owned subsidiaries and one associate company.
Therefore, from FY2014 onwards, Laurus Labs Ltd has continued to report standalone as well as
consolidated financials. However, before FY2014, the company used to report only standalone financials.
Therefore, in the case of Laurus Labs Ltd, during the last 10 years, we have analysed standalone financials
for FY2013 and consolidated financials from FY2014 onwards.
With this background, let us analyse the financial performance of Laurus Labs Ltd.
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Financial and Business Analysis of Laurus Labs Ltd:

Sales of Laurus Labs Ltd have grown at a pace of 24% year on year from ₹719 cr in FY2013 to ₹4,936 cr
in FY2022. The sales of the company have increased every year since FY2013. Moreover, during the
FY2019-FY2021 period, the sales growth of the company increased to 45% year-on-year when the sales of
Laurus Labs Ltd increased sharply from ₹2,292 cr in FY2019 to ₹4,814 in FY2021.
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The operating profit margin (OPM) of the company has shown a cyclical pattern. Initially, the OPM
declined from 20% in FY 2013 to 15% in FY2015. Thereafter, OPM increased to 21% in FY2017 only to
decline to 16% in FY2019. However, thereafter, the OPM increased sharply to 32% in FY2021. In FY2022,
Laurus Labs Ltd had an OPM of 29%. Over FY2013-FY2022, the net profit margin (NPM) of Laurus Labs
Ltd has followed the same pattern as its OPM.
To understand the reasons for the financial performance of Laurus Labs Ltd, an investor needs to read the
publicly available documents of the company like its annual reports from FY2014 onwards, RHP for its
IPO, conference calls, and credit rating reports as well as its corporate announcements. Then she would
understand the factors leading to its consistently increasing sales with a sharp increase during FY2019-
FY2021 as well as its fluctuating profit margins.
In addition, it would help an investor if she read the following article about the business analysis of
pharmaceutical companies: How to do Business Analysis of Pharmaceutical
Companies
The above article highlights the business environment and the challenges faced by different companies
operating in the pharmaceutical industry like bulk drugs/API (active pharmaceutical ingredient)
manufacturers, formulation (read to consume) drug manufacturers, contract research and manufacturing
(CRAMS) players as well as distributors. It also highlights the steps each of these companies takes to
increase their competitive advantage.
After going through the above-mentioned article and the documents, an investor notices the following key
factors, which have led to the significant improvement in the business of Laurus Labs Ltd, which she needs
to keep in her mind before making any predictions about the performance of the company.
1) Diversification from ARV API into formulations and CRAMS:

One of the biggest strategic decisions taken by Laurus Labs Ltd, which has contributed immensely to the
growth of its business is to diversify out of anti-retroviral (ARV) APIs focusing on the treatment of Human
Immunodeficiency Virus (HIV) and enter into segments like formulations and CRAMS (synthesis
division). It has led to a significant increase in revenues as well as profit margins.
Originally, the business of Laurus Labs Ltd was highly dependent on APIs. The company had started
thinking about diversification out of APIs into formulations as well as starting materials & intermediates in
FY2014.
Company aspires to extend from the manufacture of APIs to formulations in the near future that
derives a third of its revenues from key starting materials and intermediates, a third from APIs and
a third from formulation, over the foreseeable future.
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Therefore, over the years, it made significant investments to create formulations and synthesis capacities.
Finally, it could move its business away from the concentration around APIs.
The following chart from the April 2022 presentation of Laurus Labs Ltd indicates the significant
diversification achieved by the company over the last 5-years.
The share of ARV APIs has declined from 80% in FY2017 to 25% in FY2022. At the same time, the share
of formulations has increased to 38%. Synthesis (CRAMS) now contributes about 19% of revenues and
APIs other than ARV i.e. focusing on cancer therapy (Oncology), anti-allergic, diabetes, heart diseases etc.
contribute 16% to the revenue.
Let us try to understand how the efforts by Laurus Labs Ltd to diversify away from ARV APIs have helped
its business.
1.1) Formulations have helped Laurus Labs Ltd to immensely grow its sales as well as
profitability:
Formulations players manufacture ready-to-consume drugs and sell them in the market. They are at a higher
level in the pharmaceutical value chain and are supposed to have a better business profile than API/bulk
drug manufacturers.
Rating Methodology – Pharmaceutical Sector by the credit rating agency, CARE, June 2017, page 7:
Formulation manufacturers, being closest to the market, are at a higher point in the
pharmaceutical value chain compared to API and intermediate manufacturers and hence, are
likely to have a superior business risk profile
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Therefore, when Laurus Labs Ltd entered formulations, then it strengthened its business profile and
competitive advantages. It focused on manufacturing formulations only from its own APIs. Therefore, it
could capture a higher share of value addition in the pharmaceutical value chain i.e. value in creating APIs
as well as the value in creating formulations.
Conference call, August 2017, page 8:
Dr. Satya: Interestingly, all our Formulations what we have in our portfolio, we have our own
APIs. So far in our portfolio, current or in the near future, we are not anticipating that we will buy
third-party API and do formulations.
This decision helped Laurus Labs Ltd earn a higher profit margin when it sold a larger quantity of
formulations/finished dosage forms (FDFs). The company highlighted this aspect to its investors in January
2020 conference call, page 8:
V.V. Ravikumar:…FDF business is certainly helping us to increase our gross margins because
we are getting more gross margins on APIs for sure in formulation business.
The credit rating agency, CARE also highlighted in its report of June 2020 that the profit margins of Laurus
Labs Ltd have improved due to increased contribution from the formulations segment.
profitability has increased due to change in composition of revenue from API to formulations
The ability of Laurus Labs Ltd to gain a higher share of value-addition by entering into formulations brought
strength to its business model because it could face pricing pressures in a better manner.
Dr. Satyanarayana Chava: Since we became an integrated player in ARV formulations, we

believe we will have ability to weather the pricing challenges.
In fact, continued pricing pressure in the pharmaceutical industry, which was enhanced by the consolidation
of distributor companies in the USA was one of the reasons for Laurus Labs Ltd to enter into formulations.
Conference call, May 2017, pages 4-5:
Kunal Mehta:..we have been seeing channel consolidation in the US. That is affecting the
prices of Formulations. So from a perspective of API supplier to those companies, how do the
price decreases affect the API suppliers..?
Dr. Chava: The price pressure in US definitely put some stress on the APIs. They are buying from
a third party. If they are vertically integrated, they can withstand pressure much better than the
non-integrated companies. That was one of the reasons for us to foray into Finished Dosage Forms
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From the above article shared on the business analysis of pharmaceutical companies,
an investor would note that one of the steps that generics players take to increase competitive advantage is
by becoming vertically integrated.
No wonder the vertical integration by Laurus Labs Ltd into formulations has increased the competitive
advantage of the company in the face of other large pharma companies selling ARV drugs.
Conference call, November 2018, page 14:
Dr. Satyanarayana Chava: The lion share of the market is with Mylan, Aurobindo, Hetero and
Cipla, but we are fully integrated so that is the only advantage we have.
In formulations, Laurus Labs Ltd focused on three key segments:
1. Selling formulations of ARV (HIV) drugs, selling non-ARV drugs to lower & middle-income
countries (LMIC),
2. Making formulations for customers in Europe and other developed markets i.e. custom synthesis,
CRAMS and
3. Selling formulations of non-ARV drugs in the US and other developed markets under its own brand
names.
All these three segments were almost non-existent/very small at the time of IPO in FY2017. Therefore,
when these segments grew, they straightaway added to the revenues of Laurus Labs Ltd. For example,
during the FY2019-FY2021 period, when the company grew its sales at an annual growth rate of 45%, the
major contribution came from the formulations segment, which grew from a small level of ₹5 cr in FY2019
to ₹825 cr in FY2021.
formulation segment, growing 165x from ₹5 crore to ₹825 crore from 2018-19 to 2020-21.
The formulations segment/finished dosage forms (FDF) further increased to about ₹1,875 cr in FY2022
(i.e. 38% of FY2022 revenues of ₹4,936 cr).
The growth of the FDF (formulations) segment has been a new business for Laurus Labs Ltd without eating
into its own API business because the company is avoiding taking away the market share of its customers.
Conference call, August 2018, pages 15, 18:
Dr. Satyanarayana Chava: This will be incremental. We did not expect any cannibalization
Nitin Agarwal: So you are not necessarily sort of trying to grab market share in the current
customers?
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Dr. Satyanarayana Chava: Yes.
Moreover, the company has made sure that its API supplies to its existing customers continue without
disruption. As a result, it has created additional API capacities for its own formulation manufacturing.
Dr. Satyanarayana Chava:…it is not an activity where we are not doing without knowledge of
our current customers so we also made very clear we are creating enough capacity such that we
will not hamper any deliveries to our existing clients.
As a result, due to large investments in the formulations business, Laurus Labs Ltd could generate an
additional business of about ₹1,875 cr over FY2020, FY2021 and FY2022, which contributed significantly
to its sales as well as profitability.
Going ahead, Laurus Labs Ltd has decided to further increase its formulation capacity significantly as a
part of the capacity expansion plans of ₹2,000 cr to ₹2,500 cr in FY2023-FY2024.
1.2) Entry into custom synthesis (CRAMS) business increased the profit margins and
reduced the risk for Laurus Labs Ltd:
CRAMS/synthesis business of Laurus Labs Ltd is one of its highest-margin business segments. Therefore,
as the share of the synthesis business increases in the revenues of Laurus Labs Ltd, its profit margins
increase.
Dr. Satyanarayana Chava: So we had improved sales in our Synthesis business where our
margins are significantly higher than our other businesses.
In fact, the contract manufacturing business of Laurus Labs Ltd from Aspen group is the highest margin
business.
Dr. Satyanarayana Chava: Absolutely, this is the highest margin business right now.
As a result, an improvement in the synthesis business added to the significant increase in the profit margins
of Laurus Labs Ltd during FY2020-FY2022.
This represents PAT margins of 9.0% of revenue versus 4.1% in 2018-19. This increase is due
to improved performance from businesses like FDF and Custom Synthesis.
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By achieving an increase in the contribution from the synthesis business, Laurus Labs Ltd has reduced risk
in its overall business because as per the company, this business comes with very low development risk and
without pricing pressure.
Dr. Satyanarayana Chava: Synthesis business…is also very interesting business because there
is no development risk, because customer will give you the product, basic process and you optimize
and start giving. And there is no price pressure. Volume will only go up if molecule moves from
early clinical phase to advanced phases in commercial.
Moreover, Laurus Labs Ltd has been able to get some very good business terms from its synthesis
customers. Under one such favourable term, its customers provide it funding when it creates a dedicated
manufacturing unit for them.
Last year when Laurus Labs Ltd signed a multi-year contract-manufacturing contract with a global life
sciences company, then the customer agreed to provide funding for its manufacturing plant.
Dr. S. Chava:…signed a multi-year supply contract with a global life science company during
the quarter…also set up a dedicated manufacturing site to cater to the demand. Part of these
CAPEX will be funded through long-term commercial advance apart from sponsoring
development costs.
Similarly, in the past, one of its customers, the Aspen group of South Africa has also funded the fixed costs
of the dedicated manufacturing unit.
Dr. Satyanarayana Chava: So we have an agreement where we will recover all the fixed
expenditure and we get cost plus certain percentage…On the day one itself in Unit 5, we are not
incurring any losses right now. We are recovering all the expenses of Unit 5 from Aspen.
V.V. Ravi Kumar: We have started billing to the Aspen on the fixed expenses, though we have
supplied first validation quantity in October 2017, still there are unrecovered fixed cost that are
getting reimbursed.
When Laurus Labs Ltd entered into an arrangement with Natco Pharma about making APIs for Hepatitis-
C drugs, then the agreement allowed for Laurus Labs Ltd to earn money on the sale of API to Natco as well
as 50% of profits that Natco generated from the sale of Hepatitis-C drugs (formulations) using the APIs of
Laurus Labs Ltd.
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RHP, December 2016, page 49:
Our Company has entered into an arrangement to manufacture and sell Hepatitis C APIs with
NATCO, who commands a 38.5% share of the Indian Hepatitis C market
Dr. Satya: For Hep-C, we are supplying all the APIs required for the portfolio – one is made by
Natco. So majority of our API sales in Hep-C goes to Natco.
Dr. Satya: We mentioned in many occasions. We supply API and we get 50% of the profits on the
brands
The company has similar profit-sharing contracts with other customers like US-based Citron Pharma and
Dr Reddy’s.
We currently have contracts with generic pharmaceutical companies such as Citron Pharma LLC
(“Citron”), NATCO and Dr. Reddy’s Laboratories Limited for the development of finished dosage
products in the several therapeutic area on a profit and cost sharing basis.
Therefore, such liberal business terms with customers in the synthesis/CRAMS business help in reducing
the business risk of Laurus Labs Ltd.
As a result, Laurus Labs Ltd intends to increase the share of the synthesis business from 19% in FY2022 to
25% by FY2025.
Jeevan Patwa: How much you basically see your synthesis business in next three years or four
years?
Dr. S Chava: By FY ‘25 we want this business to be at least 25% of our overall revenue.
1.3) Oncology API segment is a high margin, but low volume business:
As an additional source of diversification, Laurus Labs Ltd has also created a large capacity in APIs for
cancer treatment (Oncology) because it is also one of the high-margin businesses.
Dr. Satyanarayana Chava: We have the largest Onco API capacities in the country.
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Increasing contribution from the Oncology API segment has added to the increased profit margins of the
company.
V.V. Ravikumar:…EBITDA margins have increased by 50 bps. So this is on account of the

higher volumes relating to…Oncology and then Synthesis business, where you are all aware that
the gross margins are higher.
However, Laurus Labs Ltd is not expecting a lot of growth from the Oncology API segment because it is a
high-margin-low-volume business.
Dr. Satyanarayana Chava: We do not expect to significant growth coming from Onco APIs. In
the Onco APIs as you are aware, the volume is low and Despite of having very large capacities
the value growth translation is quite low, which is the nature of Onco business.
Therefore, investors should keep this aspect of the Oncology API business in mind while projecting the
performance of Laurus Labs Ltd in future.
1.4) Further diversification in recombinant technology:
In FY2021, Laurus Labs Ltd acquired a majority stake in Richcore Lifesciences Pvt. Ltd and renamed it
Laurus Bio Private Limited.
The acquisition provided it access to recombinant technology, which it did not have. In addition, the
acquisition saved Laurus Labs Ltd almost 6-7 years that it would take to develop recombinant technology
in-house.
Dr. Satyanarayana Chava: We have the expertise in biocatalysis and fermentation but we do
not have any expertise in recombinant. The idea for us to acquire this capability is to shorten our
gestation period, if we start Greenfield, it will take six to seven years. By this acquisition, we will
cut out the gestation period significantly
Moreover, the newly acquired business has high-profit margins, which will improve the profitability of
Laurus Labs Ltd as it grows.
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Dr. Satyanarayana Chava: These products are very high margin business I could see from
the gross margins of about 70%.
As a result, the company is planning to significantly increase the capacity of Laurus Bio Private Limited.
After, its acquisition in FY2021, when it had a fermentation capacity of 10,750 liters, in FY2022, it
increased the fermentation capacity by 180,000 liters.
Conference call, January 2022, page
Dr. S. Chava: During the quarter, Laurus Bio commissioned two more fermenters of 45KL each
taking to total capacity of 180KL.
The newly expanded fermentation capacity of 180,000 liters was already tied up with a prospective
customer even before it was completed.
Dr. Satyanarayana Chava: And currently, the new plant one is being built and will be
operational by March 2021 is already sold, the capacity sold to one customer as part of the
CDMO.
Therefore, Laurus Labs Ltd is looking to aggressively grow this segment and has purchased land for
increasing the fermentation capacity by about 3-4 million liters out of which about 1 million liters will be
added in the first phase.
Dr. S Chava: Yes, they have taken land. Okay. 30 acre land…They will put in a phased manner
of 1 million plus 1 million plus one. In fact, the land can accommodate up to 3 million litre
fermentation capacity.
Therefore, going ahead, an investor should closely monitor the performance of Laurus Bio Private Ltd and
the execution of its capacity expansion projects to assess whether they are completed on time and with cost
estimates or not.
2) Being prepared in advance for changes in ARV/HIV treatment guidelines:

Laurus Labs Ltd has stated that whenever there is any disruption in its business segments, then it wants to
be a part of it i.e. it wants to actively gain from such disruptions instead of reacting and recovering from
their aftereffects.
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Dr. Satyanarayana Chava:…we are in ARV business since last two decades and we are
watching the developments very carefully. And if there is a disruption, we want to be part of the
disruption rather than follow it.
As a result, when the HIV/ARV treatment had a major shift from Efavirenz-based combination drugs (TLE:
Tenofovir, Lamivudine and Efavirenz) to Dolutegravir-based combination drugs (DLT: Dolutegravir,
Lamivudine and Tenofovir), then Laurus Labs Ltd was ready in advance with manufacturing capacities to
benefit from it.
Previously, Efavirenz-based therapy was the mainstay of ARV/HIV therapy and Laurus Labs Ltd had a
very large market share in the APIs for this therapy. In FY2014, Efavirenz-based therapy had 60% of HIV
drugs and Laurus Labs Ltd had a 50% global market share in Efavirenz API. At that time, Efavirenz API
constituted 50% of the revenues of the company.
Efavirenz: Within a short span of five years, the product has emerged as the largest grosser for
Laurus Labs, accounting for 50% of revenues. Laurus thus achieved global leadership via the
manufacture of Efavirenz API which caters to the needs of more than 60% of HIV patients under
drug therapy worldwide and enjoys a global market share of around 50 %.
Therefore, an investor would appreciate that a shift from Efavirenz-based therapy to Dolutegravir-based
therapy was a major challenge for Laurus Labs Ltd because Efavirenz constituted about 50% of its revenues
in FY2014. In addition, the new drug, Dolutegravir was needed in a much lower quantity (50 mg) than the
existing drug, Efavirenz (600 mg). Therefore, it was looking at a 12 times reduction in the API quantity.
Dr. Satya: As you are aware from the dose, Dolutegravir is 50 mgs and Efavirenz is 600 mgs.
The amount of API required is one-twelfth.
However, the company decided to handle this upcoming disruption in two steps. First, it created the
manufacturing capacity of Dolutegravir in advance before the tenders for ARV/HIV treatment started
asking for it. In addition, the company also created a large manufacturing capacity for Lamivudine so that
it could grow from a simple API supplier of ARV drugs to a formulator i.e. producing ready-to-consume
triple combination drug (DLT).
Dr. Satyanarayana Chava: During this quarter FY2019 we are going to inaugurate one of the
largest capacity for the Lamivudine and we are adding capacity for Dolutegravir even though
there will be a new enrolment happening in Dolutegravir we do not expect significant shift from
one therapy to another therapy.
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Laurus Labs Ltd increased its manufacturing capacity for Dolutegravir so much that it could meet its own
formulation requirement as well as sell the API outside to meet the needs of other customers.
Dr. Satyanarayana Chava: So we have increased our capacity of Dolutegravir

significantly and we are able to meet our demand, we also did supply some from quantities to third
party customers.
Laurus Labs Ltd did not want to miss its market leadership in the ARV/HIV drug segment, which it had
created over the years. Therefore, it made large investments in the capacities of Dolutegravir and
Lamivudine so that it could make up for any loss in business from Efavirenz and it could maintain its
revenue from ARV/HIV drugs.
Conference call, February 2019, page 3:
Dr. Satyanarayana Chava:…Dolutegravir and Lamivudine are not in our current sales,
any loss of Efavirenz market share will be compensated by sales of Lamivudine and Dolutegravir,
so we strongly believe ARV we will definitely maintain the franchisee at the same level and still
we continue to grow.
Over the next year, in FY2020, the ARV/HIV drug tenders started changing, Dolutegravir started making
its presence in the place of Efavirenz, and the sale of ARV API business of Laurus Labs Ltd started
declining.
Dr. Satyanarayana Chava:…ARV API business it continues to slow down, it has degrown by
23% year-on-year…fall in this growth is mainly led by change in treatment regimen from
Efavirenz to Dolutegravir
Soon, Dolutegravir-based therapies took over about 70% market share of the first-line of ARV/HIV
treatment.
Dr. Satyanarayana Chava: In the first line DLT treatment occupies maybe 70% of the market
share, remaining 30% is done through TLE or TEE
Despite this significant change in the ARV/HIV treatment drugs away from its main product (Efavirenz),
Laurus Labs Ltd was able to quickly gain a significant market share in the new line of drugs. In FY2021, it
had about one-third global market share in the overall API & formulations segment of ARV/HIV drugs.
Conference call, October 2020, pages 10, 11, and 13:
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Nitin Agarwal: 30%, 35% of the TLD market, we are present either through API or through
formulations.
Dr. Satyanarayana Chava: That is a good assumption, yes.
Therefore, Laurus Labs Ltd could successfully handle a large change in the ARV market by strategically
creating manufacturing capacities in the new drugs/APIs and then benefit from this change by positioning
itself as a triple-combination drug (DLT) formulation supplier instead of being a simple API supplier.
Moreover, it achieved this without compromising its API sales to third-party existing customers because;
the company created additional API capacities to meet its own formulation requirements.
These steps helped Laurus Labs Ltd in maintaining its market leadership position in the ARV market,
expand its business in the formulations segment as well as improve its profit margins.
Currently, the company is expanding its presence in the second-line drugs for ARV/HIV treatment.
3) Backward integration into intermediates to ensure supply of raw material:

Laurus Labs Ltd does not enter into long-term supply contracts with its suppliers. Therefore, it faces the
risk of increasing raw material prices whenever there is any challenge in its supply chain.
We typically do not enter into long term supply contracts with any of our vendors and instead
place purchase orders with them from time to time. We are thus exposed to fluctuations in
availability and prices of our raw materials
During FY2019, Laurus Labs Ltd faced challenges in getting raw material (intermediates) to produce ARV
APIs and it had to pay a high price to get the same.
V.V. Ravi Kumar:…China is getting more stricter into the environmental issues and they have
started closing down the factories on a short notice and because of that the material availability
is not a question, but the prices have shot up and since we cannot lose the production, we procured
the materials at an higher price.
For some of the intermediates, the prices increased by up to 80%.
Nimish Mehta:…what is the price increase that you have seen in this two products, Emtricitabine
and Lamivudine, if you can just percentage price increase that would be helpful?
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Dr. Satyanarayana Chava: For the intermediate the price is for as high as 80%.
An increase in raw material prices from China was one of the reasons for a decline in the OPM of Laurus
Labs Ltd in FY2019 to 16% from 20% in FY2018.
Credit rating report, CARE, June 2019, page 2:
Decline in profitability margins during FY19: The decline in PBILDT level of the company was
primarily due to increase in major raw material costs which are being sourced from China.
As a result, the company decided to make the intermediates for ARVs, Emtricitabine and Lamivudine in-
house so that it does not stay dependent on China for them.
As a result, of this backward integration, Laurus Labs Ltd could recover about 2% in EBITDA margins out
of the 3% that it had lost in the ARV segment due to high intermediate prices from China.
Conference call, November 2018, pages 3 & 6:
Dr. Satyanarayana Chava: We are also happy to share we have completed backward
integration of our key ARV products Emtricitabine and Lamivudine and we see the benefit will
come from Q3 onwards.
Dr. Satyanarayana Chava: We expect gross margins to improve by ~2% points because of
backward integration.
Ananda Padmanand: And to what extent they would have eroded…?
Dr. Satyanarayana Chava: I would say maybe 3% I am talking about overall ARV as a basket.
The backward integration for ARV intermediates helped in an increase in the profit margins for the
company in FY2020.
Dr. Satyanarayana Chava: The backward integration plan for ARV intermediates to derisk
supply chain challenges coming from China were completed successfully and that was the
reason our gross margins improved
Subsequently, in FY2020, the company faced challenges in getting raw material for its Oncology API,
Gemcitabine from China. Even then, it decided to make its intermediate in-house.
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V.V. Ravikumar:…one of our key Oncology product Gemcitabine had an issue because of
the supply chain issues from China. We have initiated an in-house manufacturing of that
intermediate and probably from September onwards we are geared up to produce
Within a few months, Laurus Labs Ltd completed the backward integration for the intermediates for
Gemcitabine and it could reduce its reliance on imports from China and make its business model stronger.
Dr. Satyanarayana Chava:…it was successfully completed and currently whatever

Gemcitabine we are producing we are using is by using our in-house intermediate only. We are not
buying intermediates from China for the last two to three months.
When the company faced challenges in getting raw materials from China in FY2018, then Laurus Labs Ltd
also decided to set up a dedicated R&D unit to focus on intermediates and strengthen its supply chain.
Dr. Satyanarayana Chava: Our Vizag R&D expansion is to boost our efforts towards backward
integration….will focus more on starting meters and intermediate to have more control on supply
chain.
Therefore, an investor would appreciate that whenever Laurus Labs Ltd faced challenges in sourcing raw
material, then it took the occasion as an opportunity to strengthen its business model so that it does not face
such challenges in the future.
This increase in the strength in the business model of Laurus Labs Ltd is reflected in the increasing credit
rating of the company over the years.
In 2010, the credit rating agency, CARE has assigned it a credit rating of BB+, which indicated a very high
credit risk and a high possibility of default. It was because; the company was continuously making cash
losses since its inception.
Credit rating report, CARE, April 2010, page 1:
CARE has assigned ‘CARE BB+’ (Double B Plus) rating to the long-term bank facilities of Aptuit
Laurus P Ltd. (Laurus)….Facilities with this rating are considered to offer inadequate safety for
timely servicing of debt obligations. Such facilities carry high credit risk.
The ratings factor in limited track record of the company, cash losses since commencement of
commercial operation in Q3 FY’08,
However, in about the next 10 years, in 2021, CARE has improved the credit rating of the company to AA,
which indicates a very low credit risk and is only two steps below the highest possible credit rating of AAA.
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Going ahead, an investor should monitor the business performance of the company closely to assess
whether it is able to maintain the strength of its business model.
4) Low pricing power over its customers:

Laurus Labs Ltd has primarily been a generics player making APIs and formulations for drugs, which were
originally made by innovator large MNC pharma companies. Laurus Labs Ltd is able to make these drugs
as either their patents have expired or it has licensed these drugs from the patent owners. Such
products/drugs are commodities where the drug produced by one company are the same as the drugs
produced by another company. This leads to intense competition in the pharmaceutical industry.
The pharmaceutical industry is a highly competitive market with several major pharmaceutical
companies present, and therefore it is challenging to improve market share and profitability.
As a result, generics API as well as formulations companies do not have a lot of pricing power over its
customers. The same is true for Laurus Labs Ltd even though it has a very high global market share for
many of its products.
The company intimated to its shareholders about this weakens in the FY2019 annual report, page 47:
Weakness: Does not have much pricing power in products in which it has significant market
share
In FY2019, when the company had to buy intermediates from China at high prices, then it could not get a
price hike from its customers like Aspen group, South Africa.
Dr. Satyanarayana Chava: we sell significant volumes to our partner Aspen where we had
a three-year price agreement for all three APIs we sell, Efavirenz, Tenofovir and Emtricitabine.
We are still talking to them for the price increase so far we are not successful
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Laurus Labs Ltd realized that it could not get a complete pass on the increase in raw material costs. At the
most, the customers would agree to a partial increase in prices and Laurus Labs Ltd would have to take a
hit on its profit margins.
Dr. Satyanarayana Chava:…we cannot pass on 100% that much we are very clear. We are
putting our best efforts to partially pass on this to customers
Another factor leading to weak pricing power for pharmaceutical companies is the active control by govt.
on drug prices.
Laurus Labs Ltd faced it when Govt. of India put control on some of the Hepatitis-C drugs that the company
used to supply API to Natco Pharma. As a result, its Hepatitis C drugs segment witnessed a sharp decline
in performance.
from April 2016, the NPPA brought Sofosbuvir, one of our key products in the Hepatitis
C therapeutic area, under price control.
Dr. Satya: We have seen significant pricing pressure in the API as well as in the Formulations,
and also please note that actually some of HEP-C formulations came under DPCO.
Going ahead, an investor should keep these pricing-related challenges in her mind while she estimates
future profit margins of Laurus Labs Ltd.
In fact, the company has also realized that it would not be able to gain price increases from its customers.
Therefore, it has also stopped factoring in price increases in its business targets.
Dr. Satyanarayana Chava: Our growth is not driven by price hikes…we have not done that in
FY’21, I do believe we will never do that in FY’22 also.
In FY2022, the profit margins of the company declined to 29% from 32% in FY2021 due to an increase in
raw material and logistics costs; however, it could not pass it on to maintain its profit margins.
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PBILDT margin reduced but remained strong at 28.99% in FY22 from 32.48% in FY21. This
reduction was due to increase in the cost of certain raw materials and high cost of logistics during
the COVID-19 crisis
5) Strong focus on research & development by Laurus Labs Ltd:

Laurus Labs Ltd has always kept a very strong focus on research & development (R&D). On average, the
company spends about 4% – 7% of its sales on R&D.
Investors’ presentation, April 2022, page 17:
In FY2022, the company had about 790 employees in the R&D department, which was about one-fourth of
the total employees of the company.
The R&D facility is staffed by over 790 R&D professionals (around 24% of the total employee
strength) in over 55 laboratories.
The company has focused on R&D right from its inception even when its business was at its initial stages.
As per the credit rating report by CARE in April 2010 (page 2), the company made cash losses and one of
the reasons for these cash losses was its high spending on R&D.
The losses were mainly due to the significant expenditure towards R&D projects along with high
interest expenses and salary expenses.
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The R&D capabilities of the company have helped the company in becoming the lowest-cost producer of
multiple APIs like ARV/HIV drugs. As a result, it could capture a large global market share. R&D
capabilities have also helped Laurus Labs Ltd gain access to reputed customers like Aspen, Mylan,
Aurobindo Pharma, Natco, Sun Pharma, and Cipla and retain their business for a long period.
Credit rating report, CARE, July 2018, page 1:
existing customers for more than a decade in the anti-retroviral and Oncology like Aspen
Pharmacare, Mylan Laboratories, Aurobindo Pharma, Natco Pharma Limited, Sun
Pharmaceutical Industries Limited, Cipla Limited.
When in FY2019, the supply chain in China faced problems, then many companies shifted their business
from China to Laurus Labs Ltd.
Damayanti Kerai: In the generic part do you think China opportunities are transit in nature or
are you seeing some opportunities to come permanently to us?
Dr. Satyanarayana Chava: Permanent to us. The customers are transferring their drug master
files to us
On the financial accounting aspect, the company does not capitalize its R&D spending and deducts it as an
expense from its income whenever it spends money on R&D. This practice affects the reporting of profits
in its financial statements.
Dr. Satyanarayana Chava:…we were unable to demonstrate the growth in profitability

quarter-on-quarter because…we do not want to capitalize preoperative expenses. We do not want
to capitalize our R&D expenditure on formulations…We did not capitalize in the API also.
The influence of R&D expenses on its profit margins is so much that the company projects that with sales
growth, a decline in its R&D spending in the terms of percentage of revenue will lead to an increase in
profit margins.
Dr. S Chava:…we invested in R&D much ahead of the business…And if you look at our R&D
expenditure remained constant as a number. But as a percentage was pegged on by almost 3.5%-
4%…So if you look at 4% came from R&D expenditure…so this is the operational leverage that
led us to EBITDA margin expansion.
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As per the management, in the recent sharp expansion of profit margins, this operating leverage has
contributed about 3%-4% to the profit margins. This is evident from a decline in the R&D expense from
7% of sales in FY2019 to 4% in FY2022 despite an increase in R&D expenditure from ₹166 cr to ₹202 cr
during this period.
The company has continued its focus on R&D. Now, it is focusing on developing sterile formulations. It is
in the process of setting up an R&D unit for the same.
Dr. Satyanarayana Chava:…we should be ready to commercialize our sterile R&D unit during
this quarter, this is being set up at IKP at Shamirpet
Going ahead, an investor should monitor the spending done by the company on R&D to assess whether it
is able to maintain its competitive edge.
6) Strong focus on strengthening relationships with existing customers instead of

adding new customers:
Laurus Labs Ltd focuses on building stronger relationships with existing customers. It is not in a continuous
quest to gain as many new customers as possible.
In FY2019, the company mentioned that in its Oncology division it is focusing on meeting the demand of
existing customers by producing new products for them instead of going after new customers and thinly
spreading its resources.
Dr. Satyanarayana Chava: We are not adding any new customers, I can tell you. In Oncology
we were producing new products to the existing customers and increasing the sales of our existing
products.
In FY2022, the company mentioned that one of the reasons it is confident of achieving its target of USD 1
billion in sales by FY2023 is because its customers are extremely happy to buy from it due to its focus on
serving existing customers instead of running after new customers.
Dr. S. Chava:…our customers are happy to buy from us because we are not adding new
customers, we are increasing sales to our existing customers. So, that is the reason we are still
comfortable with that number.
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It is a result of this focus on existing customers that the share of revenue of the company from customers
who have been with it for more than a decade was more than 65% in FY2019.
customers which have been associated with Laurus for more than a decade accounting for over
65% of the revenue in FY19.
An investor should monitor the share of the revenue from its existing customers to monitor any shift in the
strategy of the company of prioritizing existing customers.
Over the years, the tax payout ratio of Laurus Labs Ltd has been significantly lower than the standard
corporate tax rate prevalent in India. The key reason for the same is various tax incentives available to the
company like exports incentives, profits generated out of special economic zones, incentives on R&D
expenses as well as investments done by the company.
Laurus Labs Ltd had highlighted these incentives to investors in its RHP, December 2016, page 479:
Tax Incentives: We are currently availing income tax benefits…for weighted deduction of in-
house R&D expenditure…We availed investment allowance…at 15% of actual cost of new plant
and machinery…We are also availing export incentives under the Merchandise Export Incentive
Scheme (“MEIS”) on our exports and Market Accesses Initiative Reimbursement (“MAI”)
In FY2018, when the govt. reduced the weighted deduction on R&D expense from 200% to 150% and
discontinued the investment allowance, then the tax payout by Laurus Labs Ltd increased to 29% from 19%
in FY2017.
V.V. Ravi Kumar: This is because of reduction of weight deduction for the R&D expenses from
200% to 150% from FY2018 onwards and also the discontinuation of 32 AC that is for an
investment, these two contributed about the 10% increase in the effective tax rate.
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However, from FY2020, production from units 2 and 5 started, which are in special economic zones (SEZ),
which get a rebate on income tax under section 10AA.
V.V. Ravi Kumar: Once we get profits from the Unit-5 and Unit-2, these two units are SEZ units,
then the tax rate will change. So those profits will be exempted.
As a result, in FY2020, Laurus Labs Ltd got a substantial incentive in income tax and its tax payout ratio
declined to 13%.
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Going ahead, an investor should keep a close watch on the income tax incentive available to Laurus Labs
Ltd. This is because tax incentives can have a significant influence on the net profitability of the company
and its competitive advantage in tenders as well as its ability to bear pricing pressure.
Operating Efficiency Analysis of Laurus Labs Ltd:
a) Net fixed asset turnover (NFAT) of Laurus Labs Ltd:

Over the years, the NFAT of the company has declined from 3.2 in FY2014 to 2.0 in FY2022. However,
during this period, the NFAT of the company has fluctuated significantly. In the initial period of FY2014
to FY2018, the NFAT declined sharply from 3.2 to 1.5.
One reason for this decline was the large capital expenditure of about ₹1,750 cr done by Laurus Labs Ltd
during FY2014-FY2018 where it was investing money in expanding capacity for formulations as well as
APIs like Dolutegravir and Lamivudine.
However, another important reason for the decline is peculiar to pharmaceutical companies. In the pharma
industry even after a manufacturing plant is complete, the company cannot start to sell its products
straightaway. First, it has to take approvals from regulatory authorities of its target countries. Even after all
the regulatory approvals are in place, the pharma company still cannot sell its products until its customers
have approved samples produced from the new plant (called validation batches). The process of approval
of sample products i.e. validation may take about 1-1.5 years.
For example, when Laurus Labs Ltd completed the construction of it custom synthesis (CRAMS) unit for
Aspen (Unit 5) in November 2016, then it highlighted to its investors that even though the unit is complete,
its commercial sales would start only after about 15 months once all the validation batches are completed
and approved.
Dr. Satya Chava: The new unit which we inaugurated in November, we started validations.
For next 15 months, we expect to finish all the validation batches and then the commercial sales
will start.
During the validation period, the manufacturing plants of pharma companies stay as non-productive assets
that keep on consuming operating expenses without generating any revenue.
During FY2018 and FY2019 when the NFAT of Laurus Labs Ltd was the lowest at 1.5, it was carrying
manufacturing plants of about 800 cr including a large investment in the formulation business, which were
ready but not producing any revenue.
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V.V. Ravi Kumar: we have taken a conscious call, we have more than INR 800 Crores of assets
which are not generating or generating very meager revenue as of today.
From FY2020, the formulation unit started generating revenues and Laurus Labs Ltd.’s sales increased
significantly in the coming years. As a result, the NFAT of the company increased to 2.5 in FY2021.
Thereafter, in FY2021 and FY2022, Laurus Labs Ltd again went for a large capital expenditure of more
than ₹2,100 cr. Due to the above-mentioned waiting period during approvals and validation, currently,
about 25% of the total fixed assets of the company are not generating any revenues.
Dr. S Chava: …25% of our CAPEX is not yielding revenues right now.
Tushar Bohra: 25% of your CAPEX done over FY 2022?
Dr. S Chava: No, no, 25%, our gross block.
Because of the non-revenue generating capital expenditure, the NFAT of the company declined during
FY2022 to 2.0 from 2.5 in FY2021.
During this non-revenue generating period of manufacturing units, Laurus Labs Ltd ends up spending
money on the operating expenditure of the plant for producing validation batches, which many times adds
up to hundreds of crores every year.
For example, during FY2019 when the formulation unit was ready but not generating any revenue, Laurus
Labs Ltd was spending about ₹150 cr every year on the formulation segment as operating expenses.
Dr. Satyanarayana Chava: Our formulation, R&D, opex, interest, depreciation, everything is
close to INR 150 Crores per year right now.
Therefore, large investments in land, plant & machinery, skilled manpower and the added cost of non-
revenue generating approval and validation period make pharmaceutical business, especially API and
formulations like Laurus Labs Ltd, very capital-intensive.
As per the company, it is going to spend about ₹2,000-2,500 cr on capital expenditure in FY2023 and
FY2024.
Dr. Satyanarayana Chava: That is the kind of CapEx is there in front of us, but for next FY 23
and FY 24 we may stand anywhere between INR 2000 to 2500 crore CapEx.
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Going ahead an investor should keep a close watch on the commercialization of new units of Laurus Labs
Ltd to understand whether it is able to utilize its assets efficiently.
b) Inventory turnover ratio (ITR) of Laurus Labs Ltd:

Over the years, the inventory turnover ratio (ITR) of the company has declined from 4.8 in FY2014 to 3.0
in FY2022. As the company has diversified its business from API to formulations, its business has kept on
becoming inventory-intensive as reflected in the declining ITR.
V.V. Ravikumar: Formulation is taking an additional inventory of around Rs.100 Crores and
the other contract manufacturing opportunities also caused this buildup
Moreover, the company changed its production strategy for ARV formulations. Laurus Labs Ltd decided
that it would not change its production plan even if the demand is lower, which also seems to have
contributed to a higher inventory, especially in ARVs.
Dr. Satyanarayana Chava:…we are not changing our production plans based on the demand,
we fairly have a stable production plan in place for the last three months and in the next six months
also.
Dr. S. Chava:…we have built significant inventory, you might have seen our inventory also gone
up by close to Rs.300 crores, that is primarily because we are having a lot of ARV inventory
As per the company, the increasing requirement for inventory would continue in the future.
V V Ravi Kumar: And when we moved towards formulations where most of our formulations
are backward integrated with APIs, so, we need to maintain these kind of inventory levels.
The credit rating agency, CARE has also highlighted the large inventory requirements of the business of
Laurus Labs Ltd.
Laurus has high inventory holding period as the company has to maintain buffer stock for
validation of new products. Furthermore, in FY22, the inventory holding is relatively on a higher
side due to higher work-in-progress (WIP) inventory and finished stock inventory.
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Over the last 10 years, FY2013-FY2022, Laurus Labs Ltd has witnessed its inventory consume about
₹1,600 cr of additional capital as its inventory increased from ₹156 cr in FY2013 to ₹1,760 cr in FY2022.
Going ahead, an investor should keep a close watch on the ITR of the company to assess whether it is using
its inventory efficiently.
c) Analysis of receivables days of Laurus Labs Ltd:

Over the years, receivables days of Laurus Labs Ltd have deteriorated from 55 days in FY2014 to 98 days
in FY2022.
One of the reasons for increasing receivables days is the longer credit period up to 120 days the company
has to give to its customers.
V.V. Ravi Kumar: Some of the customers we have 120-days credit period. That is the reason
receivables are at that level
The credit rating agency, CARE also highlighted in its report for Laurus Lab Ltd in July 2017 that it has to
give an elongated credit period to its prime customers, which has led to delayed payment collections.
high collection period due to change in proportion of sales mix to customers and extended credit
period to prime customers
Over the last 10 years, FY2013-FY2022, Laurus Labs Ltd has witnessed its receivables consume about
₹1,200 cr of additional capital as its trade receivables increased from ₹157 cr in FY2013 to ₹1,354 cr in
FY2022.
Going ahead, an investor should monitor the trend of receivables days of Laurus Labs Ltd to assess whether
it is able to bring them down to the levels of 55 days, which it used to have in FY2013.
operations (cCFO) of Laurus Labs Ltd for FY2013-2022, then she notices that over the years (FY2013-
FY2022), the company is able to convert its profit into cash flow from operations.
Over FY2013-22, Laurus Labs Ltd reported a total net profit after tax (cPAT) of ₹2,906 cr. During the same
period, it reported cumulative cash flow from operations (cCFO) of ₹3,290 cr.
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Learning from the article on CFO will indicate to an investor that despite a significant amount of money
being stuck in inventory and receivables, the cCFO of Laurus Labs Ltd is higher than the cPAT primarily
due to the following factors:

The Margin of Safety in the Business of Laurus Labs Ltd:

target growth.
Where,

While analysing the SSGR of Laurus Labs Ltd, an investor would notice that over the years, the company
had an SSGR in the single digits. It is only recently in FY2022 that its SSGR improved to 18% in FY2022
due to a sharp increase in its profit margins due to a higher contribution from formulations and synthesis
businesses.
Therefore, an investor is looking at a situation, where over most of the last 10 years, the SSGR of Laurus
Labs Ltd has been in the single digits whereas, over the same period, the company has grown its sales at a
CAGR of about 24%.
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As the company has grown its sales more than its SSGR; therefore, it is not able to grow its business using
its internally generated cash flow. As a result, to grow its sales from ₹719 cr in FY2013 to ₹4,936 cr in
FY2022, the company has to raise additional capital in the form of incremental debt and multiple rounds of
equity dilution.
Over the last 10 years (FY2013-FY2022), the company has raised an additional debt of ₹1,485 cr as its total
debt has increased from ₹292 cr in FY2013 to ₹1,777 cr in FY2022 (1,485 = 1,777 – 292).
Over and above the debt, in the last 10 years, Laurus Labs Ltd has diluted its equity two times for meeting
its capital expenditure requirements. It raised a total of about ₹600 cr during the last 10 years (FY2013-
FY2022).
 December 2016: IPO: ₹300 cr (FY2017 annual report, page 51)

 October 2014: ₹300 cr from Warburg Pincus (Credit rating report by CARE, August 2015, page 1)
These are not the only occasions when Laurus Labs Ltd had to dilute its equity to meet its funds’
requirements.
In the past, in 2012, Fidelity and promoters had invested ₹60 cr in the company (FY2014 annual report,
page 18) and in 2007, Aptuit group had invested ₹102 cr in the company.
The company was in such urgent need of funds for growth that it committed to a minimum return of 18%
on the equity investments done by Fidelity and Warburg Pincus (Bluewater).
In case of winding up or liquidation, if the liquidation proceeds are adequate to cater to the amount
of investment of Bluewater and Fidelity as increased by an Internal Rate of Return (IRR) of 18%
per annum computed thereon from the date of investment by each of them, then the liquidation
proceeds will be shared equally among all the shareholders
In the IPO, the company paid about 4.21% of raised money as issue expenses (RHP, December 2016, page
103) i.e. out of ₹300 cr raised by the company in the IPO, it got only about ₹287.5 cr because about ₹12.5
cr was spent as the cost of IPO, merchant bankers, underwriters etc.
Therefore, an investor would note that the capital-intensive nature of the business and the desire of the
promoters to grow the company at a very fast pace beyond what its inherent cash flow can sustain has led
to multiple rounds of equity dilution. At the time of IPO, the majority stake in the company was held by
private equity companies (58.14%).
An investor arrives at a similar conclusion when she analyses the free cash flow (FCF) position of Laurus
Labs Ltd.
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b) Free Cash Flow (FCF) Analysis of Laurus Labs Ltd:

While looking at the cash flow performance of Laurus Labs Ltd, an investor notices that during FY2013-
FY2022, it generated cash flow from operations of ₹3,290 cr. During the same period, it did a capital
Therefore, during this period (FY2013-FY2022), Laurus Labs Ltd had a negative free cash flow (FCF) of
(₹1,088) cr (=3,290 – 4,378).
of ₹850 cr. As a result, the company had a total negative free cash flow of (₹1,768) cr (= -1,088 + 150 –
850). Please note that any capitalized interest is already factored in as a part of the capex deducted earlier.
As discussed earlier, Laurus Labs Ltd has used incremental debt of about ₹1,485 cr and equity infusion
from Warburg Pincus in FY2015 and IPO in FY2017 to raise funds to meet this negative free cash flow.
Going ahead, an investor should keep a close watch on the free cash flow generation by Laurus Labs Ltd
to understand whether the company continues to consume cash from outside sources or it starts to generate
surplus cash from its business.
Additional aspects of Laurus Labs Ltd:

On analysing Laurus Labs Ltd and after reading annual reports, RHP, its credit rating reports and other
1) Management Succession of Laurus Labs Ltd:

Laurus Labs Ltd is promoted by some professionals led by Dr Satyanarayana Chava, ED & CEO (current
age 61 years) and Mr V. V. Ravi Kumar, ED & CFO (current age 57 years) who are experienced in the
pharma industry having worked for companies like Ranbaxy and Matrix Laboratories.
Until February 27, 2020, Mr C. Chandrakanth, Son-in-Law of Dr. C. Satyanarayana used to be one of the
Executive Directors on the board of Laurus Labs Ltd, which indicated a succession plan. However, he
resigned as executive director on February 27, 2020, and continues as a non-executive director on the board
of directors.
Mr C. Krishna Chaitanya, son of Dr. C. Satyanarayana (current age 32 years) is working with the company
as an Executive Vice President and Head of Synthesis and Ingredients business. He is taking a remuneration
of ₹1.11 cr indicating active employment with the company (FY2022 annual report, pages 193-194).
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Moreover, in FY2020, one of the founder promoters, Dr Srihari Raju Kalidindi got himself removed from
the “Promoters” of the company and is now classified as a “Public” shareholder. He also sold some of his
shares in the company in FY2020. It may be a part of the settlement among the founder promoters about
the succession planning of the company.
Moreover, the presence of the next generation of Dr Satyanarayana Chava in the company in an active role
when the founder-promoters are still handling active responsibilities indicates a good succession plan. It
allows the next generation to learn the nuances of the business under the guidance of senior members who
are still actively involved in the business.
An investor may contact the company directly to understand the reasons for the resignation of Mr C.
Chandrakanth, Son-in-Law of Dr. C. Satyanarayana from the position of executive director. Is it a part of
the ownership succession plan of the promoters that the son of the promoter would continue to lead Laurus
Labs Ltd going ahead and the son-in-law has to look for a separate career?
An investor should look for signs of any ownership-related differences between the promoter family
members of the company.
2) Project execution by Laurus Labs Ltd:

Over the years, the company has executed some large manufacturing projects involving units dedicated to
API, formulations and synthesis divisions. Over FY2013-FY2022, Laurus Labs Ltd has executed a capital
In many cases, the company was able to complete the project within expected timelines. For example, in
the FY2015 annual report, the company stated that its formulation plant (Unit 2) in Vishakhapatnam would
be operational by December 2015.
Construction of formulation manufacturing facility in Atchutapuram, Visakhapatnam, which will

be operational from December 2015
As per the FY2016 annual report, Unit 2 was completed and opened for regulatory inspection in December
2015 by the company.
New formulation facility (Unit 2) was inspected by German authorities in December 2015 and
approval obtained in March 2016
However, it is not that it could complete the entire project within time limits. At times, it had faced some
delays. For example, in FY2020, its production of Oncology APIs suffered when it could not complete its
backward integration of intermediates in time.
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Dr. Satyanarayana Chava: In the first year, we were unable to ramp up production of one of
our key ONCO API because of backward integration which did not get complete on-time.
Subsequently, the company could not complete its debottlenecking exercise to increase its formulation
capacity.
Dr. Satyanarayana Chava: Our debottlenecking exercise of existing capacities is on course

and this capacity will be available for commercial manufacturing by end of the Q4, although with
a delay of a few months.
Similarly, while executing the expansion of fermentation capacity of Laurus Bio Pvt. Ltd, it faced delays
in meeting the stipulated timeline.
Dr. S. Chava: During the quarter, Laurus Bio commissioned two more fermenters of 45KL each
taking to total capacity of 180KL. There was a few months’ delay in qualifying the fermenters.
Going ahead, an investor should keep a close watch on the progress of capital expansion projects of the
company. This is because delays in the project execution can lead to cost overruns that may affect the
production plans of the company and may lead to loss of business opportunities.
3) Dividends funded by debt:

The company started paying dividends in FY2016 and has paid out a total dividend of ₹292 cr excluding
dividend distribution tax (DDT) during FY2016-FY2022. During this period, the company had a negative
free cash flow of ₹535 cr (FY2016-FY2022). This is because, during FY2016-FY2022, it generated a total
cash flow from operations (CFO) of ₹3,136 cr whereas it made a capital expenditure of ₹3,681 cr.
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Therefore, it consumed its entire CFO during FY2016-FY2022 for making capital expenditure and still was
short of funds (negative free cash flow). As a result, it had to raise funds from additional sources like equity
(IPO for ₹300 cr) and incremental debt of ₹749 cr (FY2016 debt: ₹1,028 cr and FY2022 debt: ₹1,777 cr).
If a company has a negative free cash flow and is using debt and equity dilution to meet its capital
expenditure, then if it payout out dividends to its shareholders, then the dividends are funded by debt. This
is because money is a fungible commodity.
We believe that companies should use their resources for capital expenditure and if any surplus is left then
should repay debt. In the situation of deficit (i.e. negative free cash flow), the companies should raise only
that much debt, which is needed to meet its business requirements and avoid raising extra debt in order to
enable it to pay dividends. Such dividend outflows put an extra burden of interest payments on the company,
which could have been avoided.
4) Lifecycle of drugs and therapies:

Over the years, therapies for diseases keep on changing and older drugs make way for newer and more
efficient drugs. Therefore, the market for older drugs undergoes significant change. Such transitions present
substantial challenges to the pharmaceutical players.
In the last 10 years, Laurus Labs Ltd has seen such changes in two of its key therapy segments.
4.1) ARV/HIV drug therapy:
In the early 2000s, treatment regimens for ARV/HIV saw major developments. The drugs became cheap
and widely available. Multiple governments and international donor organizations started providing
funding for HIV treatment. The world’s focus was on detecting as many patients suffering from HIV and
treating them.
Therefore, a huge market for ARV drugs was created and Laurus Labs Ltd captured a very big share of
such market. Laurus Labs Ltd focused on the API market for ARV/HIV drugs because, in this segment,
access to the API manufacturing capacity was the success-determining factor for the players.
Dr. Satyanarayana Chava: The biggest challenge in ARV therapy is not formulation capacity.
The biggest challenge comes from the API capacity. If you look at 20 million patients, everybody
takes one pill a day, they need 7 billion tablets. Many companies in India have that capacity, but
to treat 20 million patients assuming everybody takes a gram they need roughly 20,000 tonnes of
API. That everybody may not be able to make. So the challenge here is API and not the formulation.
Here an investor may note that it is not that for all the drugs, API capacity is the limiting factor. In fact, for
another drug made by the company, Pregabalin, the formulation capacity is the challenging factor.
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C Srihari: Is it a complex product in the sense that it could be a problem for some of the players
to crack?
Dr. Satyanarayana Chava: It is not that way, the problem is, it more into how much of FDF
capacity allocation will people do to take the market share, is more into FDF capacity rather than
API complexity.
Therefore, determining the crucial constraining step in the supply chain of the drug and then creating
manufacturing capacities for that step helps pharmaceutical companies gain a large market share.
By creating large ARV API capacities, Laurus Labs Ltd dominated the market for many APIs for ARV
drug regimens. By FY2021, the company was supplying to almost 80% of companies participating in the
HIV drug tenders.
At present, Laurus is supplying to 80% of the players who participate in ARV tenders.
Moreover, Laurus Labs Ltd also benefited from the fact that companies are not able to change their ARV
API suppliers at a short notice. Whenever any company wishes to change its ARV API supplier, it takes
about 12-14 months for a complete switch to the new supplier. It makes the supplier-switching costs high
in the ARV API segment.
Dr. Satyanarayana Chava:…in this business if someone wants to move their APIs to a new
manufacturer it takes anywhere between 12 to 14 months,
However, as the HIV treatment programs matured, the number of undetected HIV patients who could be
provided with the treatment started declining steadily. The below chart from the FY2022 annual report,
page 45 shows a consistent decline in the detection of new HIV infections over the last 10 years (2011-
2021).
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As a result, the growth of the market for HIV drugs is slowing down year after year. In FY2019, Laurus
Labs Ltd believed that the growth of the HIV drugs market would completely stop by 2023. Thereafter, the
only way to grow would be to take away market share from other players.
Dr. Satyanarayana Chava: Overall market will grow until 2023 with respect to the enrollment
of patients after that we need to get more market share.
In FY2021, the company acknowledged that the pace of growth in the ARV segment is expected to be low.
Moreover, any benefit from the growth in the number of new patients would be reduced by the decline in
the prices of ARV drugs.
Dr. Satyanarayana Chava: I think doubling is impossible….6%, 7% of patient additions we

are seeing based on the data. So the growth could be 5%, 6% in offtake. We do believe that increase
will be offset by price decline over a period of time.
As the prevalent drug therapies mature and the technology for producing them becomes more efficient and
widely available, then their prices start to decline. This price decline of the drugs further shrinks their
market.
The following chart from the RHP of Laurus Labs Ltd, December 2016, page 127 shows a consistent decline
in the cost of ARV regimens in USD per-patient-per-year from 2010 to 2015.
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Since then, the prices of ARV drugs have continued to decline and Laurus Labs Ltd had faced its impact
on the business. In FY2022, the prices of ARV APIs, as well as formulation, declined by 10%. The company
intimated to its shareholders that there is a very low probability that the prices will increase in future and
this might be the new price level.
Conference call, April 2022, pages 4 and 5:
Dr. Satyanarayana Chava: API prices and ARV prices both were down, around 10%…we don’t
foresee the API prices and formulary prices going up, I think this could be the new base.
Moreover, as discussed earlier, the drug regimen of HIV treatment shifted from Efavirenz-based therapies
to Dolutegravir-based therapies. This resulted in a decline in the sale of Efavirenz API where Laurus Labs
Ltd used to own about 50% of the global market share.
Dr. Satyanarayana Chava: The main capacity where we are not utilizing is Efavirenz where
we have 70 tonne capacity we are utilizing half of it right now
However, being the largest player in Efavirenz with the lowest cost of production, the company was still
able to gain market share in the declining market.
Dr. Satyanarayana Chava:…Efavirenz demand came down globally by 60%, but our revenue
drop in Efavirenz is not 60%. That means we were gaining market share of Efavirenz even though
volumes are going down.
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In addition to the declining global demand for one of its largest ARV APIs, the company had limited its
target market on its own by deciding that it would not participate in the HIV drug tenders in India.
Dr. Satyanarayana Chava: We are not intending to participate in the NACO Indian
government tenders.
As a result, soon the company realized that the probably ARV drug segment is past its best days and it
needs to reduce its focus from the ARV segment and focus more on the non-ARV segment, which also
offers better profit margins.
Dr. S Chava: So non ARV business, synthesis business, formulation business, other API business
are more profitable, more gross margin business than ARV business.
Therefore, when Laurus Labs Ltd planned an expansion in its formulation capacity, then it decided to
dedicate it to non-ARV business.
Dr. Satyanarayana Chava: And we expect about 4 billion tablets capacity. That additional
capacity which will come next year will be primarily used for non-ARVs, nothing will be used for
the ARVs there.
Therefore, it seems that the ARV business segment is past its prime. Laurus Labs Ltd has already earned a
substantial part of possible profits possible from this business. Going ahead, earning humongous profits
from the ARV business would be tough; therefore, the company has decided to focus more on other
segments.
4.2) Hepatitis-C segment:
Similar to the ARV segment, Laurus Labs Ltd faced circumstances where after initial good results, the
Hepatitis-C drug segment stopped making significant profits for the company and it had to divert its focus
away from Hepatitis-C drugs.
In 2015, Laurus Labs Ltd entered into the Hepatitis-C segment when it licensed drugs from Gilead and
entered into a contract with Natco Pharma, the Hepatitis-C drugs market leader in India to supply APIs.
Immediately after introduction, the Hepatitis-C segment showed very good business performance. It
contributed significantly to the improvement of the overall business performance of Laurus Labs Ltd.
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Introduction of Hepatitis C franchise brought significant business growth
However, within a couple of years, the company started facing pricing pressure in this segment.
Dr. Satyanarayana Chava: The outlook for Hep C. franchise remains challenging, although
we have seen improvements in volumes. However, we have seen significant pricing pressures as
we understood from our partner
One of the reasons for intense competition and pricing pressure in the Hepatitis-C segment was the lack of
strict regulations. Unlike ARV, in Hepatitis-C, pharma companies could get APIs from non-approved
sources as well, which increased the competition significantly.
Dr. Satyanarayana Chava: Here in the Hep C front, there are multiple reasons, one is
this market is not regulated in a sense…Whereas in Hep C people can till launch in India by buying
API from China from non-approved sources as well, so the competition is very high
The company faced another source of pricing when Govt. of India put pricing controls on Hepatitis-C drugs
by including them in Drug Price Control Order (DPCO)
Dr. Satya: We have seen significant pricing pressure in the API as well as in the Formulations,
and also please note that actually some of HEP-C formulations came under DPCO.
Moreover, another factor that limited the market size of Hepatitis-C was that it was a time-bound therapy
where a patient needed to take drugs only for about a 90-days period. It is unlike ARV/HIV where the
patient has to take drugs for her entire life.
Dr. Satyanarayana Chava:…major Hep C companies globally like Gilead and all, their
revenues in Hep C are also going down because patient pool is coming down. It is not like ARV a
patient is on and he will be on for life whereas Hep C the patient moves out of the treatment within
90 days
Therefore, due to price control by Govt. as well as the declining patient pool, the Hepatitis-C segment of
Laurus Labs Ltd saw a significant decline in sales. In FY2019, the segment saw about a 29% decline in
sales.

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Improvement in the revenue from the aforementioned segments was partially offset by decline in
the revenue from the Hepatitis C segment by around 29% during FY19.
Therefore, in FY2020, Laurus Labs Ltd reduced its focus on the Hepatitis-C segment and even removed
reporting its performance as a separate segment.
Dr. Satyanarayana Chava: We believe this is the new norm for Hep C business and the way
forward we would like to add Hep C into Other API segment for reporting because this segment
became not very significant for us.
Therefore, within a period of 5-years, from FY2016 to FY2020, the Hepatitis-C segment went from a star
performer to a poor performer and completed its lifecycle. As a result, Laurus Labs Ltd had to focus on
other business segments despite controlling about 40% of the Indian market share of Hepatitis-C via its
agreement with Natco Pharma.
Therefore, an investor should note that all drug therapies have a lifecycle. Over time, old therapies give
way to newer, more efficient therapies. In such situations, existing players despite having a large market
share have to make adjustments to their business model. For Laurus Labs Ltd, an investor should always
keep this in her mind that in future, its product profile, which might be very attractive now, would change.
At that time, she would need to focus on whether the company is able to bring in newer therapies with good
business potential.
As of now, Laurus Labs Ltd is looking forward to growing significantly in the diabetic and cardiovascular
segments.
Dr. Satyanarayana Chava: Our focus in other therapy areas, especially is on anti-diabetes
segment and cardiovascular…we have a full basket of products in the diabetic segment. So there
we have created capacity for both APIs and formulations. And when it comes to the cardiovascular
segment…we invested during this crisis to enhance capacity and the best quality product, and we
do see the opportunities for a fully integrated player in both cardiovascular as well as a diabetic
segment, because these are large volume products, and the capacity demands are also high, quality
demands are also equally high.
Due to their very large market size, both segments, diabetes as well as cardiovascular, are targeted by the
largest pharmaceutical companies from all countries. Here, Laurus Labs Ltd would have to compete with
players who are much bigger in size as well as resources.
Laurus Labs Ltd started commercial sales of one of the anti-diabetic drugs, Metformin, in July-Sept. 2018.
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Dr. Satyanarayana Chava: we started commercial sales of Metformin API from Q2FY19 from
unit 2 from this quarter
To increase its focus on the diabetes segment in the US, Laurus Labs Ltd took back the ANDA from its
partner so that it could drive its own business strategy in the US market.
Dr. Satyanarayana Chava:…some products we took back like Metformin, HCQ when we filed
it was a partnered product, now they are transferring ANDA to us
However, after one year of sustained efforts, Laurus Labs Ltd could gain only a very small market share
for Metformin.
Dr. Satyanarayana Chava: Metformin we have very small market share.
An investor should note that despite full focus, Laurus Labs Ltd could not achieve a significant
breakthrough in the anti-diabetic segment.
Therefore, she should keep a close watch on the performance of the company in the large business segments
like diabetes and cardiovascular to understand whether the company is able to achieve its aim of being a
global leader in many of its products.
Dr. Satyanarayana Chava: We have 25% more market share in seven APIs that we make, and
we want to expand that number to 15 APIs where we would like to have 25% or more global market
share in the next three years.
Moreover, the company has also increased its efforts to directly enter developed markets like the USA. In
FY2019, it made changes in its partnership with Dr Reddy’s and Rising Pharma. Previously, it planned to
enter into the US market by collaboration where it would produce the drugs and its partners would file the
ANDA etc. and market it.
However, in FY2019, it took 5 products back from its partners out of the total agreement of 11 drugs so
that it can enter the USA market with these products on its own. In the process, it had to reimburse the
expenses of about ₹4.5 cr done by its partners on these 5 products.
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V.V. Ravi Kumar:…we have renegotiated the FDF contract with Rising Pharma and Dr. Reddy
for about five products whatever we have filed before now those five products were taken back…So
we have returned them those expenses
It remains to be seen whether the company would be able to make a big impact from its direct formulation
sales to the US market. An investor should continuously monitor its performance in the US market.
5) Related party transactions of Laurus Labs Ltd with its promoters:

In the past, on many occasions, Laurus Labs Ltd had entered into transactions with its promoters. However,
an investor should focus on some of these transactions.
5.1) Laurus Labs Ltd took guesthouses on lease from promoters:
In its RHP, Laurus Labs Ltd disclosed that it has taken three guesthouses on lease from promoters. Out of
these, two properties were leased by Ms Soumya who is the daughter of founder promoter, Dr.
Satyanarayana Chava.
The company was paying a monthly lease rent of ₹56,000 for each of these properties to the promoters.
In the case of one of the properties, Ms Soumya, the daughter of Dr. Satyanarayana Chava did not own the
property herself. In fact, she has in turn taken it on lease from Ms Naga Rani Chava who is the wife of Dr.
Satyanarayana Chava, at a monthly rent of ₹47,520.
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Pursuant to sub-lease agreement dated December 31, 2015 executed between Soumya and our
Company, Soumya has leased the said property from one of our Promoters, Naga Rani Chava as
per lease deed dated December 31, 2015 for a monthly lease rental of ₹47,520
Therefore, it seems like a case where the promoters are providing their properties, which they have taken
on rent at a lower cost, to the company at a higher rent to make a profit. As an alternative, Laurus Lab Ltd
could have directly entered into the lease agreement with the ultimate owner of the property and it would
have saved money for the company and the shareholders.
5.2) Promoters’ remuneration:
Promoters of Laurus Labs Ltd have been drawing significant remuneration from the company. In FY2022,
the founder-promoter, Dr. Satyanarayana Chava took home a total remuneration of about ₹27.5 cr (FY2022
annual report, page 65).
It is appropriate for promoters to take a reasonable salary when the business performance of the company
is improving. However, an investor notices that during FY2019 when the profit margins of the company
had declined significantly, still the promoters drew a significant salary and in addition, Mr Chandrakanth
Chereddi, son-in-law of the founder promoter, Dr. Satyanarayana Chava received a significant increase in
salary.
In FY2019, the company reported the lowest operating profit margin in the last decade at 16%, down from
20% in FY2018. In the same year, the net profit margin halved to 4% from 8% in FY2018. The net profit
after tax (PAT) for the company in FY2019 was ₹94 cr.
In FY2019, the founder promoter, Dr. Satyanarayana Chava took home a remuneration of ₹12.4 cr, which
is about 13% of PAT (FY2019 annual report, page 72). In addition, in FY2019, Mr Chandrakanth Chereddi,
son-in-law of the founder promoter, Dr. Satyanarayana Chava received an increment of 18% (FY2019
In FY2021, the remuneration proposed to be paid by Laurus Labs Ltd to its promoters exceeded the
approved limits.
Company subject to shareholders’ approval made provision for payment of

managerial remuneration to three executive directors in excess of the approvals obtained earlier
under section 197 read with Schedule V to the Companies Act, 2013 aggregating INR 7.48
crores for the year ended March 31, 2021.
Going ahead, an investor should keep a close watch on the remuneration taken by the promoters of the
company.
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5.3) Sale of information technology division by Laurus Labs Ltd to the promoters:
In FY2009, the company got a software division when apparently a software company owned by Aptuit
group was merged with the company.
during the year ended March 31, 2009, 88,690 CCPCPS had been issued as part of the scheme
of amalgamation of Aptuit Informatics India Private Limited.
An investor would notice that Aptuit group was the first investor who had invested ₹102 cr in the company
in 2007. At that time, the name of the company was also changed to Aptuit Laurus Limited (RHP, December
2016, page 41).
It seems that as a part of its overall agenda, the Aptuit group merged a software entity, Aptuit Informatics
India Private Limited into the company.
In FY2014, the company sold the software/information technology division to Laurus Infosystems (India)
Private Limited (LIIPL), which was owned by the promoter, Dr. Satyanarayana Chava (80.6%) and his
wife, Ms Naga Rani Chava (19.4%) (RHP, December 2016, page 225).
Our Promoters, Dr. Satyanarayana Chava and Naga Rani Chava hold 3,115,992 and 750,000
equity shares…constituting 80.60% and 19.40%, respectively, of the issued and paid up share
capital of LIIPL.
The sale consideration received by the company for this sale was ₹3.25 cr whereas the software division
had net assets of ₹2.75 cr and was earning revenue of ₹11.7 cr (FY2014 annual report, page 74).
the informatics division…was sold on 28 February, 2014 to Laurus Infosystems (India) Private
Limited , a related party…for a total consideration of ₹32.50 Mn., received by way of cash…the net
asset value of the division in the Company’s books amounting to ₹27.50 million
Therefore, the software division was sold by the company to its promoters at a price-to-sales ratio of 0.27
(=3.25 / 11.7). In addition, it is not clear whether the net assets of the software division of ₹2.75 cr had any
fixed asset as a land parcel or a building, which might be valued on a historical cost basis and the current
market value, might be different. Therefore, an investor may do her own due diligence in this transaction.
An investor should be cautious while analysing transactions between the company and its promoters
because; such transactions provide opportunities for shifting economic benefits from minority shareholders
to promoters if the assets are sold at a price less than their fair market value.
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Moreover, in recent years, the promoters have formed a few new entities like Kapston Facilities
Management limited, Sterotherapeutics, LLC and NSN Investments etc., which have started transacting
with Laurus Labs Ltd in relation to facility maintenance, rent, sale of goods etc. (FY2022 annual report,
page 194).
6) Promoters’ personal investments in Immuno-ACT:

In FY2022, Laurus Lab Ltd decided to invest about ₹46 cr in Immunoadoptive Cell Therapy Private Limited
(ICTPL) for a 26.62% stake. Out of the said amount, it paid ₹27.6 cr in FY2022 and received an 18.94%
stake in ICTPL.
Company has acquired 26.62% of stake in Immunoadoptive Cell Therapy Private Limited on fully
diluted basis, with around ₹46 crore investment, and has paid the subscription amount of ₹27.60
crore (Rupees Twenty-Seven crore and Sixty lakh only) as “Tranche 1 Subscription Amount”
The Company has so far contributed a 1st tranche investment amount of ₹27.60 crore and has
got 18.94% voting rights as on date and upon payment of balance amount as per Shareholders’
Agreement, your Company’s voting rights will go up to 26.62%.
An investor notices that at the same time, the promoters of the company have invested in ICTPL in their
personal capacities as well.
The promoters of your Company, namely Dr. Satyanarayana Chava, Mr. V. V. Ravi Kumar and
Dr. Lakshmana Rao C V have also invested in this company in their personal capacity as well.
An investor should be cautious while analysing such transactions where a company invests in an asset and
the promoters also invest in their personal capacity. This is because; such transactions open a door for
numerous channels where the promoters may benefit at the cost of the company and its minority
shareholders.
Such situations represent typical principal and agency issues. For example, if the deal involves selling a
stake at a higher cost to the company so that the promoters can get a lower cost for their stake, then it would
not be in the favour of the company or its minority shareholders.
This is not to state that such considerations would have taken place in the investments in ICTPL; however,
such transactions leave room for unscrupulous promoters to shift economic benefits from the company to
themselves. Therefore, an investor should be cautious when she comes across such transactions involving
combined investments by the company and the promoters in their personal capacity.
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7) Promoters of Laurus Lab Ltd invested money in the company in 2012 and
booked profits by selling it to a PE investor in 2014:
In 2012, the promoters of the company along with Fidelity invested about ₹60 cr in the company.
2012: Fidelity and the promoter invested ₹600 million in the Company
As per the RHP of the company, page 42, Fidelity had put in its money at a cost of about ₹60-63 per share
(adjusted for bonus). Therefore, an investor may assume that the promoters of the company would also
have invested at a similar valuation.
Thereafter, when in 2014, Warburg Pincus invested ₹300 cr in Laurus Lab Ltd via its entity, Bluewater,
then it also purchased shares from existing investors including private equity players as well as the
investors.
Credit rating report, August 2015, page 1:
During October 2014, Warburg Pincus through its affiliate Bluewater Investment Ltd. invested Rs
300 crore in the company to meet growth requirements. Warburg Pincus has also acquired part
stakes held by Fidelity and a few other promoter associates
As per the RHP, December 2016, page 42, the average cost of acquisition of shares for Warburg Pincus
(Bluewater) was ₹181.62 (adjusted for the bonus issue before IPO). Therefore, an investor may assume that
Warburg Pincus would have acquired shares from Fidelity and promoters at a similar price.
As per the FY2015 annual report, page 47, the promoters had sold almost 700,000 shares in the year, which
is pre-bonus. Before the IPO, in July 2016, the company had allotted 3 bonus shares for every one held.
Therefore, overall, the sale from promoters involved 2,800,000 post-bonus shares at an approximate price
of ₹181.62, for about a total consideration of ₹50.8 cr (=2,800,000 * 181.62).
Therefore, it looked like a situation where promoters capitalized on the available opportunity and cashed in
on their investment in the company even though the promoters’ stake in the company was low at about 17%
(FY2015 annual report, page 47).
8) Investment by the company in Viziphar Biosciences Private Limited:

As per the FY2014 annual report, page 19, during the year, Laurus Lab Ltd acquired a 100% stake in
Viziphar Biosciences Pvt Ltd (VBPL).
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An investor notices that for this acquisition, the company had paid about ₹0.455 cr to acquire 2,454,059
equity shares of ₹10 each (FY2014 annual report, page 72) i.e. Laurus Labs Ltd paid ₹0.455 cr for share
capital of ₹2.45 cr.
This transaction on its face indicated that the value of the share capital of VBPL has eroded significantly
by more than 80%.
Within one year of acquisition, in FY2015, Laurus Labs Ltd wrote off its entire investment done in VBPL
indicating that the investment has gone wrong and would not produce any value for the shareholders of the
company.
Therefore, in the very next year, in FY2016, the company sold its investment in VBPL to a third party and
also wrote off advances of about ₹0.23 cr given to VBPL. (RHP, December 2016, page 335).
vide Agreement dated April 18, 2016, the Company had agreed to sell its entire shareholding in
Viziphar Biosciences Private Limited to a third party
As per the RHP, December 2016, page 196, the company received about ₹0.3 cr for its sale of VBPL i.e. it
lost more than half of its total investment in VBPL.
The company did not disclose the names of the third parties who bought VBPL. An investor may contact
the company directly to understand more about this transaction and also the reasons for buying VBPL in
the first place and writing off the entire investment within one year.
9) Management of foreign exchange fluctuation risk:

Over the years, Laurus Labs Ltd has witnessed a sharp fluctuation in the impact of movements in foreign
exchange (forex).
At times, it has had large forex gains like ₹18 cr gain in FY2015, ₹24 cr gain in FY2017, ₹19 cr gain in
FY2018, ₹17.7 cr gain in FY2021 and ₹10 cr gain in FY2022. On other occasions, it experienced significant
losses due to foreign exchange fluctuations.
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For example, in Q2-FY2019, the company reported a forex loss of ₹17 cr.
V.V. Ravi Kumar:…forex losses – as you all aware that the rupee Depreciated close to ~6% in
the quarter itself and the impact was close to INR 17 Crores
In Q4-FY2020, the company reported a forex loss of about ₹10 cr.
V.V. Ravi Kumar: Last quarter it was about an around Rs. 10 Crores forex loss.
Laurus Labs Ltd has a forex risk hedging policy where it keeps its foreign exchange positions open up to
exposure of $60 million. It does not prefer to hedge its forex exposure until it is below $60 million. As a
result, it witnesses large forex gains and losses. As per the company, it is considering updating the hedging
threshold of $60 million.
V.V. Ravi Kumar: We have an forex policy to keep it open up to $60 million both trade and the
debt so beyond $60 million we hedge…we are seriously looking at this current rupee depreciation
whether do we need to reduce the limit
In addition, Laurus Labs Ltd gets a natural hedge in forex due to the import of raw materials where it makes
payments in foreign currency. Moreover, the company has put certain clauses in its contracts with customers
to protect itself from excessive movements of foreign exchange.
The credit rating agency, CARE, June 2022, page 3:
Foreign exchange fluctuation risk:…gets mitigated to certain extent as the contracts have
clause embedded for the exchange rate fluctuation and there is natural hedging through netting
off the imports and exports to a large extent.
To manage the forex risk further, Laurus Labs Ltd has taken loans in foreign currency so that its earnings
in foreign currency can directly be used to make repayments of loans in foreign currency without converting
the foreign currency into Indian Rupees.
In the past, the company started billing one of its Indian customers in USD so that it could protect itself
against USD/INR fluctuation risk while making repayments for its USD borrowings, which come at a lower
cost.
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V.V. Ravi Kumar: With one of our customers in India, we are billing in US dollar denomination
instead of Indian rupees. So, our borrowings in the US dollar will go up and thereby our cost of
funds will come down in the future quarters.
Nevertheless, Laurus Labs Ltd continues to witness large fluctuations in its results due to forex gains and
losses. Going forward, an investor may monitor whether the company starts to improve its hedging
activities.
10) Scope for improvement in internal processes and controls of Laurus Labs Ltd:
In the past, there have been certain instances, which indicate that the internal process and control have room
for improvement.
In the case of administrative works, the company raised money from private equity investors in 2012, then
it did not make proper filings with the Registrar of Companies (RoC).
including non-filing/ incorrect filing of the prescribed form with the RoC for allotment of Equity
Shares on account of conversion of Series A Preference Shares of our Company in February 2012
In addition, it did not take the required shareholders’ approval before paying a salary to relatives of
promoters.
failure to take necessary adequate shareholders approvals in relation to payment of salary to

certain relatives of our executive and whole time Director and CEO, under applicable law
In the past, there have been two occasions of industrial accidents where there was a loss of life as well as
loss of business due to the shutdown of operations.
In FY2017, one of its workers died while working and there was a blockage of the unit for 5 days.
On November 10, 2016, there was an incident at our Unit 1 facility in Vishakhapatnam, which
resulted in a fatality and the temporary suspension of operations in the relevant manufacturing
block for five days.
In FY2014, there was a major fire in one of the units of the company, which result in a significant loss of
operations.

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Further, in January 2014, there was a major fire accident at the manufacturing facility of Sriam
Labs. This accident caused Sriam Labs to incur significant expenditure and led to the temporary
shutdown of operations.
In the FY2014 annual report, the company presented different data about its future plans at different places.
On page 9, it mentioned that by FY2016, it plans to have 3 sites whereas, on page 22, it mentioned that by
FY2016, it would have 5 sites.
Going ahead, the Company expects to grow from two sites in 2013-14 to three sites in 2015-16
Company expects to increase the number of sites from two in 2012-13 to three in 2014-15 and five
in 2015-16
At the time of IPO in December 2016, Laurus Lab Ltd intimated to the investors that it does not have a
registered certain trademark including its logo. Such omission exposes the company to avoidable issues.
Also, we have applied for but not yet obtained certain trademark registrations, including for our
Company’s logo.
An investor may contact the company directly to know if it has now received the registration for these
trademarks including its logo.
The company did not provide details about the ageing of trade receivables in its annual reports for FY2018,
FY2019, FY2020 and FY2021. The company provided a table containing the ageing of trade receivables
in its FY2022 annual report.
Similarly, the company has not provided any explanation for its decline in stake in Laurus Bio Private
Limited during FY2022.
As at March 31, 2022 the Company holds 76.60% (March 31, 2021: 79.21%) stake in Laurus Bio
Private Limited.
The company acquired a 79.21% stake in Richcore Lifesciences Private Limited in FY2021 by buying out
two private equity funds as well as buying a part of the stake from the promoters later on. Thereafter, it
renamed the company Laurus Bio Private Limited.
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At the same time, the promoters of Richcore Lifesciences Private Limited had stipulated a put option to sell
their remaining stake of 20.79% in the company to Laurus Labs Ltd.
the selling shareholders (Promoters) have “put option” over 20.79 % shareholding at any time
between January 20, 2024 and January 20, 2026 for a consideration equal to their proportion of
the equity value of Laurus Bio.
Therefore, it seems that Laurus Labs Ltd had every intention of increasing its stake in Laurus Bio Private
Limited by buying out the remaining stake of its promoters. However, in such a situation it comes as a
surprise to the investor to see that in FY2022, the stake of Laurus Lab Ltd in Laurus Bio Private Limited
has declined.
Moreover, the company has not provided any explanation in its annual report about the decline of its stake
in Laurus Bio Private Limited. An investor may contact the company directly to know further details in this
regard.
Due to a lack of oversight, the company made a mistake in the data presented in the investors’ presentation
for Q1-FY2019. The same was circulated to investors and later on, the company had to mention the
rectification in the conference call.
V.V. Ravi Kumar:…small typo on the slide #12 where our EBITDA for Q1 FY2018 is
incorrectly shown as 1,250 million, whereas it is about INR 1,045 million and the margin
percentage is 21.6% instead of 26.1%
In FY2018, the company was required to form a dividend policy and disclose it in the annual report. The
company formed a dividend policy but did not disclose it in the FY2018 annual report. As a result, the
secretarial auditor highlighted this lapse in its report in the FY2019 annual report.
The Company has formulated the dividend policy and disclosed at the website of the Company.
However, the same is not disclosed in the annual report for the year 2017-18.
In the announcement sent to stock exchanges for its AGM for FY2022, the company inadvertently made an
error and mentioned the time as 3 PM instead of 4 PM. As a result, it had to submit a rectification letter to
the stock exchanges.
Corporate announcement to BSE on April 28, 2022:
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This is to inform all the Stakeholders of the Company that the time of I 71h Annual General
Meeting of the Company which was erroneously shown as 03.00 PM (IST) on June 30, 2022 may
be read as 04.00 PM (IST).
All these instances indicate a lack of oversight and room for strengthening internal processes and controls
at Laurus Labs Ltd.
Moreover, on one occasion, the company created a step-down subsidiary in one year and the very next year,
it applied to the Registrar of Companies for closing it down. In January 2021, Laurus Synthesis Private
Limited formed a step-down subsidiary named Laurus Ingredients Private Limited.
The Company through its wholly owned subsidiary, M/s. Laurus Synthesis Private Limited
incorporated a Step-Down Subsidiary named M/s. Laurus Ingredients Private Limited in January
2021, in India.
In the next year, FY2022, the company decided to close down Laurus Ingredients Private Limited.
decided to voluntarily strike off the name of the step down subsidiary of the Company, Laurus
Ingredients Private Limited…since there was no business activity in this step down subsidiary for
more than an year.
An investor would appreciate that such instances end up taking crucial time from management bandwidth.
The Margin of Safety in the market price of Laurus Labs Ltd:

Currently (July 6, 2022), Laurus Labs Ltd is available at a price-to-earnings (PE) ratio of about 33 based
on consolidated earnings of FY2022. An investor would appreciate that a PE ratio of 33 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, Laurus Labs Ltd seems a company, which has grown its sales at a rate of 24% year on year for the
last 10 years. It increased its sales consistently every year; however, its profit margins have witnessed many
fluctuations.
The profit margins declined in FY2015 due to work disruption resulting from the Hudhud cyclone in
Andhra Pradesh. Profit margins declined again in FY2019 due to a sharp rise in raw material costs due to
the Chinese crackdown on polluting industries, which disrupted the supply chain. However, an excellent
performance of its formulation division increased profit margins to much higher levels in recent years.
Entry into the formulations segment has proved to be a very good decision for the company even though it
had to bear a prolonged period of non-revenue generating assets when regulatory approvals and validation
of the formulating units were going on. However, once these units started commercial production, then very
quickly, Laurus Labs Ltd could use them fully and in turn, increased its business at a very fast pace during
FY2020 and FY2021.
Apart from formulations, the entry of Laurus Labs Ltd in custom synthesis, Oncology APIs etc. has helped
the company grow with improving profit margins. Encouraged by these developments, now the company
has entered into recombinant technology, which is a very high margin segment.
Apart from diversification, other decisions of the company like creating capacities of new-age ARV drugs
like Dolutegravir and Lamivudine have helped the company successfully deal with the transition in the HIV
drug therapy from its previous product, Efavirenz.
When it faced a shortage of raw material (intermediates) from China, then it decided to do backward
integration, which helped in strengthening its business model with vertical integration.
The company faced the impact of the lifecycle of drug therapies when its Hepatitis-C drugs lost their initial
good performance and when the HIV treatment guidelines moved away from its key products. However,
the company has handled such transitions well by focusing its attention on other drug segments.
The company has always focused on research & development and has been spending about 4%-7% of its
sales on R&D. A large spending on R&D has helped it achieve a global leadership position in its products
and a long-term relationship with its customers. Laurus Labs Ltd prefers to strengthen the relationship with
existing customers to chase new customers. As a result, it derives a large part of its business from customers
who have been with it for more than a decade.
Nevertheless, it deals in generic drugs where companies have low pricing power over their customers.
Whenever its raw material prices have increased, then it has faced challenges in passing it on to its
customers. As a result, it had to take a hit on its margins in FY2019.
The business of Laurus Labs Ltd is capital intensive where it has to create expensive manufacturing plants
and then run them at a low utilization level during regulatory and customer approval (validation) phases. In
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addition, its business is working capital intensive because; the customers ask for a long credit period and it
also has to maintain a large inventory for ensuing smooth supply of products to its customers.
As a result, its funds’ requirements are more than the cash that it could generate from its operations. Over
time, it has met its requirement of excess funds using debt as well as equity dilution. Since its inception, it
has had multiple rounds of equity dilution from three private equity players and an IPO. It remains to be
seen whether the company would be able to make free cash flow in the future.
Nevertheless, since FY2016, the company is paying a regular dividend to its shareholders, which,
unfortunately, is funded by debt, as it does not have a surplus cash flow after meeting its capex requirements
to declare a dividend.
The company has completed most of its projects within a reasonable time; however, at times, it faced delays
in project completion, which affected its business.
At times, the company has taken sub-optimal business decisions like its investment in Viziphar Biosciences
Private Limited, which was written off fully within one year of purchase and decisions like establishing a
subsidiary in one year and then closing it in the next year without starting any business. Such decisions put
undue pressure on the management’s bandwidth.
Currently, the founder promoters are active in the day-to-day management of the company and at the same
time, the son of the promoter has joined the company in an active role. It looks like the company has a
succession plan in place. The promoters of the company have done a few related party transactions with the
company like giving a guesthouse on lease to the company, which they had themselves taken on lease at a
cheaper price.
At times, the promoters have taken a very high salary and increment even when the performance of the
company had declined. On one occasion, the salary proposed to be given to the promoters exceeded the
approved limit as well. In the past, promoters have purchased the information technology division from
Laurus Labs Ltd and have invested in ImmunoACT along with the company in their personal capacity. All
these transactions require deeper due diligence by the investors.
There have been a few instances where it looks like the internal processes and controls at Laurus Labs Ltd
leave a room for improvement.
Going ahead, an investor should keep a close watch on the profit margins of the company to understand
whether it is able to pass on the increase in its raw material costs to its customers. She should track the
performance of its various diversification initiatives like selling formulations in the developed markets like
the USA, entry in recombinant space etc. The investor should also monitor its capital deployment efficiency
like capital consumption in inventory, and receivables as well as timely completion and commercialization
of capital expenditure.
The investor should monitor whether the company is able to generate free cash flow or it continues to
declare dividends, which are effectively funded by debt. She should track its forex gains and losses to assess
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whether it has improved its hedging policy. She should ask the company about its reduced stake in Laurus
Bio Pvt Ltd as well as monitor future investments to see if it does more co-investments with promoters in
their personal capacity.
These are our views on Laurus Labs 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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4) RHI Magnesita India Ltd

RHI Magnesita India Ltd, formerly known as Orient Refractories Limited. The company is a part of the
global RHI Magnesita group and is one of India’s largest manufacturers of refractory products used in
industries like steel, cement, glass etc.
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RHI Magnesita India Ltd has undergone many corporate restructurings in its short history of existence. The
company was formed in FY2011 as Orient Refractories Limited when Orient Abrasives Limited (OAL)
decided to separate its refractory business. In FY2012, OAL transferred its refractory business to Orient
Refractories Limited.
In FY2013, the Rajgarhia family of OAL sold their stake in Orient Refractories Limited to the RHI group
of Austria.
In 2016, the RHI group of Austria merged with the Magnesita group of Brazil and the parent group of
Orient Refractories Limited changed from the RHI group to the RHI Magnesita group.
In FY2018, RHI Magnesita group decided to merge its three Indian subsidiaries into one. It received all
approvals in 2021; therefore, RHI Clasil Pvt. Ltd. and RHI India Pvt. Ltd. merged into Orient Refractories
Limited.
Soon thereafter, in July 2021, the name of Orient Refractories Limited was changed to RHI Magnesita India
Ltd. The company revised its financials from FY2020 onwards to show the impact of this merger of three
companies.
In the meanwhile, in FY2020, Orient Refractories Limited acquired Intermetal Engineering India Private
Limited, which became its wholly-owned subsidiary. As a result, from FY2020 onwards, the company
started reporting consolidated financials as well as incorporating the financial performance of its subsidiary.
Therefore, while analysing the past financial performance of RHI Magnesita India Ltd, an investor should
keep in her mind that from FY2012 to FY2019, standalone financials reflect its overall performance.
However, from FY2020 onwards, the consolidated financials reflect the performance of its subsidiary as
well as the merger of RHI Clasil Pvt. Ltd. and RHI India Pvt. Ltd.
Therefore, during the last 10 years (FY2013-FY2022), we have analysed standalone financials from
FY2013 to FY2019 and consolidated financials from FY2020 onwards.
With this background, let us analyse the financial performance of RHI Magnesita India Ltd.
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Financial and Business Analysis of RHI Magnesita India Ltd:

Sales of RHI Magnesita India Ltd have grown at a pace of 21% year on year from ₹361 cr in FY2013 to
₹1,995 cr in FY2022. Further, sales have increased to ₹2,336 cr in the last 12 months ended September
2022 (i.e. Oct. 2021-Sept. 2022).
It may seem that the revenue of the company has increased consistently at a fast pace. However, the revenue
of RHI Magnesita India Ltd declined during FY2020 and FY2021.
In FY2020, the revenue of the company may seem to increase sharply from ₹748 cr in FY2019 to ₹1,388
cr in FY2020. However, it was due to the merger of RHI Clasil Pvt. Ltd. and RHI India Pvt. Ltd. into the
company.
The corresponding figures of the Company for the year ended March 31, 2020 have been prepared
by the Management based on the audited financial statements of the Company and its erstwhile
fellow subsidiaries as adjusted for giving effect to Scheme as approved by the NCLT
If an investor removes the impact of the merger, then in FY2020, the revenue of RHI Magnesita India Ltd
had declined from ₹748 cr in FY2019 to ₹699 cr in FY2020.
Thereafter, the revenue of RHI Magnesita India Ltd declined from ₹1,388 cr in FY2020 to ₹1,370 cr in
FY2021.
Apart from these two years of decline, RHI Magnesita India Ltd has increased its revenue every year.
Over the years, the operating profit margin (OPM) of the company has been nearly stable at 20%; however,
there have been a few periods of decline in OPM like FY2015 when the OPM declined to 18% from 20%
in FY2014 and FY2019-FY2021 when the OPM declined consistently from 20% in FY2018 to 15% in
FY2021. In FY2022, the OPM of the company increased to 19%, which further increased to 20% in the last
12 months ended September 2022 (i.e. Oct. 2021-Sept. 2022).
To understand the reasons for such a financial performance of RHI Magnesita India Ltd, an investor needs
to read the publicly available documents of the company like its annual reports from FY2012 onwards,
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credit rating reports by CARE and CRISIL, corporate announcements as well as other public documents.
Then she would understand the factors leading to an overall increase in its sales and profit margins over the
years with fluctuations in between.
The above-mentioned documents indicate that the following key factors influence the business of RHI
Magnesita India Ltd, which are critical to understand for any investor analysing the company.
1) High dependence on the steel industry:

Refractory products are used as the inner lining of the furnace in which materials like iron ore, steel, glass
etc. are melted. As per RHI Magnesita India Ltd, the steel industry consumes about 75% of refractory
products.
The steel industry accounts about 75% of consumption of refractory materials, with cement (12%),
non-ferrous (6%) petrochemicals (4-5%) and glass (3%) making up the remainder.
As the steel industry is the largest consumer of refractory products; therefore, factors affecting the demand
and prices of steel have a significant indirect impact on the demand for refractory products.
As per the company, the refractory industry grows at about 1.5 times the growth rate of the steel industry.
Historically, revenue growth of refractory players has been ~1.5 times of growth in
steel production
The impact of adverse conditions in the steel industry is more apparent in RHI Magnesita India Ltd because
it had been almost entirely dependent on the steel sector for its sales.
ORL supplies only to steel industries.
In FY2015, the steel industry globally as well as in India faced troubled times with reducing demand and
prices. In such situations, steel manufacturers push the refractory players to lower their prices. It resulted
in a decline in the profit margins of RHI Magnesita India Ltd in FY2015.
have led to a drop in the growth rate of steel sector in Indian economy…Further, steel companies
in India are experiencing a rise in operating costs…the pressure of prices of steel products coupled
with rising operating costs has led to decline operating margin
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2) Pricing power of refractory manufacturers:

Over FY2013-FY2022, the OPM of RHI Magnesita India Ltd has stayed in the range of about 20%;
however, there have been periods when the profit margins of the company have declined. For example,
during FY2019-FY2021, the OPM of the company declined sharply from 20% in FY2018 to 15% in
FY2021.
The key reason for this decline was a sharp increase in raw material costs, which RHI Magnesita India Ltd
could not pass on to its customers. The raw material prices have increased sharply because China, which is
the biggest supplier of raw materials, imposed duties on their export.
China is a major supplier for inputs to refractory material and has been imposing heavy taxes on
mining and export of refractory products and raw materials including magnesium used in
production of refractory products…India’s refractory industry sources almost half of its raw
material from China…This has resulted in sharp increase in imported raw material costs
The sharp rise in raw material costs had put severe pressure on the margins of refractory players and as a
result, the companies had started looking for alternative materials sources including recycling.
Indian refractory makers are currently reeling from high raw material prices…The refractory
industry is looking for alternate minerals and trying to increase the use of recycled materials.
Indian refractory manufacturers are dependent on China for key raw materials like Bauxite and
Magnesia. Clogged logistical network and lack of transportation facilities are taking toll on timely
delivery of raw material. Increased freight and raw material cost are starting to be felt in result
of refractory industries in the year 2021.
The inability of the company to pass on an increase in input costs to its customers led to a decline in the
profit margins of the company during FY2019-FY2021.
3) High technology requirement of refractory products:

During the manufacturing of steel, cement, glass etc. a part of refractory material is mixed with the final
product. As per RHI Magnesita India Ltd, the manufacturing of materials like steel, cement, glass etc.
consumes a few kilograms of refractory material per tonne of production.
Sept 2022 presentation, page 4:
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1 tonne of STEEL demands ~10‐15 Kg of refractories
1 tonne of CEMENT demands ~1 Kg of refractories
1 tonne of GLASS demands ~4 Kg of refractories
1 tonne of ALUMINIUM demands ~6 Kg of refractories
1 tonne of COPPER demands ~3 Kg of refractories
As the refractory material is mixed up in the steel/cement/glass etc. in the manufacturing process and
affects the final product quality; therefore, the quality of refractory material becomes very important.
Refractories constitute around 2~3% of the total steel manufacturing cost…Despite being a small
portion of the total steel manufacturing costs, refractories are critical to get the desired size, shape
and quality of the final product.
As a result, refractory companies need to spend money on research continuously to produce the best quality
refractory material.
The technology to produce the best refractory material, which can be used by major steel and glass
producers is not easily available and is in fact controlled by only a handful of large global refractory players.
As a result, most domestic refractory manufacturers have tied up/formed joint ventures with or sold their
companies to foreign refractory players. There have been many instances in the Indian refractory industry
where domestic players brought in/sold to foreign players.
Orient Refractories Limited was sold by the Rajgarhia family in FY2013 to the RHI group.
Rudraraju family, which established Clasil Refractories to produce refractory products entered into a joint
venture with RHI group to gain access to its technology.
In India he joined family-owned Refractory Manufacturing Unit in Visakhapatnam called Clasil

Refractories in 2006. In this pursuit for producing World Class Refractory Products, they entered
into a Joint Venture with RHI AG.
RHI Clasil Pvt. Ltd was merged with Orient Refractories Limited in 2021.
In 2022, Dalmia group is selling its refractory business to RHI Magnesita India Ltd. The Dalmia group has
mentioned access to technology from the RHI Magnesita group as one of the reasons for this sale.
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Corporate announcement to Bombay Stock Exchange (BSE) by RHI Magnesita India Ltd on November 19,
2022, page 4:
Commenting on the transaction, Sameer Nagpal, Managing Director & CEO of DBRL said…For
the next phase of growth of this business it is imperative to have access to technology which RHI
Magnesita, being a global leader, brings to the table. We believe our business can be optimally
utilised to serve Indian customers by becoming a part of RHI Magnesita’s network.”
Currently, players like RHI Magnesita India Ltd are focusing on making products, which are otherwise
imported into the country. However, these products are being made by using technology provided by global
refractory players.
During the year we started number of projects at the Bhiwadi and Vizag plant to make
certain high-grade import substitute products like purge plugs, coke oven blocks, tap hole clay
mass, etc. These are being done via technology transfer arrangements with the European and
American plants of the parent company
RHI Magnesita India Ltd established a research & development (R&D) centre, which is created in
collaboration with the global R&D network of RHI Magnesita group giving it access to the global
technology and knowledge base of the group.
The year saw the setting up of a world-class R&D centre at our Bhiwadi plant. The centre works
in close collaboration with RHI Magnesita global R&D network
Apart from these acquisitions of Orient Refractories Limited and Dalmia group’s refractory businesses,
there have been many other transactions where Indian refractory players have sold to/entered into
collaboration with global refractory companies.
In 2011, Tata group sold its majority stake in its refractory business to the Nippon group of Japan
(Source). ACE Refractories was sold to the French group, Imerys (Source)
Currently, global players like Vesuvius Group, UK, RHI Magnesita etc. control a significant portion of the
Indian refractory market. The key reason for the same is access to the advanced technology available to
them.
The requirement for advanced technology along with a long and tough approval process by customers
creates barriers to entry for new players in the refractory industry.
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4) Intense competition among refractory players:

An increasing presence of global refractory players in India is increasing the competition in the refractory
industry. These players have access to good quality products made with advanced technologies and provide
an option to the customers to switch suppliers if they ask for a high price for refractory materials.
Due to the competition, players like RHI Magnesita India Ltd are not able to pass on those input price
increases, which are specific to it. For example, RHI Magnesita India Ltd sources many raw materials from
its parent in Europe, which has seen an increase in costs (energy surcharge) due to high energy prices in
Europe due to the Russia-Ukraine war.
Unfortunately, RHI Magnesita India Ltd is not able to pass on this increase in input costs to its customers
because none of its other competitors is facing this energy surcharge; thereby, undermining its pricing
power.
The rise in energy surcharge which we are not able to pass on to all our customers as
our competitors are not asking for any energy surcharge (all their supplies are from India and
China and not from Europe) is a major concern which have reduced the margins.
Therefore, increasing competition due to the presence of many global refractory manufacturers in India has
affected the pricing power of RHI Magnesita India Ltd and other refractory players.
5) Strategy of increasing the business size and market share:

To strengthen their competitive position, all the global players are focusing on increasing their market share
and business size by acquiring as many local players and their refractory units as possible.
RHI Magnesita group has focused on increasing its stake in the Indian refractory market by making JV with
Clasil Refractories, acquiring Orient Refractories Ltd, acquiring Intermetal Engineering India Pvt. Ltd., and
acquiring the Cuttack plant of Manishri Refractories & Ceramics Pvt. Ltd.
In Oct. 2022, RHI Magnesita India Ltd announced the acquisition of the refractory business of Hi-Tech
Chemicals Ltd. for about ₹621 cr.
Corporate announcement to BSE, October 19, 2022, page 1:
Company has executed a BTA with Hi-Tech Chemicals Limited (“Hi-Tech”) vide agreement dated
18 October 2022 for acquisition of the refractory business of Hi-Tech by way of a slump sale on a
going concern basis for a cash consideration of INR 621 Crores
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In addition, the company is also in the process of acquiring the refractory business of Dalmia group for
₹1,708 cr.
Corporate announcement to BSE, November 11, 2022, page 4:
DBRL will transfer its Indian refractory business to Dalmia OCL (DOCL)…RHI Magnesita will
acquire all outstanding shares in Dalmia OCL (DOCL) in exchange for 27 million new shares in
RHI Magnesita India Limited…a value of approximately ₹1,708 Crores
The refractory business of Dalmia group will add a manufacturing capacity of about 320,000 MTPA to the
company (source).
The integration will add almost 320,000 tons of capacity to RHI Magnesita India production
footprint, particularly in magnesia carbon and alumina bricks.
In addition to the above inorganic methods, RHI Magnesita India Ltd has also increased its manufacturing
capacity by organic methods i.e. by doing capital expenditure in its plants & machinery.
In FY2018, the company increased the capacity of its Bhiwandi plant from 9,300 MTPA to 11,700 MTPA.
expanded its existing production capacity of isostatic products from 9,300 tons per year to 11,700
tons per year at Bhiwadi…The plant was successfully commissioned on 17 May, 2018
In FY2022, the company started work on increasing the manufacturing capacity of its three plants and
completed the expansion of its Vizag plant by 30%.
During the year, the capacity of the Vizag plant was expanded by almost 30%. Capacity expansion
projects are ongoing at the other two plants.
To increase its business size and resultant competitive advantages, RHI Magnesita India Ltd has planned
to double its manufacturing capacity to about 300,000 MTPA over the next 4 years by investing about ₹400
cr.
FY2022 annual report, pages 4 and 14:
business goal of doubling our production capacity and revenue by FY 2025-26 as compared to
2020-21. This will be achieved through organic and inorganic means. In 2020-21, we earmarked
a phased capex investment of Rs. 400 crores upto 2025-26 for expanding capacities and
automation of our three plants..
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The company aims to double its production to almost 3,00,000 tons per annum by 2026.
Apart from increasing capacity by way of acquisitions and capital expenditure, the company is also going
in for franchise agreements where third parties produce the refractory goods required by the company. The
company has one such agreement with a plant based in Salem (source).
This also has an allied plant in Salem run under franchise arrangement, that produces monolithics.
6) Cost-cutting measures by RHI Magnesita India Ltd:

In light of the competition, the company has focused on reducing its costs by taking measures like reducing
employee costs through a voluntary retirement scheme (VRS). The company came out with a VRS scheme
in FY2013.
In response to the VRS, 43 employees opted for the same. Expenditure of ₹125.86 Lacs on VRS
has been charged to statement of profit and loss
The company faced margin pressure when the cost of sourcing raw materials from China increased. As a
solution, the company decided to focus on recycling refractory products because it provided a cost saving
of up to 30% and also reduced dependence on China.
Localization and recycling to support margins (discourage imports): Recycled material which
saves 30% of the cost. This will also reduce dependence on China.
To achieve its recycling objectives, RHI Magnesita India Ltd purchased a manufacturing plant of Manishri
Refractories & Ceramics Private Limited capable of producing MGU bricks via recycling.
Company has invested Rs. 43.56 Crores to purchase certain assets of plant…of Manishri
Refractories & Ceramics Private Limited (MRCPL). This plant capacity is 10,000 Tons
for manufacturing of MGU bricks through recycling and with further capex the capacity will be
increased to 18,000 Tons per annum.
The company also tied up with a large steel manufacturer to source used refractory material for recycling.
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company recently signed its first long-term contract with a major steel maker in India for lifting
of spent refractories for recycling
As a result of these initiatives, RHI Magnesita India Ltd could achieve up to 16% share of recycled raw
material in its operations.
Use of more than 16 % of recycled raw collected from different steel plants.
Going ahead, an investor should keep a close watch on the profit margins of the company to understand if
it can pass on an increase in its input costs to its customers.
The tax payout ratio of RHI Magnesita India Ltd has largely been in line with the standard corporate tax
rate prevalent in India.
Operating Efficiency Analysis of RHI Magnesita India Ltd:
a) Net fixed asset turnover (NFAT) of RHI Magnesita India Ltd:

NFAT of the company used to be high in the range of 13-16 until FY2019. However, since the merger of
three subsidiaries of RHI Magnesita, the NFAT of the company declined to the range of 6-7.
This sharp decline in the NFAT is due to the different product profiles of merging companies. The data
from the three-years financials of the merging companies (source) shows that one of the merging
companies, RHI Clasil Pvt. Ltd had a comparatively very low NFAT.
RHI Clasil Pvt. Ltd: FY2018 sales: ₹266 cr, fixed assets: ₹60 cr, NFAT = 4.4
Due to the merger of a company with an NFAT of 4.4 with another company with an NFAT of 14.9, the
NFAT of the resultant entity declined.
Going ahead, an investor should keep a close watch on the NFAT of the company to assess whether it can
use its fixed assets and manufacturing capacity optimally.
b) Inventory turnover ratio (ITR) of RHI Magnesita India Ltd:

In the past, the inventory turnover ratio (ITR) of the company used to be in the range of 6.5-7.5. However,
upon the merger of the three companies, the ITR of the company declined to 4.2 in FY2022. This is visible
in the sharp rise in the inventory of the company from ₹278 cr in FY2020 to ₹608 cr in FY2022.
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c) Analysis of receivables days of RHI Magnesita India Ltd:

Over the years, the receivables days of RHI Magnesita India Ltd have stayed in a range of 70-80 days. After
the merger of three entities, the receivables days witnessed an improvement to 64 days in FY2020.
However, since then, the receivables days have gone back to the historical average of about 75 days in
FY2022, which is visible in a sharp rise in the receivables of the company from ₹332 cr in FY2020 to ₹489
cr in FY2022.
Going ahead, an investor should monitor the trend of receivables days of RHI Magnesita India Ltd to assess
whether it is able to collect its receivables on time and keep its working capital position under control.
operations (cCFO) of RHI Magnesita India Ltd for FY2013-2022, then she notices that over the years
(FY2013-FY2022), the company has not converted its profit into cash flow from operations.
Over FY2013-22, RHI Magnesita India Ltd reported a total net profit after tax (cPAT) of ₹989 cr. During
the same period, it reported cumulative cash flow from operations (cCFO) of ₹718 cr.
would also understand the situations when the companies would have their CFO higher than PAT.
Learning from the article on CFO will indicate to an investor that the cCFO of RHI Magnesita India Ltd is
lower than the cPAT due to a sharp deterioration in the working capital position of the company since its
merger with other RHI subsidiaries.
In fact, in the FY2022 annual report, the company highlighted to its investors its worsening working capital
position. At the same, it urged its customers to help it with support for working capital.
Industry is operating on thin margins and high working capital due to its nature of business. Over
the last few years, we are also facing serious issues of financial sustainability due to constantly
rising costs on all fronts, thus reducing margins due to constant price pressure from
customers…There is an urgent need for all stakeholders, especially our customers to help us by
compensating for such cost increases and support through working capital to avoid any adverse
impact
Going ahead, an investor should keep a close watch on the working capital position of RHI Magnesita India
Ltd.
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The Margin of Safety in the Business of RHI Magnesita India Ltd:

target growth.
Where,

SSGR is dependent on NFAT and is directly proportional to it. Therefore, companies with a high NFAT
have a higher SSGR. Despite being a manufacturing company, RHI Magnesita India Ltd has a high NFAT
ranging from 7 and above.
As a result, the company has reported an SSGR above 50%, which is higher than the sales growth rate
achieved by RHI Magnesita India Ltd over the last 10 years (FY2013-FY2022) both before the merger with
RHI subsidiaries and after the merger. It indicates that the company could generate sufficient funds from
its internal resources to fund its business growth.
Therefore, over the last 10 years (FY2013-FY2022), the company did not need to dilute its equity and had
a minimal debt of ₹65 cr in FY2022. The company was debt-free until FY2019. The debt appeared in the
balance sheet as a part of the merger with other RHI subsidiaries.
Moreover, an investor may note that at the end of FY2022, the company had cash and investments of ₹78
cr indicating that it has a surplus net cash position. In addition, the company has a net worth over ₹1,000
cr.
An investor gets the same conclusion when she analyses the free cash flow position of RHI Magnesita India
Ltd.
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b) Free Cash Flow (FCF) Analysis of RHI Magnesita India Ltd:

While looking at the cash flow performance of RHI Magnesita India Ltd, an investor notices that during
FY2013-FY2022, it generated cash flow from operations of ₹718 cr. During the same period, it did a capital
Therefore, during this period (FY2013-FY2022), RHI Magnesita India Ltd had a free cash flow (FCF) of
₹305 cr (=718 – 413).
of ₹28 cr. As a result, the company had a net free cash flow of ₹359 cr (= 305 + 82 – 28). 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 RHI Magnesita India Ltd over the last 10 years (FY2013-
2022), an investor notices that the company has primarily used its free cash flow in the following manner:
Payment of dividends to the shareholders: ₹252 cr excluding dividend distribution tax (DDT).
An increase in cash & investments of about ₹71 cr i.e. from ₹7 cr in FY2013 to ₹78 cr in FY2022.
Going ahead, an investor should keep a close watch on the free cash flow generation by RHI Magnesita
India Ltd to understand whether the company continues to generate surplus cash from its business and keep
its debt levels under control.
Additional aspects of RHI Magnesita India Ltd:

On analysing RHI Magnesita India Ltd and after reading annual reports, credit rating reports and other
1) Management Succession of RHI Magnesita India Ltd:

RHI Magnesita India Ltd is a part of the RHI Magnesita group. The company originally used to be a part
of Rajgarhia as Orient Refractories Ltd before they sold it to the RHI group. Upon the sale of the company,
the promoter, Mr S G Rajgarhia, resigned from the position of managing director.
Then, RHI group appointed Mr Pramod Sagar as managing director of the company. Mr Pramod Sagar is
an old employee of the company since 1992 and had been working with the company for 21 years.
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Joined Orient Refractories Limited (de-merged from Orient Abrasives Ltd.) on 15th April 1992 as
Marketing Manager. Before taking up his present assignment, he was heading Marketing and
Operations of Orient Refractories Ltd. as Senior Vice-President.
After the merger of the three subsidiaries of RHI Magnesita group, Mr R V S Rudraraju, a part of the
promoter family of RHI Clasil Pvt. Ltd. joined the board of directors of the company in an executive
position.
Currently, the active day-to-day management of the company is handled by Mr Pramod Sagar as managing
director & CEO (aged 57 years) and Mr R V S Rudraraju as chief operating officer (aged 52 years).
As RHI Magnesita India Ltd does not have any identified family as a promoter in India, an investor may
assume that whenever the company needs to fill up a position in the senior management, then RHI
Magnesita group might be able to hire a suitable candidate either from within the company or from outside.
2) Scope of improvement in the internal controls and processes at RHI Magnesita

India Ltd:
An investor notices many instances that indicate that the internal controls and processes in the company
leave scope for improvement.
2.1) Composition of the board of directors:
On many occasions, the composition of the board of directors of RHI Magnesita India Ltd was not as per
the statutory requirements.
For example, in FY2015, for a total of about 5-month period, the board of directors did not have the required
number of independent directors.
The board of directors of the Company and its various committees thus ceased to be properly
constituted during the period 30 July, 2014 to 12 November, 2014 till the time independent
directors were appointed in place of resigning independent directors…again ceased to be properly
constituted during the period 9 February,2015 to 31 March, 2015 as at least 1/3rd of the total
board should be comprised of independent director where the Chairman is an independent
director.
In FY2020, one of the independent directors continued to hold his position without approval from
shareholders despite crossing the statutory age limit of 75 years.
FY2020 annual report, page 26
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Further in violation of the requirements of regulation 17(1A) of said Regulations, Mr. Rama
Shankar Bajoria continued to hold office of Independent Director without approval of
shareholders by means of a special resolution (as he crossed 75 Years of age as on 1 April 2019).
The company did not appoint an independent woman director on time even though the regulations had
stipulated it. In addition, during a part of FY2020, it did not have the required number of total directors.
Company was in Non-Compliance with regard to appointment of Independent Women Director till
12.08.2019 and No. of Directors being less than six till 12.08.2019 and also during 1.1.2010 to
10.02.2020 as required
2.2) Failure to comply with other statutory requirements:
In FY2017, the company breached its limit of transactions with related parties.
The threshold limits approved by its shareholders…for material related party transactions of the
Company with RHI AG, Austria was breached by the Company during the year.
In FY2020, the company delayed an announcement of its board meeting to the stock exchanges and
investors at large. Therefore, both the stock exchanges, NSE and BSE, fined the company.
NSE & BSE also imposed fine on Company for Delay in furnishing prior Intimation of Board
meeting which was duly paid by the Company.
On multiple occasions, RHI Magnesita India Ltd violated foreign exchange management regulations
concerning its trade receivables and payables and it had to repeatedly apply for a pardon for its violations.
Foreign currency trade payables amounting to Rs. 43.78 lacs (31 March, 2020: Rs. Nil lacs) have
been written back during the year. Subsequent to the year end,(the Company has approached the
authorised dealer, under the Foreign Exchange Management (Import of Goods and Services)
Regulations, 2015, to condone the delay in relation to obtaining approval for write back
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Other Payables as at 31 March, 2020 are foreign currency payables which were overdue for more
than three years…During the year, the Company has approached the authorised
dealer…to condone the delay
Includes foreign currency receivables amounting to ₹ 547.83 lacs…which are overdue for more
than nine months. The Group has approached the authorised dealer…to condone the delay
Includes foreign currency trade payables amounting to ₹ 8,314.54 lacs…which are overdue for
more than 180 days. The Group has approached the authorised dealer…to condone the delay
In FY2018, the company delayed depositing undisputed statutory dues to the govt. authorities.
Company is generally regular in depositing undisputed statutory dues in respect of income tax,
though there has been a slight delay in a few cases
Moreover, since FY2016, RHI Magnesita India Ltd has rarely spent the required amount on CSR and almost
every year, the auditors have pointed it out.
The Company was required to spend Rs. 230.37 lacs…towards CSR activities. However the
Company has spent Rs. 205.04 lacs towards CSR
expenditure made by the Company towards CSR activities during the year ended 31 March 2022
was less than the prescribed amount by ₹187.68 Lacs
2.3) Fire in the warehouse of RHI Magnesita India Ltd:
In FY2012, the company had a fire in its warehouse. However, at the time of the insurance claim, the insurer
did not agree with the claim raised by the company and as a result, it had to recognize a loss.
During the previous year, a fire occurred at the warehouse…the Company estimated the loss of
₹149.76 Lacs…The Company filed a claim with the insurance company for the equivalent
amount…as the management was confident that claim receivable shall not be lower than the above
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amount….was settled for a lesser amount and accordingly net loss of ₹55.73 Lacs has been
accounted for
2.4) Differences in the same data presented by company in different parts of annual report:
In FY2016 annual report, RHI Magnesita India Ltd reported different data for the salary taken by Mr S. C.
Sarin at three different places in the annual report.
On page 27, the company reported the remuneration taken by Mr Sarin as ₹10.52 lac. On page 31, it
mentioned the remuneration of Mr Sarin as ₹119.38 lac. Further, on page 83, the company mentioned the
remuneration taken home by Mr Sarin as ₹15.54 lac.
2.5) When the majority shareholder (RHI) voted against a board resolution:
Normally, we see that the resolutions in the annual general meeting (AGM) are proposed by the board of
directors with the consent of the majority shareholder. This is natural because the majority shareholder has
the maximum representation on the board by way of its nominee directors.
However, in FY2015, the secretarial auditor pointed out that the shareholders have defeated the resolution
of creating security in favour of banks.
However, the shareholders defeated the special resolution proposed under Section 180(1)(a)
giving authority to the board of directors to borrow money by creation of charge / security on the
assets of the Company upto ₹150 crores
The resolution was defeated when 90.57% of shareholders voted against the resolution.
In FY2015, the company had a total of 120,139,200 equity shares (FY2015 annual report, page 50).
Therefore, if 83,644,267 votes are cast against the resolution, then it becomes clear that the majority
shareholder, Dutch US Holding B.V., Netherlands (representing RHI group) holding 83,637,771 (FY2015
annual report, page 68) has voted against the resolution.
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This incident might present a case where the management of the company moved a resolution via the board
without keeping the majority shareholder on the same page.
An investor may seek any further clarifications directly from the company.
2.6) Land pending for allotment in the name of the company for more than 15 years:
Multiple land parcels and a building owned by the company in Vishakhapatnam (Vizag) have not been
transferred in the name of the company since 2005-2007 because, apparently, the revenue department of
the govt. is still assessing the stamp duty.
Stamp duty is under assessment with Revenue Department of the Andhra Pradesh. Title deed will
be transferred in the name of the Company once stamp duty is deposited after assessment is
completed.
On the face of it, it seems like a case where the company has moved an application for the transfer of the
title deed in its name and after that, it has not followed up with the authorities.
An investor would acknowledge that such incomplete actions like the transfer of title deeds might prove a
significant roadblock in future if the company intends to transfer/sell these assets to any other person.
An investor may contact the company directly to understand the reasons for such a long delay in the
assessment of stamp duty by the govt. authorities and whether it has continued to follow up with the govt.
office for closure of its application.
Going ahead, an investor should keep a close watch related to the signs indicating a lack of strong processes
and controls at the company.
The Margin of Safety in the market price of RHI Magnesita India Ltd:
Currently (January 7, 2023), RHI Magnesita India Ltd is available at a price-to-earnings (PE) ratio of about
42 based on consolidated earnings of the last 12 months ending September 2022 (Oct. 2021 – Sept. 2022).
An investor would appreciate that a PE ratio of 42 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
RHI Magnesita India Ltd has grown its revenue at a fast pace of 21% year on year for the last 10 years
(FY2013-FY2022). The company has used both organic and inorganic methods. RHI Magnesita group has
acquired companies, and plants, formed joint ventures in India and consolidated all of them under RHI
Magnesita India Ltd. As a result, the sales of the company have increased from ₹361 cr in FY2013 to ₹2,336
cr in 12 months ending Sept 2022 (i.e. Oct. 2021 to Sept 2022).
The company is planning to grow aggressively and therefore, it has announced aggressive expansion plans
to double its production capacity by investing ₹400 cr by FY2026. In addition, in recent months it has
acquired refractory businesses of Hi-tech Chemicals and Dalmia group.
High technological requirements to produce good quality refractory products needed by steel, cement and
glass industries create a strong barrier to entry for new players in the refractory industry. Therefore, most
small Indian players are not able to grow beyond a point and thereafter, they either tie up with/sell out to
global players, which bring in technology to cater to large customers. As a result, the refractory industry is
dominated by a few global players.
These global players, all of whom have the technology to cater to large customers compete intensely for
market share. Because of this intense competition, players like RHI Magnesita India Ltd are not able to
pass on an increase in their input costs and are facing pressure on their profit margins and working capital.
Therefore, companies like RHI Magnesita India Ltd focus on aggressive business size growth to gain
competitive advantages. To withstand competition, the company is also focusing on cutting costs by
reducing employee costs (VRS) and developing alternative raw material sources like recycling. These steps
have helped the company in improving its profit margins in recent years.
Ever since the merger of three Indian subsidiaries of RHI Magnesita group, the working capital of the
company has come under stress and a significant amount of money is stuck in receivables and inventory.
However, as the company’s business is asset-light with a high turnover; therefore, it had to do only limited
capital expenditure to achieve its business growth.
As a result, until now, it has managed to grow its business without raising a lot of debt. However, going
ahead, looking at the aggressive growth plans, an investor needs to keep a close watch on the debt levels of
RHI Magnesita India Ltd.
An investor also needs to keep a close watch on the profit margins of the company as well as signs of
weakness in the internal controls and processes of the company. In the past, RHI Magnesita India Ltd has
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seen many instances of non-compliance with statutory norms; therefore, an investor needs to be cautious
while analysing the company.
These are our views on RHI Magnesita India 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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5) Lloyds Metals and Energy Ltd

Lloyds Metals and Energy Ltd is jointly controlled by Mr B.L. Agarwal’s family and the Thriveni group.
The company owns an iron ore mine and sponge iron plant in Naxal-affected areas of Maharashtra;
Chandrapur and Gadchiroli districts.
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On different occasions in the past, Lloyds Metals and Energy Ltd has created child entities (subsidiaries,
joint ventures etc.). As a result, at times, it has published standalone as well as consolidated financials.
On Dec 31, 2022, the company had a joint venture (JV) company, Thriveni Lloyds Mining Private Limited
with the Thriveni group. It formed the JV with the Thriveni group in FY2021 when the Thriveni group
acquired equal promoter rights from the B.L. Agarwal family by infusing about ₹200 cr in the company.
pursuant to this MOU the Thriveni Earthmovers Private Limited and Lloyds Metals and Energy
Limited has incorporated a Joint Venture Company namely “Thriveni Lloyds Mining Private
Limited” on 28th May, 2020 in the ratio of 60:40, for doing Mining Operations only
As a result, of this JV, in recent times, Lloyds Metals and Energy Ltd started publishing consolidated
financials from FY2021 onwards. Previously, the company had started publishing consolidated financials
in FY2005 when it formed a wholly owned subsidiary (WOS) company, Gadchiroli Metals & Minerals
Limited.
During the year, Company has floated a wholly owned subsidiary M/s. Gadchiroli Metals &
Minerals Limited with a share capital of Rs. 10 Lacs.
However, from FY2014, it stopped publishing consolidated financials because Gadchiroli Metals &
Minerals Limited did not remain its wholly owned subsidiary as the stake of Lloyds Metals and Energy Ltd
was diluted when the subsidiary raised money from other parties.
M/s. Gadchiroli Metals and Minerals Limited, ceased to be wholly owned subsidiary of the
Company due to dilution of shareholding during the year under review.
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 the consolidated financials of the company, whenever they are
present.
Therefore, while analysing the past financial performance of Lloyds Metals and Energy Ltd, we have
analysed standalone financials until FY2004, consolidated financials from FY2005 to FY2013, standalone
financials from FY2014 to FY2020 and again consolidated financials from FY2021 onwards.
With this background, let us analyse the financial performance of Lloyds Metals and Energy Ltd.
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Financial and Business Analysis of Lloyds Metals and Energy Ltd:

In the last 10 years (FY2013-FY2022), the sales of Lloyds Metals and Energy Ltd have declined from ₹759
cr in FY2013 to ₹692 cr in FY2022. The long-term decline in performance looks even sharper when looked
at in the context of sales of ₹251 cr achieved by the company in FY2021, which is about 67% down from
the sales of FY2013.
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After FY2021, the company has been growing very fast. In FY2022, it reported sales of ₹692 cr, which is
a growth of 175% over FY2021. In the last 12 months ending Dec. 2022 (i.e. Jan. 2022 to Dec. 2022), the
company reported sales of ₹2,849 cr, which is a very significant growth.
However, if an investor looks at the financial performance of Lloyds Metals and Energy Ltd from FY1996
onwards, then she comes across an entirely different story. The performance of the company has been
highly erratic.
The below table contains the data of sales, non-operating income and profit after tax (PAT) of Lloyds
Metals and Energy Ltd from FY1996 to FY2022.
The first thing that an investor notices is that over the last 27 years (FY1996-FY2022), on a cumulative
basis, the company has lost money because; over this period, it has reported a cumulative loss after tax of
₹17 cr. This is despite reporting sales of ₹10,783 cr over these 27 years.
Moreover, the business performance of Lloyds Metals and Energy Ltd had been highly volatile. From
FY1998 to FY2004, the company reported losses for 7 consecutive years.
The sales of the company have been highly fluctuating. Sales reached a peak in FY1997 at ₹336 cr and
thereafter started declining consistently. Sales bottomed out after declining 66% at ₹115 cr in FY2001 and
then started increasing. Subsequently, sales peaked at ₹1,007 cr in FY2012. However, once again sales
started declining and bottomed out after declining more than 75% at ₹251 cr in FY2021.
The sales of Lloyds Metals and Energy Ltd in FY2021, ₹251 cr were less than its sales of ₹336 cr achieved
almost 25 years back in FY1997.
To understand the reasons for such a financial performance of Lloyds Metals and Energy Ltd, an investor
needs to read the publicly available documents of the company like its annual reports from FY1997
onwards, credit rating reports by Brickwork, corporate announcements as well as other public documents.
Then she would understand the factors leading to a highly fluctuating business performance along with the
recent-most sharp improvement.
The above-mentioned documents indicate that the following key factors influence the business of Lloyds
Metals and Energy Ltd, which are critical to understand for any investor analysing the company.
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1) Major contributions from Iron ore mining operations:

Sponge iron, power production and mining operations are the main revenue segments of Lloyds Metals and
Energy Ltd. Out of these, the recent sharp increase in the business performance of the company is primarily
due to a significant increase in revenue from its mining operations.
In FY2022, the company reported sales of about ₹238 cr from mining, which was nil in the previous year.
The same pattern in continuing in FY2023 as well. In 9M-FY2023 financials, the mining operations
contributed ₹1,951 cr whereas, in 9M-FY2022, mining operations contributed ₹51 cr to sales.
The increasing size of the mining operations of the company has helped it on two fronts.
First, it is able to source all its iron ore requirements for sponge iron production from its own mine, which
has significantly reduced its iron ore costs by up to 50% from earlier ₹7,000 per MT to now ₹3,000-3,500
per MT. It has led to a high-profit margin in sponge iron operations.
Credit rating report by Brickwork, August 2021, pages 2-3:
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reduction in iron ore cost from Rs. 7000 per tonne to Rs. 3000~Rs. 3500 per tonne leading
to healthy profitability of the company.
On account of captive consumption, the cost of sourcing raw material has come down leading to
an increase of profitability of the Company.
In order to use more of its captive iron ore in-house, the company has announced major capacity expansions
for manufacturing steel products.
Second, its iron ore production approval of 3 million tonnes per annum is much higher than its own
requirement of about 0.5 million tonnes, until now. As a result, Lloyds Metals and Energy Ltd sells most
of its iron ore production to other buyers.
Credit rating report by Brickwork, August 2021, page 3:
iron ore requirement for the company is around 0.50 million tonnes per annum hence any surplus
iron ore production will be available for sale to third parties.
The Company could mine 2.9 million tons in 6 months of operation against an allowed capacity
of 3 million tons per annum.
Selling iron ore in the open market is a highly profitable business because companies just need to dig the
ore out from the earth and sell it without any value addition. The key factor leading to high-profit margins
in this low-value-adding business is the license for mining.
It is difficult to get a mining license and at times, the steel industry has to face a shortage of iron ore e.g. in
FY2021.
acute shortage of iron ore is prevailing due to the cancellation of the iron ore mines in March,
2020 and subsequent reduction in mining activities from the 19 auctioned mines in Odisha
Due to these regulatory hurdles, anyone who gets a license to mine iron ore can earn high-profit margins
from digging the ore and selling it. In light of the same, it comes as no surprise to the investor that companies
like NMDC Ltd, which rely primarily on iron ore mining enjoy operating profit margins of 50% to 70%.
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Therefore, an increasing contribution of iron ore mining operations during FY2022 and FY2023 has led to
a significant increase in the profit margins of Lloyds Metals and Energy Ltd from 4% in FY2021 (with nil
mining sales) to 21% in FY2022 and 27% in 9M-FY2023.
1.1) Mining operations face a lot of uncertainty:
Mining operations are the mainstay of significant improvement in the performance of Lloyds Metals and
Energy Ltd in recent years. The company tied up with Thriveni group, which is the largest mining operator
in India for its iron ore mine. The decision seems to have worked well for the company because even during
the rainy season, the mine could produce at near full capacity.
Q2-FY2023 results presentation, page 6:
Despite monsoons, the production run rate remained unaffected, indicating strong operational
controls due to sufficient infrastructure in place.
However, if an investor takes a comprehensive view of the long-term history of the mining operations of
Lloyds Metals and Energy Ltd, then she notices that its mining operations have faced many issues beyond
simple operation matters. These are issues related to security threats, Naxals, regulators, approvals,
litigations etc., which have played a bigger role in stopping its mining operations until now.
Lloyds Metals and Energy Ltd received the mining lease more than 15 years back in 2007.
The Company was awarded a lease for iron ore mines in 2007 at Surjagarh Village, Gadchiroli
district (having Maharashtra’s richest iron ore reserve)
However, despite getting the lease in 2007, it could start its operations only in 2012.
company has received all statutory permissions…and the mining operations have commenced on
trial basis.
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However, mining operations were short-lived because Naxals opposed mining in the area. In the next year
in July 2013, Naxals killed one of the employees of Lloyds Metals and Energy Ltd and the mining
operations stopped.
due to insurrection by Naxals near Surjagarh Iron Ore Mine in which one of the official of the
Company was killed, the Mining Operations…has been temporarily discontinued w.e.f. July, 2013
The mining activities could resume in FY2017 after security arrangements by the police.
mining of calibrated iron ore at captive mine at Surajagarh in Maharashtra has 1.01 Lakh MT as
against previous year’s mining of Nil MT
The mining operations required heavy police protection of about 200 police personnel dedicated to the
mine.
Due to Naxalites’ threat mining takes place under police protection at Surjagarh. Around 200
strong force is deployed in the area to ensure safe transport of iron ore from the mines.
Due to the deployment of a large police force dedicated to protecting mining operations, the police
department has charged a hefty security bill to Lloyds Metals and Energy Ltd. (Source: Mining firm
gets Rs 45 crore bill from Gadchiroli police for providing security to mine: Indian
Express)
Gadchiroli police have given a bill of Rs 45 crore against to Lloyds Metals and Energy
Limited Company for providing security to its iron ore mine
The area of the company’s mine has such a large security threat from Naxals that without continuous police
protection, no mining can take place. The company has disclosed to its shareholders that it can expand
mining operations only if the police provide it protection.
The Company is taking all the effective steps to double the iron ore production for the financial
year 2019-20, and hopeful of achieving it provided the requisite security is provided by police.
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Mining activities, which had started in FY2017, could only continue for 3 years because in FY2020 the
mining operations stopped because the police could not provide it sufficient protection due to the
deployment of police personnel in election duties.
The iron ore production for the financial year 2019-20 is nil due to political uncertainties as the
Central and State elections have adversely impacted the security arrangements in the Naxal
affected area.
Subsequently, Lloyds Metals and Energy Ltd could start its mining operations only after a gap of 2 years,
in FY2022.
Therefore, on an overall basis, out of about 16 years since the allotment of its iron ore mine, Lloyds Metals
and Energy Ltd could operate it only for about 5 years with frequent disruptions including the killing of
one of its employees.
In light of such significant uncertainties related to mining operations due to security threats, an investor
should be very cautious while projecting the performance of the mining operations of Lloyds Metals and
Energy Ltd into the future. This is because, in this Naxal-affected area, any single security-related incident
might put a complete stop to mining operations for many years.
2) Intense competition in sponge iron segment:

Apart from mining operations, the sponge iron segment is the next major contributor to the revenue of
Lloyds Metals and Energy Ltd. The company started the production of sponge iron almost 27 years back in
FY1996. FY1997 was the first full year of this segment’s operations.
The Sponge Iron Plant located at Ghugus…has reported its first full year of operation during the
year under review.
Despite running the sponge iron division for more than 27 years, Lloyds Metals and Energy Ltd has not
been able to make it a source of sustainable growth because the sponge iron industry in India is highly
fragmented.
There are over 400 sponge iron units in India. Indian sponge iron industry is highly fragmented.
Top 20 producers contribute about 60-65% of total production whereas rest contributes 35-40%
of the production.
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These numerous sponge iron units compete strongly with each other
Credit rating report by Brickwork, January 2019, page 2:
Intense competition: The sponge iron industry is largely a fragmented industry with
numerous unorganised players, thus resulting in a highly competitive industry
Apart from domestic sponge iron producers, Lloyds Metals and Energy Ltd has to compete with cheaper
imports of steel from foreign manufacturers as well.
Due to rising imports from countries like China, Japan and Russia, domestic steel industry is
struggling to retain margins. Cost structure in these countries has significantly come down
In addition to other sponge iron producers and imported steel, Lloyds Metals and Energy Ltd also has to
compete against scrap steel, which is a substitute for sponge iron in steel making.
Steel scrap becomes a direct substitute of sponge iron; since both of them are tradable
commodities
The outcome of a fragmented sponge iron industry with intense competition from domestic players, cheaper
imports as well as substitutes like scrap iron, is that Lloyds Metals and Energy Ltd does not have any pricing
power over its customers.
3) No pricing power of Lloyds Metals and Energy Ltd over its customers:
The company does not have pricing power over its customers. It is evident from the fact that over the last
27 years (FY1996-2022), Lloyds Metals and Energy Ltd had reported overall net losses. At one stretch
(FY1998-FY2004), it reported losses for 7 consecutive years.
On multiple occasions, Lloyds Metals and Energy Ltd highlighted to its shareholders its inability to pass
on the increase in costs to its customers.
For example, recently, during FY2014 and FY2015, when the company reported losses for two consecutive
years, then it pointed out tough business conditions and the inability to pass on costs to customers as the
reason for losses.
Margins of steel producers would continue to be under pressure, given the high cost of production
on the back of higher input costs and their limited ability to pass on hikes in costs.
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It is not only limited to recent times. Due to the commodity nature of the company’s products, it has always
faced challenges in passing on increases in input costs to its customers.
At the same time, when steel prices fall, then the company is not able to do anything to prevent losses.
There have been times when the manufacturing of the company’s products became financially
unviable/uneconomical and it had to shut down production to restrict its losses.
The overall fall in the margin is mainly due to a slowdown in the industrial activities in general
and the depressed market conditions which did not permit any increase in sales price to offset the
rising input costs. Resultantly the company had to curtail production at CRCA and Pipe Division.
To sell its products, in addition to reducing the prices, it also had to give them a longer credit period.
in trying to be competitive had to suffer a fall in price realisation. The division has taken various
measures to improve the sales target, like easing credit terms to the regular customers
In FY1999, the company had to shut down one of its steel processing divisions because cheaper imports
made manufacturing its products unviable.
The recession in the user industry segments, availability of cheap imported Cold Rolled
material from CIS countries and uneconomical scale of operation forced the Management
to temporarily close down the CRCA Plant situated at Dombivli,
In FY2001, when the company continued to make losses, then it once again it highlighted that
The rising input cost without corresponding increase in realisation has put further squeeze on
margins.
In FY2007, when the company once again reported losses, then it highlighted an increase in raw material
costs as the reason for losses.
Company has incurred a Loss, before exceptional items, of Rs. 30.56 crores during the
year…mainly due to increase in the cost of raw materials
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In FY2007, the production of galvanized pipes by the company became economically unviable due to an
increase in the prices of zinc, which it could not pass on to customers.
PIPE DIVISION: The production in the division was lower due to unexpected increase in the price
of zinc, having more than doubled during the year under review, which has made the sale of
galvanized pipes commercially uneconomical.
Moreover, even after one full year, the operating environment had not become conducive and Lloyds Metals
and Energy Ltd was not able to produce pipes profitably.
Pipe division: The division has in second successive year, underperformed due to the reasons
beyond the control of the company owing to its product becoming commercially uneconomical.
The poor bargaining position of the company is not limited to its sponge iron/steel products division. Even
in the case of power generation, it faced situations where its buyers, which are large state distribution
companies, are not willing to buy power. As a result, the company’s performance suffered as it could not
produce sufficient power to sell.
FY2014 annual report, pages 6-7:
Reluctance of State Electricity Boards to buy power due to their financial weakness which has led
many power producers to operate at sub-optimal capacities….production of the division was 17.05
MWH during the year under review as compared to 23.96 MWH for the previous year.
It seems that due to its poor negotiating position in its existing businesses of sponge iron and power, Lloyds
Metals and Energy Ltd was feeling frustrated and even made plans to diversify into other business areas
like infrastructure and trading.
Company is currently engaged in steel and steel related products activity and is looking for new
avenues of business in various areas like infrastructure and trading.
4) Steps taken by the company to improve operations:

Due to the tough business environment and poor bargaining power of the company, Lloyds Metals and
Energy Ltd undertook many steps to improve its operations.
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4.1) Using low-cost Hospet iron ore to make sponge iron:
In FY1998, the company started using Hospet iron ore, which proved to be a cheaper source of raw material.
Sponge Iron Division has successfully used HOSPET Iron Ore. The landed cost of which is lower,
resulting in saving in raw material cost.
As per the company, Hospet iron ore is not suited for its plants; however, it could improvise and make
adjustments to use it in its plant.
Normally the Hospet ore is soft and not suitable for rotary kiln based Sponge Iron production
process. By making necessary adjustments to the process, the plant has successfully used low
grade Hospet ore.
By improvising the manufacturing process, Lloyds Metals and Energy Ltd could increase the proportion of
Hospet iron ore to about 26% of total consumption. It reduced the raw material costs for the company.
During the year Hospet ore was used in larger proportion successfully. The total Hospet ore used
was 45,961 MT accounting to 26% of the total feed.
4.2) Steps for efficient utilization of coal:
Coal is one of the key raw materials used by Lloyds Metals and Energy Ltd to produce sponge iron. It forms
a major portion of input costs. As a result, the company focused on various steps to reduce the cost of coal
like buying a cheaper variety of coal from Western Coalfield Ltd (WCL) and making suitable changes in
its manufacturing process.
Further to save in raw material cost from this year company started using less costly EPROM
coal from WCL mines. The process is under stabilization with this type of coal.
Subsequently, the credit rating agency, Brickwork, highlighted the long-term sourcing arrangement of the
company with WCL as one of the key advantages for the company, which ensures raw material supply.
Credit rating report by Brickwork, May 2020, page 6:
The Company procures coal from Western Coalfields Limited under long-term linkages.
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However, despite such long-term linkages to buy coal, it is still difficult to get the required quantity of coal
by the company. As a result, it has to look for various ways to efficiently utilize coal and reduce its wastage.
In FY2004, the company adjusted the manufacturing process to improve productivity.
We have reduced the distance to less than half i.e. about 7-8 mtrs from kiln discharge end for
achieving better coal throw pattern particularly during monsoon season when coal is wet which
used to jam. By this reduction of distance, coal throw pattern is achieved better and jamming
problem is sorted out resulting better productivity.
In FY2006, the company started work on a coal-washing facility at its plant to improve the efficiency of
coal usage.
Washed coal trials have been taken and is being continued to use as it gives better production and
proper control of sulphur levels as desired by the customer. In pursuance to this coal washers
design has been finalized and erection work is under progress to wash coal in our premises only.
In FY2009, the company started mixing domestic coal sourced from WCL with the imported high FC coal
to improve efficiencies.
Imported coal with High F.C has been introduced to get a better coal mix with our WCL-coals,
enhance the quality of fuel to achieve consistency in quality of the finished products, higher
productivity and higher campaign life of kilns.
The company had to import high calorific value coal from outside India because in India sponge iron
industry finds it difficult to get this coal. Moreover, in India, such coal is given to the power and cement
sectors on priority.
The sponge iron sector in India faces major challenge of high calorific value domestic coal
availability and more allocations to power and cement sector…The sponge iron manufacturers
are facing this as the biggest challenge as most of the coals reaching sponge iron plants from
domestic sources are usually of low calorific value.
In order to decrease the usage of coal, the company started using high-quality iron ore from its own captive
mines.
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By using high quality hematite iron ore from our captive mines we are able to reduce coal
consumption by 10% in DRI manufacturing process with compare to sponge iron industry norms
Even though the company attempted a lot to reduce its costs of using coal. However, still, in FY2022, it
had a large exception expense of coal cess for ₹51 cr (FY2022 annual report, page 99).
4.3) Captive waste-heat recovery power plant to reduce power costs:
Lloyds Metals and Energy Ltd established a waste-heat recovery (WHR) power plant to reduce its costs
and stay competitive in the tough sponge iron industry. The company installed a 30 MW power plant out
of which it could produce 17-18 MW of power using waste heat. It helped it in producing power at a low
cost of ₹2/- per unit.
The company used only a part of it (5MW) in-house and could sell the remaining in the open market.
Corporate presentation, July 2022, page 14:
The cost of Generation is very low at less than Rs. 2.00 per Unit…17-18 MW is generated from
Waste Heat & balance 12-13 MW is generated from Coal…company uses approximately 5 MW
internally and sells the balance
The power plant got certified emission reductions (CERs) from the UNFCCC because it had an
environmentally-friendly impact by recovering waste heat. The company could sell these CERs to make
some additional money.
project shall be eligible for 109,660 Carbon Emission Reductions (CER) Certificates every
year for 10 years duration from 2013-2023.
However, after completing the power plant, the company continued to face challenges in selling power
because the power prices were not highly profitable in comparison to the high input costs.
High fuel prices and low merchant realization has put pressure on operating margins of the power
companies.
4.4) Other steps to reduce operating costs:
In FY2009, Lloyds Metals and Energy Ltd even resorted to changing the technology to produce sponge
iron so that it could use lesser raw material and power in its operations.
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Sponge Iron Division: Operating technology of 500 TPD Kiln has been changed to LURGI based
concept during the year 2008-2009. The conversion of technology has improved plant
productivity with-substantial reduction of raw materials input and electrical power
consumption per MT of DRI.
However, at times, intense competition from domestic as well as cheaper imports created conditions when
manufacturing products became unviable. In such conditions, Lloyds Metals and Energy Ltd closed down
its units.
For example, in FY2000, due to tough business conditions and the poor pricing power of Lloyds Metals
and Energy Ltd, it became financially unviable to produce CRCA sheets. As a result, the company decided
to shut down this division. The company gave the unit to a third party for operations.
CRCA Division has been given on conducting basis to an outside party for a period of three years,
in order to offset the fixed costs.
Therefore, an investor may note that the intense competition and nil pricing power ensured that despite all
the efforts by Lloyds Metals and Energy Ltd to reduce its costs and improve its profitability, it could not
protect its business from suffering.
5) Financial support by Govt. to Lloyds Metals and Energy Ltd due to operations
in the Naxal affected area:
The company’s sponge iron plant and mine are located in a remote tribal area, which is Naxal-affected. In
order to promote industrial development in such areas, govt. give various financial incentives to the
companies like Industrial Promotion Subsidy refunds and other capital subsidies.
At times, the capital subsidies exceed the investment done by companies in such areas. For example, in
2022, Lloyds Metals and Energy Ltd got approval from the govt. of a subsidy of 125% of the capital that it
plans to invest in its upcoming plant at Konsari, Gadchiroli.
Government Subsidy Letter Received of 125% of Capital Invested.
The other plant proposed by the company at Ghugus, Chandrapur, has received approval for an Industrial
Promotion Subsidy of 110%.
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incentives under Package Scheme of Incentives -2019 (PSI -2019 ) in the form of exemption on
electricity duty, 100% exemption on Stamp Duty, Industrial promotion subsidy equivalent to 110%
of the Fixed Capital Investment.
In the past also, almost every year, the company received a substantial sum of Industrial Promotion Subsidy
(IPS) refund, which is reported under other income/non-operating income.
For example, in the last 4 years (FY2019-FY2022), it received an IPS refund of about 100 cr.
 In FY2022, it received an IPS refund of ₹27 cr and in FY2021: ₹19 cr (FY2022 annual report, page
100).
 In FY2020, it received an IPS refund of ₹25 cr and in FY2019: ₹28 cr (FY2020 annual report, page
86).
In the previous years, the company had continued to receive IPS refunds of about ₹12-15 cr every year.
Such subsidy support helped the company to sustain itself in the face of intense competition. However, it
did not prove sufficient in the past.
6) Default to the lenders/bankruptcy and then high-interest rates:

Due to the tough business environment of the steel industry, Lloyds Metals and Energy Ltd started reporting
losses in FY1998 and defaulted to its lenders, as it could not make interest and principal repayments to
them. As a result, its overdue started to accumulate from FY1998 onwards.
In FY1998, the company had about ₹11 cr of interest payments that it had to pay but it could not.
In FY1999, the overdue interest increased to ₹30 cr and in FY2000, it increased to ₹60 cr. (FY2000 annual
report, page 12). In FY2001, the overdue interest increased to ₹89 cr and in FY2001, it increased to ₹137
cr. (FY2000 annual report, page 13). In FY2003, the overdue interest had crossed ₹150 cr. (FY2003 annual
report, page 13).
In FY2004 annual report, the auditor of Lloyds Metals and Energy Ltd intimated to its shareholders that an
amount of ₹352 cr is still overdue to different lenders since FY1998.
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Amount of default aggregating to Rs.352 crores since 1997-98.
Due to continued losses and defaults in loan repayments, in FY2003, the company was admitted to the then
bankruptcy court of India, Board of Industrial and Financial Reconstruction (BIFR).
Based on the Audited Balance Sheet for the year ended 31st March 2002, the Company has become
a Sick Company…and reference has been registered during the year with Hon’ble Board- for
Industrial and Financial Reconstruction (BIFR)
In FY2006, BIFR appointed IDBI as the operating agency for resolving the bankruptcy situation and
rehabilitation of the company.
BIFR declared the Company as Sick…and appointed IDBI as the Operating Agency (OA) to
prepare a Draft Rehabilitation Scheme (DRS) for the company.
In FY2008, as per the resolution of the BIFR-mandated debt restructuring, it was decided that Lloyds Metals
and Energy Ltd would have to sell its pipe division, Murbad and then use the money for repayment of
lenders.
The CDR terms…stipulates that the company shall sell / transfer the entire assets along with
employees of its pipe division at Murbad and utilize the sale proceeds for payment of settlement
dues.
It was a second attempt by the lenders to recover their money from the company by making it sell its pipe
division. Previously, in FY2000, the lenders had asked the company to sell its sheets division to repay loans.
your Company along with major creditors…As a part of the revival of the economic condition of
the Company,…the de-merger of the C.R. Sheets Division into Incon Technologies Limited and
amalgamation of rest of the Company thereafter with Insco Steels Limited is proposed
In FY2002, the lenders approached the debt recovery tribunal, which ordered Lloyds Metals and Energy
Ltd not to sell/mortgage its assets.

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In respect of the dues of some banks, Debt Recovery Tribunal (DRT, Mumbai) has issued
an injunction order restraining the Company from transferring or creating third party right in the
charged assets
However, these schemes did not work and the lenders had to take losses.
In FY2004, some lenders took a loss of 75% of their loan amount because they had to accept a payment of
only ₹4.42 cr against their claims of ₹17.72 cr. The company reported the difference as an income/profit to
its shareholders.
outstanding amount (Principal plus Interest) as per books of Rs.1772.96 lacs has been
restructured and settled for Rs. 442.00 lacs. The difference amount of Rs. 1330.96 lacs has been
written back to profit & loss account.
Next year, in FY2005, lenders had to accept a loss of about 60% of their money when they had to accept
only about ₹83 cr against their loans of about ₹202 cr. Lloyds Metals and Energy Ltd reported the difference
of ₹119 cr as an exception income/profit to its shareholders.
outstanding amount (Principal plus Interest) as per books is Rs.20279.51 lacs has been
included in Exceptional Item in Profit & Loss account
Once again, in FY2006, lenders had to accept a loss of about 60% of their money when they had to accept
only about ₹62 cr against their loans of about ₹146 cr.
total outstanding amount (Principal plus Interest) as per books of Rs. 14669.23 lacs has been
restructured and settled for Rs.6226 98 lacs.
In FY2007, the company had lenders whose dues were not paid for almost the last 10 years as it had defaults
of about ₹62 cr pending since FY1998.
Amount of default aggregating to Rs.61.98 crores is outstanding since 1997-98 & Rs.9.29 crores
during the year.
In FY2008, lenders had to take a loss of 80% when they had to accept only about ₹14 cr against their loans
of about ₹62 cr.
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total outstanding amount (Principal Plus Interest) as per books of Rs.6197.72 lacs has been
restructured and settled for Rs.1423.27 lacs.
In FY2009, lenders had to take a loss of 75% when they had to accept only about ₹20 cr against their loans
of about ₹76 cr.
total outstanding amount (Principal) as per books of Rs. 7573.76 lacs has been
restructured and settled for Rs. 1965.75 lacs
The company benefited from the loss taken by lenders and its reported profits increased as it wrote back
the interest provisions as income/profits when lenders took a haircut under restructuring.
For example, in FY2006, the net profit of the company increased over the last year mainly due to writing
back of interest expenses.
Company has reported a Net Profit of Rs. 42.11 crores as against a net Profit of Rs. 29.83 crores
in the previous year mainly due to exceptional adjustments on account of write back of past interest
provisions upon negotiated restructuring of debt.
It does not come as a surprise that when the company was continuously defaulting to lenders and forcing
them to accept a loss on the money given by them to the company, then lenders will not be too eager to
give to the company when needed.
As a result, on numerous occasions, the company faced a situation where lenders did not give its working
capital loans and its business suffered.
For example, in FY2000-FY2002, lenders hesitated to give working capital loans to Lloyds Metals and
Energy Ltd, which limited its ability to operate efficiently.
Constraints of working capital further eroded the operating capacity of the Company.
The ongoing working capital constraint & continuing slowdown in the user industry has affected
the operations of the Company
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During this period, the lenders were still trying to recover their money. However, by FY2008, the lenders
had burnt their fingers and accepted losses of 60% to 80% on the money given by them to the company.
As a result, they were not willing to give any working capital loans to the company. The company had to
take loans from outside parties other than banks etc. and therefore, it had to pay very high-interest costs for
such loans, which has also led to a decline in profit margins.
higher Financial Charges incurred due to non-availability of working capital assistance from
regular banking channel.
In terms of such a relationship of the company with lenders, it does not come as a surprise to the investors
that the company had to do multiple rounds of equity dilution for raising money for working capital and
capital expenditure. Whether it is by way of issuing warrants, preference shares, or convertible debentures
to promoters or non-promoters and including raising money from the Thriveni group.
In addition, the company had to take debt from other promoter entities like Lloyds Steels Industries Ltd and
Indrajit Properties Pvt. Ltd etc. (FY2019 annual report, page 86).
7) Breaking of contract by Lloyds Metals and Energy Ltd leading to a very large
penalty leading to a very large loss in FY2023:
In Q1-FY2023, Lloyds Metals and Energy Ltd reported a very large non-operating loss of ₹1,194.40 cr
leading to a net loss after tax of ₹930 cr.
Q1-FY2023 results, page 9:
The exceptional item has arisen pursuant to an arbitration award under which the company is
liable to pay the amount…amount is being paid by way of 0% Optionally Fully Convertible
Debentures (OFCD`s). The OFCD`s when converted will result in a dilution of equity capital to
the extent of 6 crores equity shares.
Lloyds Metals and Energy Ltd had to pay this large sum of money because broke its contract with Sunflag
Iron & Steel Company Ltd (Sunflag). Sunflag gave it money (₹312 cr) for the development of the iron ore
mine; however, Lloyds did not supply iron ore to Sunflag.
Sunflag had advanced funds to the Company towards the operation and commencement of the
mine. In the year 2016, the Company started mining operations with minimal production; however,
the Company could not share the iron ore extracted with Sunflag for various reasons.
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In the arbitration, Lloyds Metals and Energy Ltd was held responsible for breaking the contract and was
asked to pay ₹900 cr to Sunflag.
The Company was liable to pay ₹900 crores to Sunflag (i.e., ₹312 crores on account of refund of
advance along with accrued interest and the balance ₹588 crores as full settlement of all other
claims).
As Lloyds Metals and Energy Ltd did not have so much money to pay in cash; therefore, it gave 6 cr OFCDs
for free to Sunflag, which give Sunflag an 11.89% stake in the company (Board meeting outcome, April
29, 2022, page 14).
The breach of contract with Sunflag by Lloyds Metals and Energy Ltd has further complicated the business
position of the company. Over the last 27 years (FY1996-FY2022), Lloyds Metals and Energy Ltd has
made a cumulative net loss of ₹17 cr and now it has reported its biggest loss of ₹930 cr in Q1-FY2023.
Going ahead, an investor needs to keep a close watch on the business performance of Lloyds Metals and
Energy Ltd. She should closely track all the developments related to mining operations because any security
failure can lead to the closure of mining operations for a couple of years. She should monitor the
performance of the sponge iron segment to check if it is able to operate profitably in light of intense
competition. She should check whether the power segment of the company is able to increase its production
and sell it to distribution companies.
Over the last 10 years (FY2013-FY2022), the tax payout ratio of Lloyds Metals and Energy Ltd is nil
indicating that the company has not paid any income tax during this period.
From the above discussion, an investor would remember that over the years, the company has made
cumulative losses (a total net loss of ₹17 cr from FY1996 to FY2022). Due to such large losses, which are
carried over the years, Lloyds Metals and Energy Ltd has not paid any income tax.
In addition, during FY2020 and FY2022, Lloyds Metals and Energy Ltd reported negative tax i.e. a profit
after tax (PAT) higher than profit before tax (PBT). This is due to large brought forward losses, which the
company has used to create tax assets i.e. it will use these losses against future profits when they happen.
In FY2020, Lloyds Metals and Energy Ltd recognized a negative tax payout (deferred tax assets) of about
₹19 cr as it utilized brought forward losses of about ₹80 cr.
FY2020 annual report, pages 96, 97:
sufficient profits will be available in future to recoup…carried forward losses and accordingly
deferred tax has been recognized on those losses under Ind-AS provisions. The deferred tax asset
has been recognized of ₹1,873.32 Lakhs as on 31.03.2020
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Brought Forward Losses ₹7,949.68 lac
Similarly, in FY2022, the company recognized negative tax payout (deferred tax assets) of about ₹9.5 cr as
it utilized brought forward losses of about ₹50 cr.
Deferred Tax recognized during the year in the P/L ₹950.68 lacs
Brought Forward Losses ₹4,950.87 lacs
Looking at the large loss of ₹930 cr in Q1-FY2023, it remains to be seen whether Lloyds Metals and Energy
Ltd will pay income tax in the near future or not.
Nevertheless, it seems that the income tax department is not agreeing with the position of the company to
pay nil tax. In FY2022, Lloyds Metals and Energy Ltd received a demand notice from the Income Tax
Dept. for ₹32 cr, which it has disclosed under contingent liabilities without sharing any more details
An investor may contact the company directly for getting more information about this demand notice.
Operating Efficiency Analysis of Lloyds Metals and Energy Ltd:
a) Net fixed asset turnover (NFAT) of Lloyds Metals and Energy Ltd:
Over the years, the NFAT of the company had declined from 2.3 in FY2015 to 0.7 in FY2021. Such
declining NFAT indicates a deteriorating efficiency of utilization of fixed assets by the company.
NFAT has improved to 1.8 in FY2022 due to a sharp improvement in mining operations.
use its fixed assets and manufacturing capacity especially related to sponge iron and power production
optimally.
This is especially important because, on many occasions, auditors of Lloyds Metals and Energy Ltd have
highlighted that the company has not verified and taken the needed care of its fixed assets.
The fixed assets of the company have not been verified during the year
All the fixed assets have not been verified during the year
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All the fixed assets have not been verified during the year
There have been instances where due to lack of proper care and required investments in the fixed assets,
their quality deteriorated significantly and they had to be sold off in slump sale.
In FY2009, Lloyds Metals and Energy Ltd sold off its CRCA sheets division in a slump sale because its
fixed assets had deteriorated due to a lack of investment in the last 10 years.
sale /transfer of its CRCA Unit at Dombivli on Slump sale basis as the conditions of the plant and
machinery of the unit were deteriorated over the years. As the company could not make any
investment in the unit since 1999 due to financial constraint
Therefore, an investor should keep a close watch on the signs that indicate whether the company is
maintaining its fixed assets properly or not.
b) Inventory turnover ratio (ITR) of Lloyds Metals and Energy Ltd:

In the past, the inventory turnover ratio (ITR) of the company had declined from 16.0 in FY2015 to 4.9 in
FY2022. A decline in the inventory turnover ratio indicates that the efficiency of inventory utilization of
the company has deteriorated over the years.
A decline in inventory efficiency increases the burden of working capital finance on the company. As a
result, Lloyds Metals and Energy Ltd had to raise money from external parties (Thriveni group) to meet its
working capital requirements by diluting its equity.
The proposed issue of 9,00,00,000 (nine crore) Equity Shares and 1,00,00,000 (one crore) 3%
OFCDs…is being made for…meeting the short term and long term funding requirements of the
Company including but not limited to working capital requirements
c) Analysis of receivables days of Lloyds Metals and Energy Ltd:

Over the years, the receivables days of Lloyds Metals and Energy Ltd have improved from 19 days in
FY2014 to 8 days in FY2022. A trend of declining receivables days indicates that the company is able to
collect its dues on time from its customers.
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This comes as a welcome change from the history of Lloyds Metals and Energy Ltd when it could not
collect its money from its customers who used to delay payments even by many years.
recovery from customers were delayed beyond the normal credit period.
In FY2000, the company had an overdue of more than ₹50 cr from customers who had not paid the money
even after 6 months after the payment date.
Debtors outstanding for more than 6 months amounting to Rs.5249.88 Lacs
The company had to initiate court cases to recover its money.
Sundry Debtors exceeding six months includes Rs. 107.15 Lacs (Previous year Rs. 92.32 Lacs) for
which the company has initiated legal proceedings
However, despite all its efforts, Lloyds Metals and Energy Ltd was not able to recover its money. In
FY2003, the company had payments of about ₹23 cr due from its customers for more than 3 years since the
payment date.
debtors outstanding for more than three years and aggregating to Rs. 2301.76 Lacs
In the next year, FY2004, Lloyds Metals and Energy Ltd had to write off ₹13.6 cr of receivables.
Bad Debts/ Provisions /Sundry Balance W/off (Net) ₹1,360.34 lac
Even in recent times, in FY2018, the company had some receivables where customers had not made
payments even after more than 3 years.
More than 6 month receivables of 54.92 lac are pending since at least last 3 years.
Going ahead, an investor should monitor the trend of receivables days of Lloyds Metals and Energy Ltd to
assess whether it continues to collect its receivables on time.
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operations (cCFO) of Lloyds Metals and Energy Ltd for FY2013-2022, then she notices that over the years
Over FY2013-22, Lloyds Metals and Energy Ltd reported a total net profit after tax (cPAT) of ₹112 cr.
During the same period, it reported cumulative cash flow from operations (cCFO) of ₹47 cr.
Learning from the article on CFO will indicate to an investor that the cCFO of Lloyds Metals and Energy
Ltd is lower than the cPAT due to a significant amount of money consumed by inventory, which as
discussed above, is evident from the deteriorating inventory turnover ratio of the company.
Going ahead, an investor should keep a close watch on the working capital position of Lloyds Metals and
Energy Ltd.
The Margin of Safety in the Business of Lloyds Metals and Energy Ltd:

target growth.
Where,

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Over the years, Lloyds Metals and Energy Ltd has reported an SSGR of negative to nil. SSGR has improved
only in recent years due to a sharp improvement in the mining business. However, in previous years, the
SSGR of the company has been very low.
As a result, to run and expand its capital-intensive business, the company has to rely on external capital in
the form of debt and equity dilution.
The company has historically relied on debt to meet its capital requirements. However, from FY1998, it
started to default to the lenders. As a result, lenders had to accept losses on their loans and they hesitated to
give loans to the company.
Therefore, the company had to rely on equity dilution and loans from promoter companies to meet capital
requirements. In the last 25 years, on many occasions, Lloyds Metals and Energy Ltd had to raise money
via equity dilution.
 In FY1999, the company raised ₹23 cr by issuing Cumulative Redeemable Preference Shares to
promoters (FY1999 annual report, page 11), which were converted into equity shares in FY2007
 In FY2008, the company raised ₹9.2 cr by issuing warrants and then converting them into equity
shares to non-promoters. (FY2008 annual report, page 4).
 In FY2020, the company issued warrants to promoters for ₹18 cr. (FY2020 annual report, page 4),
which were converted into equity shares later (FY2021 annual report, page 28).
 In FY2021, the company issued further warrants for ₹62.5 cr to promoters (FY2021 annual report,
page 29). These warrants were converted into equity shares in the board meeting on April 29, 2022.
 In FY2021, in another transaction, the company raised ₹20 cr by issuing Optionally Fully
Convertible Debenture (OFCDs) to Clover Media Private Limited (CMPL) (FY2021 annual report,
page 29). These OFCDs were later on converted into equity shares (FY2022 annual report, page
15). The conversion gave a 9.66% shareholding to CMPL (FY2020 annual report, page 13).
 In FY2022, the company raised ₹200 cr from Thriveni group (₹180 cr via allotting equity shares
and ₹20 cr via Optionally Fully Convertible Debentures (OFCD’s) to Thriveni Earthmovers Private
Limited (FY2022 annual report, page 15). Because of infusing ₹200 cr, Thriveni group became the
joint promoters of Lloyds Metals and Energy Ltd along with the B.L. Agarwal family.
Therefore, over the years, the company has raised a total of ₹332 cr via equity dilution out of which ₹300
cr has been raised in the last 3 years.
Apart from this, the business also consumed about ₹320 cr during debt restructuring over FY2004-FY2009,
which the lenders had to accept as a loss on their loans.
Therefore, an investor can notice that the business of Lloyds Metals and Energy Ltd has not generated
sufficient money to run and expand its operations. The cost of the company’s operations and growth is
borne by lenders via haircuts and shareholders by equity dilution.
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Even during the Covid period, the company availed the moratorium on debt services provided by the
Reserve Bank of India (RBI) for 5 months duration.
company had availed moratorium period for the interest and principal payments towards the term
loan from its lenders during March 2020 to August 2020 under the COVID-19 regulatory package.
Such incidents indicate the precarious cash flow condition of the company that with every stressful
development in the business environment, the company faces a liquidity crunch.
An investor gets the same conclusion when she analyses the free cash flow position of Lloyds Metals and
Energy Ltd.
b) Free Cash Flow (FCF) Analysis of Lloyds Metals and Energy Ltd:
While looking at the cash flow performance of Lloyds Metals and Energy Ltd, an investor notices that
during FY2013-FY2022, it generated cash flow from operations of ₹47 cr. During the same period, it did a
capital expenditure of about ₹326 cr.
Therefore, during this period (FY2013-FY2022), Lloyds Metals and Energy Ltd had a negative free cash
flow (FCF) of (₹279) cr (=47 – 326).
of ₹114 cr. As a result, the company had a net negative free cash flow of ₹237 cr (= – 279 + 156 – 114).
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 Lloyds Metals and Energy Ltd over the last 10 years
(FY2013-2022), an investor notices that the company has primarily used the following sources to meet this
cash shortfall:
 Raising equity by equity dilution, preferential issue of shares, warrants, OFCD etc. to promoters
and non-promoters.
 Increase in debt by ₹51 cr as total debt has increased from ₹26 cr in FY2013 to ₹77 cr in FY2022.
Going ahead, an investor should keep a close watch on the free cash flow generation by Lloyds Metals and
Energy Ltd to understand whether the company is able to generate surplus cash from its business and stop
its frequent equity dilutions.
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Additional aspects of Lloyds Metals and Energy Ltd:

On analysing Lloyds Metals and Energy Ltd and after reading annual reports, credit rating reports and other
1) Management Succession of Lloyds Metals and Energy Ltd:

Lloyds Metals and Energy Ltd is a part of the B.L. Agarwal family group in which Thriveni group has
become a joint promoter in FY2022 by investing ₹200 cr.
As on date, Mr Babu Lal (B.L.) Agarwal (age 75 years) is leading the day-to-day operations of the company.
Mr Balasubramanian Prabhakaran (age 49 years), the promoter of the Thriveni group is present on the board
as a non-executive director.
Mr Mukesh Gupta, nephew of Mr B.L. Agarwal is currently the chairman of the company. Mr Rajesh
Gupta, brother of Mr Mukesh Gupta is present on the board as a non-executive director.
Grandson of Mr B. L. Agarwal, Mr Madhur Gupta is also present on the board as a non-executive director.
Mr. Babulal Agarwal, Managing Director of the company is maternal uncle of Mr. Mukesh Gupta
& Mr. Rajesh Gupta, Directors of the Company and Grandfather of Mr. Madhur Gupta, Additional
Director of the Company.
It is important to note that the son of Mr Ravi Agarwal, son of Mr B. L. Agarwal is not a part of the board
of directors.
Mr. Babulal Agarwal, the Managing Director of the Company is the father of Mr. Ravi
Agarwal (belonging to Promoter/ Promoter Group of the Company)
Going ahead, an investor should keep a close watch on the relationship between the son and nephews of
Mr B. L. Agarwal to understand more about the succession planning of the group.
2) Accounting issues pointed out by auditors of Lloyds Metals and Energy Ltd:
On numerous occasions, the auditors of the company have highlighted instances when Lloyds Metals and
Energy Ltd did not follow proper accounting policies and as a result, it reported a higher profit or lower
losses than what it actually should have.
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At times, the amount of impact of these accounting changes was more than ₹100 cr.
2.1) Non-provision of interest expense in the P&L by Lloyds Metals and Energy Ltd:
In FY2004, the company did not provide for interest amounting to about ₹104 cr. As a result, the company,
which should have reported a loss of about ₹105 cr for FY2004, reported only a loss of ₹1.5 cr.
The company has not provided interest amounting to Rs. 10378.09 lacs (till date Rs. 18177.47 lacs
) had the same been considered the loss for the year after taxation would have been Rs. 10535.27
lacs (as against the reported figure of loss of Rs. 157.18 lacs)
In FY2003, the company did not make provisions for interest expense of ₹68 cr and reported a loss of ₹32
cr whereas the actual loss was about ₹100 cr.
Note No 20 regarding non-provision of interest amounting to Rs. 6830.44 lacs (till date Rs.
7977.97 lacs)…had the observations…been considered the loss for the year after taxation would
have been Rs. 10079.85 lacs (as against reported figure of loss of Rs.3241.41 lacs)
Lloyds Metals and Energy Ltd tried to show lower losses in FY2007 as well when it did not provide for
interest expense of ₹34 cr and showed a lower loss of ₹30 cr instead of an actual loss of ₹64 cr.
The company has not provided interest amounting to Rs. 3351.25 lacs (till date Rs.11385.31 lacs),
had the same been considered the Loss for the year after taxation would have been Rs. 6416.86
lacs (as against the reported figure of Loss of Rs. 3065.61 lacs)
In FY2006, the company inflated its profit by not providing for interest expense of ₹27 cr and showed a
higher profit of ₹42 cr whereas the actual profit was only about ₹15 cr.
The company has not provided interest amounting to Rs. 2707.21 lacs (till date Rs. 8034.06 lacs),
had the same been considered the Profit for the year after taxation would have been Rs. 1498.01
lacs (as against the reported figure of Profit of Rs. 4205.22 lacs)
Similarly, in FY2005, the company inflated its profit by not providing for interest expense of ₹25 cr and
showed a higher profit of ₹30 cr whereas the actual profit was only about ₹5 cr.

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The company has not provided interest amounting to Rs. 2476.68 lacs (till date Rs. 6162.53 lacs),
had the same been considered the Profit for the year after taxation would have been Rs. 505.86
lacs (as against the reported figure of Profit of Rs. 2982.54 lacs)
Similarly, Lloyds Metals and Energy Ltd did not provide for interest expense of ₹3.8 cr in FY2000, ₹3.82
cr in FY2001, and ₹3.77 cr in FY2002.
2.2) Non-provision of deferred taxes by Lloyds Metals and Energy Ltd:
In FY2002, the company did not provide for a deferred tax liability of about ₹35.5 cr in its books. As a
result, it reported lower losses of ₹86 cr whereas the actual losses would have been higher by ₹35.5 cr.
The company has not created deferred tax liability in the books of account to the extent
of Rs.3550.04 Lacs…As the company has not made any provision for the deferred tax liability
the losses for the year after tax are lower to the extent of Rs.3550,04 Lacs.
It is not a case that Lloyds Metals and Energy Ltd did not follow proper accounting policies only in the past
and now it has started following all the policies. Even in recent times, in FY2021, the company did not
follow the accounting policies, as it did not create provisions for deferred taxes.
No provision has been made during the year ended on 31st March 2021 for Deferred Tax. Ind AS
12 requires recognition of tax consequences of difference between the carrying amounts, of assets
and liabilities and their tax base. With reference to the above, the company has not adhered with
measurement criteria as per Ind AS 12.
From the above points highlighted by the auditors of the company, over the years, Lloyds Metals and
Energy Ltd did not provide for the interest and deferred taxes of about ₹304 cr over FY2000 to FY2022
and the cumulative profits declared by the company are elevated/losses are suppressed to that extent.
Keeping this in mind, the cumulative loss suffered by the company during the last 27 years (FY1996-
FY2022) of ₹17 cr increases to ₹321 cr (= 17 + 304), which brings out the tough business journey of Lloyds
Metals and Energy Ltd over the years.
The situation looks further grim if the investor adds the ₹930 cr of loss suffered by the company in Q1-
FY2023 penalty on the company for breaking its contract with Sunflag even after receiving ₹312 cr from
Sunflag for developing the mine and then not delivering the iron ore to Sunflag.
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3) Suboptimal capital allocation by Lloyds Metals and Energy Ltd:

In the past, on multiple occasions, Lloyds Metals and Energy Ltd did not put shareholders’ capital to its
best use. At times, it invested money in projects but abandoned the project midway leading to large write-
offs.
For example, in FY2005, the company wrote off ₹95 cr because of an abandoned project.
Exceptional items includes an amount of Rs. 9537.10 lacs on account of write off during the year
of abandoned project.
Similarly, in FY2008, the company wrote off another ₹7.8 cr due to the impairment of its fixed assets.
Exceptional items includes an amount of Rs.777.09 lacs on account of impairment loss on fixed
assets
FY2005 and FY2008, the years when Lloyds Metals and Energy Ltd recognized these write-offs were the
years in which it recognised large gains due to the haircut/loss accepted by lenders. Therefore, effectively,
lenders’ loss became the company’s gain and during the years when it had large exceptional gains due to
debt restructuring, it recognized the write-offs on its fixed assets.
For example, the company recognized the write-off for ₹95 cr due to the abandoned project in FY2005
when it had an exceptional gain of ₹119 cr due to haircut loss taken by the lenders.
outstanding amount (Principal plus Interest) as per books is Rs.20279.51 lacs has been
included in Exceptional Item in Profit & Loss account
Similarly, the company recognized the next write-off for about ₹8 cr on its fixed assets in FY2008 when it
had another large exceptional gain due to haircut loss taken by the lenders.
the total outstanding amount (Principal Plus Interest) as per books of Rs.6197.72 lacs has been
restructured and settled for Rs.1423.27 lacs. Principal amount of Rs 1135.22 lacs written back
has been credited to Capital Reserve and the balance amount of Rs 3639.22 lacs has been credited
to profit & loss account
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It may seem like an attempt to mitigate the impact of large fixed asset write-offs by recognizing them in
suitable periods.
Even in recent times, Lloyds Metals and Energy Ltd has taken decisions on capital deployment, which seem
strange to an investor.
For example, in FY2021, the company purchased a land parcel for ₹15 cr from a promoter group entity,
Snowwhite Realty Developers LLP. Lloyds Metals and Energy Ltd kept it as “held for sale”, which
indicates that the company planned to sell it in a short period to gain some profits.
Related party transactions: Purchase of Property of the Value of ₹1,513.56 Lakhs from
Snowwhite Realty Developers LLP.
The management estimates that the land so acquired is to be held for sale and not for use in the
ordinary course of business.
In the next year, in FY2022, instead of selling the property to any third party for some profit, it transferred
it back to Snowwhite Realty Developers LLP.
Related party transactions: Transferring back of Property of the Value of ₹1,513.56 to

Snowwhite Realty Developers LLP
An investor may contact the company directly to understand the logic of this transaction and how it
benefited the shareholders of the company.
4) Allegations of damage to the environment by the business activities of Lloyds

Metals and Energy Ltd:
Media has reported a few instances, which indicate that the business activities of the company have caused
damage to the environment.
For example, in February 2018, Maharashtra Pollution Control Board (MPCB) ordered the company to shut
down its plant due to pollution (Source: MPCB orders closure of Lloyds’ Ghugus plant: The
Times of India, February 9, 2018). As per the article, MPCB has termed the company as a habitual
defaulter.
MPCB member-secretary Dr P Anbalagan has termed the company as habitual

defaulter that knowingly and willingly violates the provisions of Air and Water (Prevention and
Control of Pollution) Acts causing serious pollution in the surrounding.
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In another instance in February 2021, the irrigation department cut the water supply to the company stating
that it was stealing water from a govt. reservoir. (Source: Irrigation dept snaps water supply of
Lloyd Metals: The Times of India, February 26, 2021)
Department has also discovered that the company was “stealing water” from the reservoir of a
nearby WCL mine for the last few years. The department’s executive engineer (EE) has issued
an order to file police complaint in the matter.
In light of such instances, it is advised that an investor should keep a close watch on the local developments
in the region of the company’s plants so that she may get an idea about the perception of the company in
the local population and if it may face local unrest in the future.
5) Remuneration to promoter-manager by Lloyds Metals and Energy Ltd:

While analysing the history of remuneration paid by the company to its promoter-manager and investor
notices a few instances where the company paid a high remuneration in comparison to the performance of
the company.
For example, in FY2002, when the company reported its highest loss of ₹86 cr, higher than the loss in the
previous year of ₹72 cr, it increased the remuneration of its managing director, Mr B.L. Agarwal by more
than 9 times. The remuneration of Mr B.L. Agarwal increased from ₹2.69 lac in FY2001 to ₹24.38 lac in
FY2002.
Subsequently, due to the poor performance of the company, the remuneration of Mr B.L. Agarwal exceeded
the statutory limits and therefore, the company had to take approval from the central govt. to pay his
remuneration.
Lloyds Metals and Energy Ltd had to take such approval from the central govt. for paying remuneration to
Mr B.L. Agarwal for FY2006, FY2007, FY2008 and FY2009.
The remuneration paid to Managing Director from 1st January, 2005 onwards is subject to the
approval of the Central Government for which necessary application has been made.
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For remuneration paid to Managing Director from 1st January, 2005 onwards necessary
application has been made for approval of Central Government.
In FY2018, when the profit of the company was ₹17 cr, which is even less than the profit of ₹23 cr earned
by the company; it increased the remuneration of its managing director, Mr B.L. Agarwal to ₹65 lac.
6) Dividend funded by equity dilution:

In FY2022, Lloyds Metals and Energy Ltd declared a dividend of ₹0.50/- per share (FY2022 annual report)
and as a result, it paid out an amount of about ₹19 cr to its shareholders.
However, the decision to pay a dividend to shareholders seems strange in a situation when the company is
raising money by diluting equity to meet its funds’ requirements. The company had raised ₹18 cr in
FY2020, ₹82 cr in FY2021 and ₹200 cr in FY2022 by diluting its equity by way of preference shares,
warrants, OFCDs etc.
Moreover, in FY2022, the company reported a negative cash flow from operations (CFO) of (₹78 cr) and
in the previous year, FY2021, it had a negative CFO of (₹15 cr).
In such a financial situation, it seems that the money for the dividend payout has come from the funds
provided by shareholders themselves, and it is not from the cash flow generated by the business of the
company.
We believe that when dividends are not funded by the free/surplus cash flows generated by the business
and instead are funded by debt or equity, then shareholders should not take comfort in such dividend yield
because these dividends can stop at any time.
7) Long time taken in project execution by Lloyds Metals and Energy Ltd:
Due to one reason or another, almost always, the projects announced by Lloyds Metals and Energy Ltd
have taken a very long time to get completed.
For example, the company had started work on the expansion of its sponge iron plant with a waste-heat
recovery (WHR) power plant in FY1997.
Company has already taken up the work of the Second Phase to double the capacity of the Sponge
Iron Plant and to install a Captive Power Plant of 12MW.
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However, immediately in the next year, the work on the project became slow due to a change in the
technology of the plant.
The work on sponge iron second phase to enhance production capacity alongwith captive power
plant of 12 MW is progressing slow due to change in plant technology.
Finally, the expansion of the sponge iron plant was completed in FY2006 after 10 years after its
commencement in FY1997.
SPONGE IRON DIVISION: Company has enhanced the capacity of its plant to 240000
TPA from the existing 150000 TPA. The additional capacity has become operational in a phased
manner over the year.
The waste-heat recovery (WHR) plant, which was originally started in FY1997, was completed in FY2011
after about 15 years of commencement.
Company has commissioned its 30 MW co-generation Waste Heat Recovery Based (WHRB) Power
Plant, at Ghugus, Maharashtra
Another project that witnessed a lot of delays in operationalization is the iron ore-mining project, which we
have discussed above. The mine was allocated to the company in 2007; however, ore extraction from the
mine commenced only in 2012 that too for a short period before the mining stopped again in June 2013
when Naxals killed one of the employees of the company.
In FY2018, the company announced a mineral-based steel plant at Konsari Village, Gadchiroli for ₹700 cr
and expected to complete it by June 2020.
SETTING-UP MINERAL BASED STEEL PLANT:…at Konsari Village, Chamroshi Tehsil,

Gadchiroli District for manufacturing of Sponge Iron, Electric Power Generation with Waste Heat
Recovery Boiler… Company has agreed to make an investment of ₹700 Crores…expected date of
commencement of initial production would be 30th June, 2020.
However, the progress of the plant is already delayed. The construction of the project has started in July
2022 after govt. approvals are received.

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Work for this project is on in full swing with around 200 construction workers already employed at
site…land has been procured and Environmental Clearance for the 1st phase has been received.
In FY2021, the company announced another steel plant, which is supposed to be a megaproject in Ghugus,
Chandrapur. The project is expected to cost ₹1,200 cr and will be completed over 8 years in 3 phases.
The entire plan would be carried out over 8 years at a total cost of ₹1,200 Crores in 3 Phases.
The focus of the company will be on completing phase 1 costing about ₹185 cr first.
Board of Directors have approved the implementation at the earliest of the Phase 1 which consist
of installing an Induction Furnace based steel Plant with a capacity to produce 2,50,000 MTPA
at a cost of ₹185 Crores
As per the credit rating agency, Brickwork, phase 1 should commence production in July 2023.
The construction for Phase I is expected to commence in November 2021 and the commercial
operation shall commence from July, 2023. The total project outlay is estimated at Rs. 185.00
crores
An investor needs to closely track the developments related to these large projects announced by the
company at Konsari, Gadchiroli and Ghugus, Chandrapur as well as other projects worth ₹20,000 cr for
which it has received govt. approval.
Corporate announcement, BSE, December 14, 2022, page 1:
Maharashtra State’s cabinet sub-committee on industries on Tuesday, 13th December, 2022

cleared 13 projects worth Rs 70,000 crore…of which it has cleared a project worth Rs. 20,000
crores by Lloyds Metals and Energy Limited. The Company would first like to clarify that these
approvals are preliminary and require a series of regulatory and internal approvals.
In addition, in January 2023, the company announced an additional capacity expansion of 72,000 MTPA at
its sponge iron manufacturing plant at Konsari, Gadchiroli for ₹225 cr. (Corporate announcement at BSE,
Jan. 20, 2023, page 3)
These projects are significantly large and any delays in these projects might lead to significant cost
escalations and opportunity costs, which might have a significant financial impact on the company.
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8) Related party transactions of Lloyds Metals and Energy Ltd:

An investor should analyse the transactions of the company with other promoter group entities.
As per the FY1997 annual report, in FY1996, the company had invested ₹1.57 cr in shares of Lloyds Global
Trade Limited (FY1997 annual report, page 23). However, in FY2003, the company wrote off this entire
investment to zero (FY2003 annual report, page 15).
Investing money in promoter group entities and then writing it off is like handing over money to someone
and then waiving it off. An investor should analyse such transactions cautiously because these might
represent instances of shifting the economic benefits from the listed company to promoters’ entities.
An investor may contact the company directly for any clarifications in this regard.
In FY2001 and FY2002, the auditor of Lloyds Metals and Energy Ltd pointed out that the company has
given unsecured loans to its related party entities (under section 301).
The Company has given unsecured loan to a company listed in the register maintained under
Section 301 of the Companies Act, 1956
This was the period when the company was making large losses and defaulting to its lenders. Giving out
money to promoters’ entities at a time when the company itself is suffering from a cash crunch might have
put the listed company in a very tough situation.
During this period, the company could not meet its debt repayment obligations and defaulted to its lenders,
which led to debt restructuring and the lenders had to take losses on their loans. Later on, the lenders
hesitated to give working capital debt to the company, which led to a further liquidity crunch for the
company and it had to raise working capital from outside sources at a high cost, which affected its profit
margins.
Recently, the company has handed over its mining operations to the Thriveni group, which is a joint
promoter of the company. As a result, it is doing large transactions with the Thriveni group.
As per the disclosure of related party transactions for the period ending Sept 30, 2022, it had done
transactions of about ₹286 cr with Thriveni group in 6M-FY2023.
Corporate announcement, BSE, Nov. 1, 2022, page 2:
Disclosure of related party transactions:
 Purchase of fixed assets: Lloyds Steels Industries Limited – 4,316.75 lac.

 Purchase of services: Thriveni Earthmovers Private Limited – 22,341.56 lac.
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 Purchase of fixed assets: Thriveni Earthmovers Private Limited – 1974.53 lac.
An investor should analyse these transactions in depth to understand whether these are at ongoing market
prices. This is because in case, these transactions are at a higher price than the market price, then it may
have a probability of shifting economic benefits from the public shareholders of Lloyds Metals and Energy
Ltd to the promoters of the company.
9) Information provided by Lloyds Metals and Energy Ltd in its annual reports:
On occasion, an investor finds that the information provided by the company in its annual reports could
have been improved to make it more meaningful for investors.
At times, while calculating cash flow from operations (CFO), the company has included inflows from
borrowings into operating activities. For example, in FY2020, Lloyds Metals and Energy Ltd included an
inflow of about ₹15 cr from borrowings as an inflow from operating activities.
On other occasions, the data presented by the company in its indebtedness table needs improvement. For
example, in FY2017 annual report, on page 25, Lloyds Metals and Energy Ltd disclosed that it is a debt-
free company with no debt either at the start of the year or at the end of the year, which meant that during
FY2017, it did not have any debt on its books.
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However, in the next year’s annual report (FY2018), Lloyds Metals and Energy Ltd disclosed that at the
start of the year, it had a debt of about ₹26 cr.
Therefore, the annual reports of FY2017 and FY2018 presented different data on indebtedness at the end
of FY2017. As per FY2017 annual report, it did not have any debt on March 31, 2017, whereas as per
FY2018 annual report, it had a debt of about ₹26 cr on March 31, 2017.
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An investor may contact the company directly for such a discrepancy in the data presented by it in the
annual reports.
In another instance, in FY2021 annual report, the company mentioned that it has raised funds by issuing 90
crore warrants (90,00,00,000) to promoters.
During the year under review, the Company raised the funds through (i) issue of 90,00,00,000
warrants convertible into equity shares on preferential basis to promoters/promoter entities;
However, after reading through the rest of the annual report, AGM notices etc., an investor is not able to
find any issuance of 90 crore warrants to promoters. She is able to find one transaction where the company
planned to issue 9 cr equity shares on a preferential basis to the Thriveni group for making it a joint
promoter.
Board be and is hereby authorized to create, issue, offer and allot on preferential basis,
9,00,00,000 (Nine Crore Only) equity shares of the Company of face value of ₹1/- (Rupee One
only) per share for a cash consideration at an issue price of ₹20/- (Rupees Twenty Only) per share
An investor may contact the company directly to know more about this transaction of issuing 90 cr warrants
to promoters regarding whether it is a typographical error where the issuance of 9 cr equity shares to
Thriveni group is mentioned erroneously as 90 cr warrants. Or it is an actual and separate transaction, which
assuming the ongoing price of about ₹20 at that time, would lead to an inflow of ₹1,800 cr (= 20 * 90 cr)
to the company from its promoters when they subscribe to these 90 cr warrants.
If this is a typographical error, then it would not be the only occasion when the company has made such
errors in its annual reports. For example, in FY2022 annual report, while describing the performance of its
power segment, it mentioned that the increase in revenue of the power segment is due to less production
whereas it should have mentioned it as more/higher production.
The production of the division was 17.41 MWH during the year under review as compared to 12.37
MWH for the previous year. The total income of the division was ₹4,972.94 Lakhs during the year
under review as against ₹3,640.86 Lakhs during the previous year showing an increase of 36.59%
due to less production.
It is obvious to an investor that when the power unit has generated 17.41 MWH of power during the year
when compared to a generation of 12.37 MWH in the previous year and the revenue has increased, then it
should be mentioned as “more production” instead of “less production” as mentioned by the company.
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On other occasions, the company has not provided any explanatory details regarding large-sized
transactions like a change in the other non-current liabilities of about ₹120 cr in FY2022.
In the CFO calculation for FY2022, Lloyds Metals and Energy Ltd has shown an outflow of ₹120 cr under
“Increase/(Decrease) in Non Current Liabilities”. When an investor studies the balance sheet of the
company to understand the nature of this large cash outflow, then she simply gets a line entry without any
further explanation about what these liabilities consist of for which such a large cash outflow has taken
place in the year.
An investor may contact the company directly to understand more about these liabilities, which have seen
a large cash outflow in FY2022.
At times, Lloyds Metals and Energy Ltd has disclosed transactions with certain companies in the related
party transactions section showing purchases and expenses; however, it has missed out on providing an
introduction to these entities explaining the nature of relations with them. i.e. the company did not highlight
whether these entities are subsidiaries or joint ventures or entities on which promoters have a significant
influence.
These entities include:
 M/s. Trofi Chain Factory Pvt. Ltd.

 M/s. Aeon Trading LLP
 M/s. Shree Global Tradefin Ltd.
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An investor may contact the company directly to understand the nature of its relationship with these entities.
The Margin of Safety in the market price of Lloyds Metals and Energy Ltd:
Currently (January 21, 2023), Lloyds Metals and Energy Ltd is available at a price-to-earnings (PE) ratio
of about 16.2 based on consolidated earnings of the last 12 months ending December 2022 (Jan. 2022 –
Dec. 2022). An investor would appreciate that a PE ratio of 16.2 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
Lloyds Metals and Energy Ltd seems a company, which apart from a recent spurt in its business activity
due to mining operations, has not been able to grow its business significantly over the years. The sales of
the company in FY2021 (₹251 cr) were lower than the sales of the company almost 25 years back (₹336
cr) in FY1997. The sales of the company had peaked at ₹1,007 cr in FY2012 from which it declined almost
75% by FY2021.
On an overall level, the company has lost money over the last 25 years because the company had a net loss
of ₹17 cr from FY1996 to FY2022. This is despite adding back about ₹300 cr of haircut/loss taken by
lenders during restructuring from FY2004 to FY2009.
The recent sharp rise in the business activity of the company is due to iron ore mining operations, which
restarted in FY2022. However, mining operations carry a lot of uncertainties. Out of almost 16 years since
the allotment of the mine in 2007, the company has barely been able to operate the mine for 5 years.
The mining activity was stopped due to violence when Naxals killed one of the employees of the company,
litigations when others challenged the company’s mining operations in Delhi High Court, lack of security
personnel during elections etc. Even going ahead, an investor needs to keep in her mind that the mining
operations are at a high risk of disruption where a single security instance may stop it for a couple of years.
The intense competition faced by the company in sponge iron and other steel product business divisions
has taken away all the pricing/negotiating power of Lloyds Metals and Energy Ltd over its customers. It
had reported large losses even extending for 7 years in a row because it could not pass on the increase in
input costs to its customers.
Despite various steps taken by the company to improve its productivity as well as the financial
subsidies/support provided by the govt., the company could not protect its profits and it defaulted to lenders
leading to near bankruptcy. In the subsequent restructuring exercise, the company had to sell off its pipes
division to repay lenders and the lenders had to take haircuts/losses on their loans.
As a result, the lenders became hesitant to give loans to the company and it had to raise working capital
finance from outside sources at a high cost, which further affected the profit margins of the company.
Over the years, Lloyds Metals and Energy Ltd had to rely primarily on equity dilution by way of warrants,
preferential issue of shares, OFCDs etc. to promoters and non-promoters to meet its funds’ requirements.
This became critical because the company’s operations have not produced surplus cash flows and are cash-
consuming. Recently, it had to raise money from the Thriveni group (₹200 cr) by making them joint
promoters of the company.
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Lloyds Metals and Energy Ltd got an order against it for paying ₹900 cr to Sunflag Iron & Steel Company
Ltd because it was held responsible for breaking the contract with Sunflag after it took ₹312 cr for mine
development; however, it did not supply iron ore to Sunflag.
The company did not have money to pay ₹900 cr to Sunflag and as a settlement; it offered an 11.89% stake
to Sunflag in the company for free by issuing OFCDs.
In FY2022, the company declared a dividend of about ₹19 cr; however, it seems that it is just handing over
money raised from equity shareholders as a dividend because the company is losing cash from its operations
and does not have any surplus/free cash flow to distribute dividends.
There are allegations against the company for causing pollution in the local area due to its operations. It has
been termed as a habitual offender by the Maharashtra Pollution Control Board and it was asked to close
its plant. Lloyds Metals and Energy Ltd has also been accused of stealing water from the reservoir of a
govt. company and instructions for lodging a first information report (FIR) against the company in the
police station were issued.
The auditors of Lloyds Metals and Energy Ltd have highlighted numerous instances where the company
resorted to inflating its profits and showing lower losses by not complying with accounting provisions. At
times, it did not provide for interest expenses and on other occasions, it did not recognize deferred taxes.
The company has not paid taxes over the last 10 years and now, the income tax department has issued a
demand notice to the company for recovering ₹32 cr.
In the past, the company seems to have made poor capital allocation decisions because it had to write off
large amounts of more than ₹100 cr for abandoning projects and impairment of fixed assets. It had to sell
its CRCA sheets division in a slump sale because it could not maintain it properly when it did not invest
any money in it for almost 10 years.
Many projects announced by the company were delayed for a long time, which includes the expansion of
the sponge iron plant, construction of the WHR power plant, development of iron ore mine, mineral-based
steel plant at Konsari, Gadchiroli or integrated mega project at Ghugus, Chandrapur. Recently, there are
news about a ₹20,000 cr plant of the company approved by the govt. and also an additional capacity creation
of 72,000 MTPA at its sponge iron plant at Konsari for ₹225 cr.
Investors need to keep a close watch on the existing plants announced by the company as well as the new
approved plant. This is because these are large projects and any delays would have significant cost
escalations, which may affect the financial position of the company.
Going ahead, an investor needs closely monitor the business operations of the company especially the
revenue from the iron ore mine, the profitability of the sponge iron and power divisions, the efficiency of
utilization of its assets and inventory, and the generation of free cash flow. She should check whether the
company is able to fund its projects with its profits or whether it had to continuously rely on equity dilution
to meet its funds’ requirements.
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Investors should also keep a track of news related to the company regarding developments in the local area
to get alerts on any pollution-related issues, security incidences etc., which might have a significant impact
on the business of the company.
These are our views on Lloyds Metals and Energy Ltd. However, investors should do their own analysis
before making any investment-related decisions about the company.
P.S.

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6) Asahi India Glass Ltd

Asahi India Glass Ltd is India’s leading producer of automotive and float glass. The company is a part of
the AGC Group, Japan, which is one of the largest glass manufacturers in the world.
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Asahi India Glass Ltd publishes both standalone as well as consolidated financials because, on March 31,
2022, it has three subsidiaries and four associate companies.
Investment in Subsidiaries:
 AIS Glass Solutions Limited (82.55% stake)

 GX Glass Sales & Services Limited India (93.48% stake)
 Integrated Glass Materials Limited India (100.00% stake)
Investment in Associates:
 AIS Distribution Services Limited India (49.98% stake)

 AIS Adhesives Limited India (47.83% stake)
 Timex Group Precision Engineering Limited India (30.00% stake)
 Fourvolt Solar Private Limited (40.00% stake)
subsidiaries, joint ventures, associates etc. The consolidated financials of a company present such a picture.
Therefore, in the case of Asahi India Glass Ltd, during the last 10 years (FY2013-FY2022), we have
analysed consolidated financials.
With this background, let us analyse the financial performance of Asahi India Glass Ltd.
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Financial and Business Analysis of Asahi India Glass Ltd:

Sales of Asahi India Glass Ltd have grown at a pace of 6% year on year from ₹1,944 cr in FY2013 to ₹3,170
cr in FY2022. Further, sales have increased to ₹3,492 cr in the last 12 months ended June 2022 i.e. July
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2021-June 2022). Asahi India Glass Ltd has seen volatility in its business performance in the last 10 years
because its sales have seen multiple periods of decline.
In FY2015, sales of Asahi India Glass Ltd declined to ₹2,099 cr from ₹2,217 cr in FY2014. Thereafter,
during FY2019-FY2021, sales of the company declined sharply from ₹2,913 cr in FY2019 to ₹2,421 cr in
FY2021.
On an overall basis, the operating profit margin (OPM) of the company improved from 9% in FY2013 to
24% in FY2022 and further to 25% in the last 12 months ended June 2022 (July 2021 – June 2022). During
this period, OPM declined once in FY2020 from 18% in FY2019 to 16% in FY2020.
The net profit margin (NPM) of Asahi India Glass Ltd had seen a remarkable change during the last 10
years (FY2013-FY2022). During FY2013 and FY2014, Asahi India Glass Ltd faced large losses. However,
from FY2015 onwards, its performance improved and in FY2022, it reported an NPM of 11%, which further
improved to 12% in the last 12 months ended June 2022 (July 2021 – June 2022).
To understand the reasons for the financial performance of Asahi India Glass Ltd, an investor needs to read
the publicly available documents of the company like its annual reports from FY1997 onwards, letter of
offer for its rights issue in 2013, credit rating reports, corporate announcements as well as other public
documents. Then she would understand the factors leading to an overall increase in its sales and profit
margins over the years with fluctuations in between.
In addition, she should also read the following article, which explains the key factors influencing the
business of auto ancillary companies like Asahi India Glass Ltd: How to do Business Analysis
of Auto Ancillary Companies
After going through the above-mentioned article and the company’s documents, an investor notices the
following key factors, which influenced the business of Asahi India Glass Ltd, which she needs to focus on
before making any predictions about the performance of the company.
1) Cyclical business of Asahi India Glass Ltd:

Asahi India Glass Ltd sells its glass products mainly to customers in two industries: automobiles and real
estate. Both these industries go through alternate periods of boom and bust linked to general economic
cycles. As a result, Asahi India Glass Ltd faces cyclicity in its business performance.
Credit rating report by CRISIL, February 2022, page 1:
These strengths are partially offset by susceptibility to inherent cyclicality in the end-user industry
Asahi India Glass Ltd faced the impact of cyclicity in its customers’ industries in FY2020 when a slowdown
in the automobile and real estate industries led to a decline in its sales.
Credit rating report by CARE, September 2020, page 3:

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The primary reason for decline in sales on y-o-y basis is the overall slowdown in the automotive
and real estate sectors, aggravated by the breakout of COVID-19 towards the end of FY20.
Even historically, the business of Asahi India Glass Ltd was impacted significantly whenever the
automobile industry faced challenges. In 1998, when the auto industry faced tough times, then the net profits
of Asahi India Glass Ltd declined by more than 50%.
the automobile industry has been suffering from overcapacity, fragmentation, low volumes and
relentless price cutting. The impact of this slump on the component industry has been direct and
immediate.
In FY2004-FY2005, when the economy recovered from the dot-com bubble-induced recession, then both
the automobile and real estate sector started performing well. As a result, Asahi India Glass Ltd got so much
demand for its products that despite operating at full capacity utilization, it could not fulfil all the orders.
In laminated windshields, we are operating at a nearly 100 per cent capacity utilisation…In the
float glass segment, we are currently operating at 108 per cent of rated capacity.
increase in the after-market sale did not keep pace with increase in OE sales in 2004-05 largely
on account of capacity shortfall, which impacted after-market sales directly
Because of excessive demand, Asahi India Glass Ltd increased its capacity significantly by starting a large
integrated plant at Roorkee. However, when the plant was completed then the economic cycle turned into
a downturn. As a result, the company reported losses in FY2009.
The timing of depletion of the external environment could not have been worse. Post completion
of the major phase of expansion program in 2007-08 – the largest ever by AIS – your Company
had positioned itself to cater to the potential explosion in demand in the expanding automotive
and construction sectors, the global recession stepped in
During this downturn, two float glass manufacturers in India shut down their plants.
In the float glass business, with the shut down of two glass plants, namely, Triveni’s Chinese float
plant (250 TPD) and HSG’s sheet glass plant (180 TPD), which squeezed supplies in the market
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When the economy recovered after the global recession, in FY2011, Asahi India Glass Ltd again started
operating at full capacity. If fact, it realized that it is getting demand from all across India whereas its
manufacturing capacity is concentrated in North India and it had to ship its products over long distances.
Our auto glass plants operated at peak capacities
The capacity constraint and mismatch in locational demand and supply resulted in the SBU
incurring heavy costs on premium freights to ensure that the goods reaches customers on time.
Besides this, the SBU also lost on high-margin sales in the burgeoning aftermarket.
During this period, Asahi India Glass Ltd announced capital expenditure to increase production capacities.
However, the demand euphoria of FY2011 was short-lived and in the following downturn, Asahi India
Glass Ltd reported losses in three subsequent years, FY2012, FY2013 and FY2014.
our growth is primarily driven by growth of automotive and construction sectors. Both these
sectors depend a lot on borrowings and bore the brunt of higher interest rates leading to
slowdown in growth of demand
The economic downturn leading to a decrease in demand was so severe that Asahi India Glass Ltd faced
severe challenges in making repayments of debt raised by it to complete capacity expansions. During this
time, a few glass manufacturers went out of business.
This is unsustainable as is evident from some of the market developments – one new player has
sold out, another is in a corporate debt restructuring and a third has got fresh equity via a strategic
international partner. Even we had to inject fresh capital through our Rights Issue.
The downturn of FY2012-FY2014 was a very severe phase for Asahi India Glass Ltd. It was carrying a
large debt and was not generating sufficient cash flow to repay it. It reported large losses during FY2012-
FY2014 and had to raise money via the rights issue to survive.
Today, the challenge is of a higher magnitude with severe liquidity crunch arising out of slowdown
in demand at a time when your Company has undertaken a massive debt funded expansion.
Therefore, while in an overview of the financial performance of the last 10 years (FY2013-FY2022), it may
seem that the company’s business has grown consistently with an improvement in profit margins; however,
an investor should never forget that the business of Asahi India Glass Ltd is highly dependent on two of the
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most cyclical industries, automobiles and real estate. In the past, downturns in the auto and real estate
industry have significantly affected the performance of Asahi India Glass Ltd. These factors are not
expected to go away and may affect its performance in the future as well.
Therefore, an investor should always keep in her mind the susceptibility of Asahi India Glass Ltd.’s
performance to the cyclical demand from the automobile and real estate sectors.
2) Intense competition in the glass manufacturing industry:

Manufacturing both auto-glass and architectural float glass is a very competitive industry where very large
global players dominate the market. In both segments, float glass as well as automotive glass, 3-4 players
control almost 65%-70% of the global market.
Letter of offer, August 2013, page 39:
The global glass industry is quite concentrated, with four companies – Asahi Glass Co. Limited,
Japan, NSG/Pilkington, Saint-Gobain and Guardian, producing 67% of the total high quality float
glass in the world.
For automotive glazing, there are only three major players – Asahi Glass Co. Limited, Japan,
NSG/ Pilkington, and Saint-Gobain – who along with their respective associates meet nearly 75%
of the world’s Original Equipment (OE) glazing requirements.
All these players are very large in business size and financial strength. As a result, they are able to sustain
downturns better than smaller players and even buy out weaker players that face problems. As a result, the
glass manufacturing industry continues to be consolidated/concentrated.
In the past, the Indian market as well has witnessed consolidation where global players have bought out
smaller players.
It is also witnessing some consolidation. For example, in May 2011, Saint Gobain Glass India
limited acquired the float glass plant of Sezal Glass Limited.
Further, the industry recently witnessed some consolidation with 50% stake of HNG Float
Glass being taken over by a Turkish Company – Trakya
Large global glass players compete intensively for acquiring market share and as a result, price competition
in the industry is high. Asahi India Glass Ltd. highlighted the state of intense competition to investors in
the letter of offer in August 2013.
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We operate in a highly competitive industry, and we expect that competition will continue to
increase. The glass business, especially the architectural glass segment, is facing
increased competition from domestic players and cheaper imports.
In addition, due to the cyclical nature of demand, glass manufacturers witness frequent periods of supply-
demand mismatch. Whenever the demand goes down in any country, then it starts aggressively exporting
its glass products to other countries.
Exporting glass even at cheaper prices becomes necessary for manufacturers with excess supply capacity
because glass production is a continuous process. Glass is manufactured in a furnace at a very high
temperature. It takes a lot of time for the furnace to reach such high temperatures and then stabilize its
production at an optimal level.
Therefore, once a glass furnace has started functioning then it cannot be stopped at a short notice if demand
declines. Stopping and starting the glass furnace is both costly and uneconomical. Therefore, the glass
manufacturer has to continue to produce glass even if the demand goes down in the country. In such a
situation, countries with an excess supply aggressively export glass to other countries even at a very low
price, even if it is lower than their cost of production, which is called “dumping”.
This creates a big problem of competition from cheaper imports for glass producers in India like Asahi
India Glass Ltd. This is because glass production is a continuous process and Indian players have to continue
glass production even if the demand is low or the prices are uneconomical.
Credit rating report, CARE, September 2020, page 5:
Since float glass production is a continuous process, and therefore, the Domestic Industry has no
choice but to continuously produce the float glass despite poor off-take in the market adding to
their financial stress.
Over the years, Asahi India Glass Ltd has faced intense competition from cheaper imports from glass
surplus countries, which has significantly affected its performance. In the past, countries like China,
Indonesia, UAE, Malaysia, and Pakistan have exported glass to India at very cheap prices.
decline in domestic prices mainly due to dumping of float glass, especially from China
In FY2007, excessive imports of float glass at very cheap prices led to a sharp decline of about 30% in
prices, which significantly affected the business of Asahi India Glass Ltd.
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The profitability of AIS Float Glass was adversely impacted by a sharp decline in prices of float
glass in the domestic market from a peak of Rs. 56/mm/m to Rs. 50/mm/m by March 2007. The
prices declined further to Rs. 40/mm/m in the subsequent months. The price decline was largely
on account of a sudden influx of imports.
Asahi India Glass Ltd intimated to its shareholders in the FY2008 annual report that Indian glass
manufacturers are not able to match the prices offered by Chinese companies. This, in turn, has hurt the
business performance of the company. Asahi India Glass Ltd also mentioned that the threat of competition
from cheaper imports from China is so much that it threatens the viability of any new glass manufacturer
looking to enter the Indian market.
Thus, the prices at which Chinese glass is imported are difficult to match by Indian manufacturers.
Chinese imports may further threaten the viability of new entrants
Asahi India Glass Ltd faced one of the toughest periods of its operating history and reported large losses
for three consecutive years, FY2012-FY2014, defaulted to lenders and had to raise money by rights issue
to survive. During this phase, in FY2013, Asahi India Glass Ltd highlighted to its investors that due to
rising energy prices, Indian players have become uncompetitive against cheaper imports from countries
with low energy prices, which led to losses for the company.
The problem is almost 15,000 metric tons per month of imports coming in from energy surplus
countries who are selling gas at less than 5% of what we pay here in India. . Naturally,
the domestic industry becomes uncompetitive.
prices were under severe pressure due to cheap imports being dumped into India, notably
from Saudi Arabia, UAE & Pakistan. Consequently, the SBU incurred losses.
Once again in FY2020, when the automobile and real estate industries were facing a slowdown, low-cost
imported glass, this time from Malaysia, started affecting the business of Asahi India Glass Ltd.
Further domestic float glass industry was grappling with the domination of low cost imports from
Malaysia as a result companies had to realign their prices or were losing their share to the
imports.
Therefore, an investor should keep in her mind that due to the continuous nature of glass production, its
players suffer significantly when they face low demand and market prices. Glass manufacturers have to
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continue producing glass. If demand is low in their own country, then they have to export glass even if at a
price lower than the cost of production. Similarly, Indian players like Asahi India Glass Ltd, have to
continue to produce glass even if domestic prices are uneconomical.
An investor should always keep this position of helplessness of glass manufacturers in controlling
production due to the continuous nature of glass furnaces while she assesses any glass player.
3) Very low pricing power:

Many factors take away the pricing power from the hands of glass manufacturers. Their customers are large
automobile and real estate developers who command greater bargaining power due to their large order sizes.
These customers can easily switch their glass suppliers whereas a glass manufacturer has to be on a
continuous lookout for customers due to the uninterrupted nature of glass production. Intense competition
from low-priced imports further reduces the pricing power of Indian glass manufacturers.
Over the years, there have been numerous instances when automobile players forced Asahi India Glass Ltd
to reduce its prices.
In 1999, Asahi India Glass Ltd had to reduce prices due to strong pressure from its auto customers, which
led to a decline in the profits for company.
This put a severe strain on the car manufacturers in the country, which was passed on to vendors
such as Asahi India, by way of demands for price reductions. In this difficult period, AIS reduced
prices, in an effort to help shore up the industry. This allied with increasing costs…resulted in
a squeeze on profitability.
In FY2001, once again, the profit margins of Asahi India Glass Ltd declined as it reported higher sales over
FY2000; however, the net profit declined over FY2000. The company cited the intense pressure from
automobile customers as one of the reasons. Due to its low pricing power, the company could not increase
prices to its customers even if its costs have increased significantly.
AIS has in no case found it necessary to approach its customers for compensation for cost
increases, even when these cost increases have been totally beyond our control.
The pressure, from automotive companies, on pricing is getting fiercer by the day.
In FY2006, Asahi India Glass Ltd once again highlighted to investors, the difficulties it faces in getting a
price hike from customers despite increasing raw material costs. The costs were increasing and product
prices were stagnant.
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current situation is one where we face a squeeze – with product prices at best stagnant, with a
tendency to decline, and input costs rising substantially.
In FY2008, the company’s situation worsened because, in addition to increasing input costs and pricing
pressure from customers, cheaper imports from China put further pressure on the profit margins.
The year witnessed unprecedented increase in the costs of key inputs – fuel, soda ash and PVB,
which severely impacted operating margins. Input costs pressures coupled with dumping of cheap
Chinese float glass into the country multiplied the stern effect on AIS’s operations.
In the next year, FY2009, Asahi India Glass Ltd reported losses, because, despite a significant increase in
manufacturing costs, it could not get a price hike from its customers.
Once again, in FY2012, the company faced the tough situation of increasing input costs when it could not
get sufficient price hikes from its customers and it reported losses.
Cost pressures emanated primarily from increasing cost of inputs including raw materials, power
& fuel and sharp depreciation of Indian Rupee against US Dollar. Energy costs have almost
doubled during last year.
the increase in cost is so vast that factors like scale, technology and efficiencies cannot offset the
incremental costs and prices have to increase.
In FY2013, when the company reported its second year’s losses in succession, then its desperation was
clearly visible as it explained its inability to get a price hike despite a significant rise in inputs costs due to
very low pricing power resulting from intense competition from within India and cheaper imports.
So, in 2012-13, the glass industry got squeezed both ways. On the one hand, competition has
intensified further for market share in a slowing market; on the other, inexorably soaring input
cost inflation further squeezed margins. Additionally, increasing imports from energy
surplus countries capped prices of finished goods
Asahi India Glass Ltd highlighted that despite an increase in input costs of more than 50%, due to intense
competition, the prices of glass products could increase only by about 10%. As a result, it could not cover
its costs and reported losses in FY2013.
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Let’s look at clear glass. Cost have risen by more than 50% in the last three years due to increases
in input prices for soda ash, sand, energy, packing material, freight and interest rates. Price,
however has, at best, increased by only 10%…Yet, the industry is not being able to improve its
pricing power.
The credit rating agency, CARE also highlighted the low pricing power of Asahi India Glass Ltd in its
report for the company in August 2012:
in view of limited pricing flexibility given surplus capacities in the float glass segment
In FY2014, when Asahi India Glass Ltd reported losses, then once again, it highlighted that due to intense
competition from domestic suppliers and cheaper imports, the Indian glass manufacturers do not have
pricing power. Despite a 70% increase in costs in the last 3 years, the glass product prices did not increase.
Such a situation resulted from a higher bargaining power in the hands of the customers and intense
competition among glass manufacturers.
FY2014 annual report, page 9, 20:
the cost of making ordinary float glass, went up 70% in 3 years, while prices did not budge. Prices
did not move because new entrants jumped into the market, and although took hideous losses, did
create a supply /demand imbalance…new plants in the Mideast…dumped material into India and
other countries.
The float glass industry in India has seen some large investments in the last few years to create
new capacities. One of these came on stream in FY14. With increased supply coming into the
market, competition is getting intense
To counter the threat from cheaper imports, which at times are below the cost of production of glass, the
govt. of India imposes anti-dumping and safeguarding duties on imports of glass.
In FY2003, India imposed anti-dumping duty on the import of glass from China and Indonesia.
However, the pressure eased with the imposition of provisional anti-dumping duties on imports of
float glass from China and Indonesia.
India continued its anti-dumping duty on the import of float glass from China in 2009 for a further period
of 5 years.
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Government of India has recommended the continued imposition of anti-dumping duty on float
glass from China for a further period of five years starting from January, 2009.
In FY2020, India imposed an anti-dumping duty on the import of float glass from Malaysia.
India has recently recommended a “reference price” anti-dumping duty on dumped imports of
clear float glass from Malaysia.
Anti-dumping duty on imports limits the competition in the industry and allows domestic glass producers
to sell products at profitable prices. The recent increase in the operating profit margin of Asahi India Glass
Ltd from 16% in FY2019 to 25% in the last 12 months ending June 2022 (July 2021-June 2022) is due to
reduced competition in the domestic market due to a decline in imports from Malaysia (due to anti-dumping
duty) and China (due to anti-emission policies).
Credit rating report, CARE, August 2022, page 1:
operating margin of float glass segment has improved over the last two years, as float glass has
benefitted from the anti-dumping duty levied on the glass imported from Malaysia in December
2020 (for a period of five years) along with reduced imports from China on account of the
decarbonisation drive taken by the country.
China, which has a very large manufacturing capacity of float glass i.e. about 250 plants vis-a-vis 11 plants
in India, has implemented tough environmental regulations, which has led to the closure of more than 50
Chinese plants. As a result, imports of float glass have declined, leading to improvement in prices and profit
margins of Indian float glass players like Asahi India Glass Ltd.
With 50% of the world’s capacity, 250 float plants to India’s 11, a 50+ old plants shutdown in
China has reduced supply considerably. Demand, however, has grown in China, creating supply
shortages and higher prices across the world
However, before an investor starts to project its current profit margins into the future, she should note that
restrictive measures like anti-dumping duty work only for a little time. Thereafter, the exporters find ways
around the duties and the imports resume.
During FY2007-FY2008, when India had put anti-dumping duties on glass imports from China, still, China
was able to sell its glass products in India at a very low price, which seemed due to under-invoicing of
imports.
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…seeking extended and wider application of antidumping duties and curbing the menace of under-
invoiced imports.
In spite of anti-dumping duties, Chinese float glass manufacturers sell their produce at very low
prices
Even after a decade, in FY2016-FY2018, glass manufacturers from other countries were able to find ways
to circumvent anti-dumping duties and sell their cheap glass products in India.
relentless dumping of glass continued through the year from some countries inspite of anti-
dumping duties being in place.
Even more concerning is the fact that imports from some countries blatantly circumvented the
existing duties in place and the legal framework.
Therefore, an investor should always be aware of the fact that if manufacturers of foreign countries are
determined to dump their glass products at a very low price in India, then measures like anti-dumping duties
protect domestic manufacturers only for a short period. Soon, the foreign manufacturers find out loopholes
in the regulations and continue to supply cheaper glass products to India, which increases the intense
competition and reduces the profit margin of domestic players.
Therefore, an investor should be cautious before she projects the current elevated profit margins of Asahi
India Glass Ltd into the future. The current margins are supported by anti-dumping duties on imports from
Malaysia and due to a reduction in imports from China. Over time, manufacturers in these countries will
find ways to export their glass products to India, which will again increase the pricing pressure on Indian
glass manufacturers.
4) Capital-intensive business of Asahi India Glass Ltd

Glass manufacturing is a highly capital-intensive business, which requires significant investments in
installing the manufacturing plant as well as in the working capital. Due to a large amount of investment in
creating a glass manufacturing plant, it takes a long time for the plant to recover its investment leading to a
long gestation period.
Glass is a capital intensive business, and projects – especially for float glass – have a long
gestation period.
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Large investment requirements along with a long gestation period act as an entry barrier for new players in
the glass manufacturing business.
Being a capital intensive, technology driven, high gestation industry, it is not easy for new entrant
to compete with integrated players like AIS. Chinese imports may further threaten the viability of
new entrants
As per Asahi India Glass Ltd, a large capital requirement in the business puts Indian glass manufacturers at
a disadvantage over foreign manufacturers because, in India, the cost of capital is very high when compared
to many foreign countries.
Glass manufacturing is also very capital intensive and AIS like many other players in the industry
believing in the potential for glass in a growing India, has made large investments in creating
appropriate capacities. These investments using domestic capital, which is priced significantly
higher than global capital have put severe financing cost pressures in the initial stage of
production ramp up
Once a company starts construction of a glass manufacturing plant, then it takes a significant time for the
plant to complete and be ready for commercial production. During this period, usually, the economic cycle
takes a turn, which creates problems for the glass manufacturers who have recently completed an expansion
project.
During the economic upcycle when demand is more than the supply of glass, many glass manufacturers
announce the capacity expansion. However, when the expanded capacity gets ready, the economic cycle
enters into a downturn and the manufacturer is left holding a large debt-funded project when there is a very
low demand for glass.
Asahi India Glass Ltd faced such difficulties twice in the past when it completed major capital expenditures.
First, when it completed its large integrated glass-manufacturing complex in Roorkee and the global
recession hit the company and it reported losses in FY2009.
The timing of depletion of the external environment could not have been worse. Post completion
of the major phase of expansion program in 2007-08 – the largest ever by AIS – your Company
had positioned itself to cater to the potential explosion in demand in the expanding automotive
and construction sectors, the global recession stepped in
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The second time, in 2020, when Asahi India Glass Ltd completed phase 1 of its large expansion plant in
Gujarat for Suzuki, then the automobile industry went into a downturn. As a result, the financial
performance of the company suffered.
The rating is further constrained on account of…past debt-funded capital expenditure undertaken
by the company which has also resulted in the moderation of its capital structure without any
incremental contribution to AIS’ total operating income and delay in the commercial start date of
its recently completed Gujarat Auto glass plant.
Such phases of demand-supply mismatch increase the impact of economic cycles on glass manufacturers
and at times lead to bankruptcy and closure of business as well.
In FY2012, the financial stress in the company reached such a level that it could not repay its lenders. It
withdrew money from its working capital loans to repay its long-term loans. It could not repay its suppliers
on time.
Further, in the recent past our Company has been unable to generate sufficient internal accruals
to meet repayments of certain long term loans. Part of such repayment was funded from our unused
working capital facilities and partly by delaying payment to regular trade creditors…Further,
such use of working capital facility in breach of the terms of the financial arrangements may result
in adverse financial implications.
In FY2012 and FY2014, the management of the company clearly pointed out to the investor that the debt
of the company has reached unsustainable levels.
I am concerned with the ₹620 short-term borrowings which are a result of combination of higher
inventory and under recovery vis-à-vis our budget…We also realise that some amount of equity
capital needs to be injected
The quantum of debt on our books, especially short term debt, is a cause of concern and debt
servicing has been challenging.
The main aim of its rights issue (₹250 cr) in 2013 was to get money for repaying loans to lenders (₹200 cr)
(Source: Letter of offer, August 2013, page 83).
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During the Covid pandemic, when most businesses suffered, debt-free companies and those with a lower
debt could survive the lockdowns well without much support from promoters or Govt. However, those
companies, which had a large amount of debt had to take protection under moratoriums provided by the
Reserve Bank of India (RBI). Asahi India Glass Ltd was one such company, which found it difficult to
make its debt payments and had to take a moratorium during April-August 2020.
Company availed moratorium on payment of instalments/interest fallen due, from 1st April, 2020
to 31st August, 2020…Due to availment of said moratorium, Company had deferred term loan
repayments by ₹ 6853 lakhs and interest outgo by ₹ 2375 lakhs in FY 2020-21
The necessity of raising money from equity shareholders and taking a moratorium to survive and repay
lenders by a player having a strong global brand and more than 75% market share in Indian auto OEMs
shows the vulnerability of the business model of glass manufacturers. It looks like a very tough business
model without any pricing power; however, requiring a large amount of capital.
An investor should always keep this aspect of the glass manufacturing business while she makes any future
prediction.
5) Highly energy-consuming business of glass manufacturing:

Glass production is a highly energy-intensive business and requires the burning of a large amount of fuel
in the furnace. As a result, fuel prices (oil, natural gas etc.) have a significant influence on the financial
performance of Asahi India Glass Ltd.
Fuel prices primarily depend on crude oil prices, which are highly volatile and cyclical in nature. The below
chart of historical crude oil price movements from Macrotrends shows a high level of volatility during the
period 2000 to 2022.
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As a result, Asahi India Glass Ltd keeps on facing alternate periods of high and low fuel prices. During
periods of high energy prices, Asahi India Glass Ltd finds it difficult to report profits.
During FY2012-FY2014, when Asahi India Glass Ltd reported losses for three consecutive years, then
persistent high-energy prices were a key reason for its high expenses.
unprecedented high costs, primarily energy costs, which gravely impacted our last year’s
profitability
Both soda ash and sand prices remained at high levels and this energy-dependent industry
continued to grapple with the impact of high oil, gas and energy prices.
During the previous phase of sharply increasing crude oil prices, FY2006-FY2009, Asahi India Glass Ltd
faced many challenges in its operations. In FY2006, the company had to bear a large impact on its
profitability.
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Float glass manufacturing being highly energy intensive, phenomenal rise in oil prices is a serious
cause of concern.
rise in fuel prices over the last one year itself had an adverse impact of over Rs. 250 million
In FY2008, oil prices increased sharply and Asahi India Glass Ltd saw its fuel prices increase by more than
40%.
Manufacturing float glass is energy intensive and furnace oil or low sulphur heavy stock (LSHS)
oil is used to run the furnaces at AIS’s manufacturing plants…. AIS had to face a 41% increase in
LSHS prices during the year.
Due to very low pricing power, the company could not pass on the impact of increasing fuel costs to its
customers and had to take a hit on its profit margins.
rise in input costs of AIS Float Glass were largely absorbed internally in 2007-08
Due to low pricing power, in FY2009, when crude oil prices touched an all-time high exceeding $140 per
barrel, Asahi India Glass Ltd reported losses.
A large part of this was on account of increase in material and manufacturing costs (28.9%
increase over last year) and by power and fuel expenses (up by 17.5% over 2007-08)
During phases of declining crude oil prices, Asahi India Glass Ltd has witnessed its profit margins increase.
This has been one of the major reasons for the increase in the operating profit margins (OPM) of the
company during FY2014-FY2016.
Operating profit (EBITDA before forex losses, extraordinary & exceptional items) increased
25.95%…as the Company benefitted from decline in oil prices.
Due to a sharp decline in crude oil prices, power & fuel costs as a percentage of overall costs declined from
a high of 25% in FY2014 to 14% in FY2017.
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The energy cost declined to 14% of cost of sales in FY17 as against 15% in FY16, 20% in FY15
and 25% in FY14.
The high impact of rising fuel costs has forced Asahi India Glass Ltd to implement numerous strategies to
control its energy costs.
In FY2009, it thought of hedging the prices of its oil purchases.
AIS is putting into place permissions to participate in oil hedging transactions,
Previously, in the early 2000s, the company used to run its only manufacturing plant at Bawal, Rewari on
diesel generators. During FY2001 when diesel prices increased sharply, then the company decided to shift
to generators able to use cheaper fuels like heavy furnace oil (HFO).
AIS presently generates its entire requirement of power, using generating sets that use High Speed
Diesel (HSD) as a fuel. With continual increases in prices of HSD, ( the cost of HSD has risen a
staggering 70% since October 1999) the growing price differential between HSD and alternate
fuels like, Heavy Furnace Oil (HFO) makes it economically attractive for us to procure and instal
generating sets using HFO.
By FY2003, the company installed generators using furnace oil and as a result, it could save on power costs.
engine of 4,6 MW capacity (slow speed) was commissioned on heavy fuel (HFO) in March, 2003.
This has resulted in a saving of 0,90 paise / unit in power generation cost over light diesel oil,
When crude oil prices increased to a lifetime high at $147 per barrel in 2009, then Asahi India Glass Ltd
modify its furnaces to use natural gas.
Taloja plant examined ways and means of substituting furnace oil with natural gas…Taloja has
now stabilised its manufacturing process using natural gas for fuel – and AIS has reduced power
and fuel costs by 7.6% during the year.
In FY2012, the company decided to shift its Roorkee plant also to natural gas.
We are on the verge of converting our Roorkee float operations to natural gas.
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Currently, almost all the plants of Asahi India Glass Ltd are versatile to use either furnace oil or natural gas
as a fuel depending upon the price differential between the two.
company is now in a position to change the fuel mix as per the fuel’s respective prevailing prices
to enable optimum savings in the fuel cost after upgrading its facilities to allow use of furnace oil
and/or natural gas as fuel.
However, an investor should keep in her mind that glass manufacturing is highly energy intensive. In such
a business, when crude oil prices increase sharply, then the natural gas prices also increase. As a result,
during very high fuel prices, even the use of natural gas is not able to protect the profit margins of the
company. Asahi India Glass Ltd faced this situation in FY2013 when the company reported large losses.
Although we have converted both our float glass plants to natural gas, our energy cost still remains
high due to the recent increase in prices of natural gas.
Therefore, during times of increasing fuel prices, an investor may expect the profit margins of the company
to go down.
6) Exposure to foreign exchange fluctuations:

The business of Asahi India Glass Ltd is highly exposed to fluctuations in the value of the Indian Rupee
(INR) against foreign currencies. The main reason for it is the high proportion of raw material purchases
that Asahi India Glass Ltd makes from overseas entities of AGC group, Japan.
AIS is exposed to forex fluctuation risk on account of imports forming about 69% of total raw
material cost and the foreign currency term loans
Asahi India Glass Ltd also raises funds in foreign currency from either its parent entity, AGC group, Japan
or from overseas lenders. In the past, Asahi India Glass Ltd did not use hedging for controlling foreign
exchange (forex) risk as mentioned in the letter of offer.
Since we do not hedge against currency rate fluctuations on long-term basis in respect of our
business transactions including purchase contracts and foreign currency loans, this exposes us to
exchange rate movements which may have a material and adverse effect on our operating results
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Due to the absence of hedging against forex movements, the company faced large losses due to currency
movements in the past. In FY2009, a sharp depreciation of INR against the US Dollar leading to a forex
loss of ₹38.3 cr was a key reason for its overall losses.
30% depreciation of Indian rupee against US Dollar…Company reported losses of Rs. 3,833 lakhs
on account of foreign exchange fluctuation in 2008-09
In FY2012, the depreciation of INR contributed to the losses of the company.
gains made on revenue front, however, were set-off by unprecedented increase in input cost owing
to the rising prices and depreciating Rupee. Loss stood at ₹65 crores compared to profit of ₹17
crores in the previous year.
In FY2014, the company lost about ₹38 cr on account of forex movements (FY2014 annual report, page
86).
In FY2016, it lost about ₹23 cr due to forex movements (FY2016 annual report, page 120).
In FY2019, the company lost ₹13.5 cr due to foreign exchange movements (FY2019 annual report, page
152).
In FY2020, the company lost ₹18.6 cr due to forex movements (FY2020 annual report, page 149).
An investor would notice that since FY2014, the business of the company has grown significantly and the
foreign exchange losses are relatively lower than in FY2014. This seems because Asahi India Glass Ltd has
taken two steps to reduce its foreign exchange exposure.
First, it has started hedging its foreign currency loans by entering into interest-rate swap transactions.
foreign currency loan of the company is fully hedged (company has entered into CIRS (Currency
Interest Rate Swap) against any rupee vs dollar movement in the future.
Second, it has attempted to do backward integration by producing raw automotive glass in its Taloja plant,
which reduces its import dependence.
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the capex done by the company for cold repair of its float glass manufacturing facility at Taloja
with upgrading its capability to manufacture auto glass, which will reduce the imports of the
company
Going ahead, an investor needs to pay continuous attention to the foreign exchange exposure of Asahi India
Glass Ltd. This is because, due to high import dependence, forex movement has the potential to significantly
affect the financial performance of the company.
The tax payout ratio of Asahi India Glass Ltd has been in line with the standard corporate tax rate prevalent
in India. The company has decided to continue with the old tax regime and has postponed shifting to a new
lower tax regimen as it has unexpired MAT (minimum alternate tax) credits, which it intends to use before
shifting to the new tax regimen.
decided to continue with the existing tax structure until utilization of accumulated Minimum
Alternate Tax (MAT) credit.
Nevertheless, the one-time remeasurement of deferred taxes in line with the changed tax rates led to a lower
tax rate in FY2020.
Company has evaluated the outstanding deferred tax liability, and written back an amount to the
extent of ₹ 4190 lakhs to the Statement of Profit and Loss. This is arising from remeasurement of
deferred tax liability i.e. expected to reverse in future when the Company would migrate to new
tax regime.
Operating Efficiency Analysis of Asahi India Glass Ltd:
a) Net fixed asset turnover (NFAT) of Asahi India Glass Ltd:

Over the years, the NFAT of the company has declined from 1.8 in FY2014 to 1.4 in FY2021. The NFAT
touched its lowest level of 1.1 in FY2021.
The decline in NFAT primarily seems due to aggressive capacity expansions done by the company to
increase its production capacities in the last decade, which have not yet been fully utilized.
Since FY2014, Asahi India Glass Ltd has invested more than ₹1,800 cr in capital expenditure and it has
plans to invest an additional amount of ₹1,700 cr to ₹1,900 cr in the next 3 years.
A highly capital-intensive business model has led to a low NFAT of less than 2 for Asahi India Glass Ltd
and successive capital expenditures have led to a steady decline in its NFAT level over the years.
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Going ahead, an investor should keep a close watch on the NFAT of the company to assess whether it is
able to use its newly created manufacturing capacity optimally.
b) Inventory turnover ratio (ITR) of Asahi India Glass Ltd:

In the past (FY2014-FY2022), the inventory turnover ratio (ITR) of the company has been stable at 4.6
indicating that the company has maintained the efficiency of its inventory utilization.
During FY2020, the ITR witnessed a sudden decline to 3.7 because, during the lockdown in March 2020,
the company was stuck with a high inventory. March usually is the month with the highest sales for Asahi
India Glass Ltd and it was prepared with a high inventory to support the expected high demand. However,
due to Covid related lockdown, in March 2020, the sales did not materialize and the company was stuck
with a large amount of inventory.
March is the highest sales month historically…The sudden stop in March caught us on both
ends : diminished sales and high inventory.
Nevertheless, as the business has started returning to normalcy after a decline in the Covid pandemic, its
ITR has improved to 4.6 in FY2022.
c) Analysis of receivables days of Asahi India Glass Ltd:

Over the years, the receivables days of Asahi India Glass Ltd have improved from 53 days in FY2014 to
30 days in FY2022. Better performance in receivables collection seems due to financially strong auto OEM
customers that make payments on time to their vendors.
While comparing trade receivables in the standalone and consolidated financials of Asahi India Glass Ltd,
an investor notices that on the consolidated level, the receivables are less whereas, on the standalone level,
the receivables are more.
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It indicates that third-party customers are making payments to the child entities on time; however, the
subsidiaries/child entities are keeping the money with themselves and delaying payments to the
parent/standalone Asahi India Glass Ltd.
Moreover, the amount of receivables withheld by subsidiaries/child entities is increasing every year. In
FY2022, the child entities have withheld about ₹134 cr of receivables.
An investor may contact the company to know the reason for this withholding of money by the child entities
of Asahi India Glass Ltd about whether it is due to some conditions put by the lenders who have given loans
to the child entities.
Going ahead, an investor should monitor the trend of receivables days of Asahi India Glass Ltd in both the
standalone as well as consolidated financials to assess whether it is able to collect its receivables on time
and keep its working capital position under control.
An investor should keep a close watch on receivables because as per the “Ageing Analysis of Trade
Receivables” section in the annual reports, about 8%-10% of its receivables generally remain outstanding
beyond 6 months from the date they became due for payment.
In FY2019, ₹40 cr worth of receivables constituting about 15% of overall receivables were outstanding for
more than 6 months from the date on which they became due for payment (FY2019 annual report, page
158).
Receivables usually are outstanding for a long period after the due date when either the customer is facing
financial stress or the customer is disputing the receivables or the invoices issued by the company.
In the past, there have been instances when Asahi India Glass Ltd and customers did not agree on the price
of the products before the sale. In such instances, the auditors have pointed out the dispute regarding pricing
in the annual reports. Such transactions are prone to turn into disputed receivables.
In one instance, in FY2002, the customer of the company issued the purchase order at a lower price;
however, Asahi India Glass Ltd booked sales in its accounts at a higher price and then started negotiating
with the customer for a higher price. This led to inflation of profit reported in the P&L and the auditors
pointed it out in their report.
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Note No. 6 regarding non acceptance of purchase order rates given by a customer resulting in
aggregate to Profit for the current year being shown higher by Rs. 175.41 Lakhs.
Even in FY2006, the auditor of the company could not determine the exact amount of excise duty liabilities
because Asahi India Glass Ltd and its customer had not agreed on a price when the annual report was
published.
excise duty liability of Rs. 3.13 million could not be ascertained timely due to delay in
reconciliation of price revision with a customer.
Such events create disputed receivables where as per the customers, they had already paid the full amount;
however, in the annual report of the company, the difference will stay as dues pending from the customer.
As per the FY2022 annual report, the company has about ₹8 cr of disputed receivables where the customer
is either not happy with the products supplied or is denying the acceptance of material.
In such scenarios, it becomes essential to closely track receivables collection.
operations (cCFO) of Asahi India Glass Ltd for FY2013-2022, then she notices that over the years (FY2013-
FY2022), the company has converted its profit into cash flow from operations.
Over FY2013-22, Asahi India Glass Ltd reported a total net profit after tax (cPAT) of ₹1,133 cr. During
the same period, it reported cumulative cash flow from operations (cCFO) of ₹3,087 cr.
Learning from the article on CFO will indicate to an investor that the cCFO of Asahi India Glass Ltd is
higher than the cPAT due to the following factors:
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 Interest expense of ₹1,449 cr (a non-operating expense) over FY2013-FY2022, which is deducted
The Margin of Safety in the Business of Asahi India Glass Ltd:

target growth.
Where,

While analysing the formula of SSGR, an investor would note that it is dependent on NFAT, which indicates
the efficiency with which a company is able to manage its plants & machinery. In the case of Asahi India
Glass Ltd, the business of glass manufacturing is highly capital-intensive with a very low NFAT. As a
result, the company has a very low SSGR of 1% – 3%.
A low SSGR indicates that the company is not able to grow its sales at the rate of 6%, which is achieved
by Asahi India Glass Ltd over the last 10 years (FY2013-FY2022). The company has achieved this growth
by investing money raised from outside sources like equity dilution (rights issue for ₹250 cr in 2013) and
debt-funded capital expenditures.
In the past, the company had raised a lot of debt to meet its capital expenditure requirements due to which
its debt reached unsustainable levels.
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Credit rating report, CARE, February 2013, page 2:
capital structure of AIS is highly skewed towards debt with overall gearing of 16.01x as on March
31, 2012 on the account of debt-funded expansions in the past and reliance on short-term debt to
meet cash flow mismatch.
The debt of the company had reached such a high level that it had to use money from short-term sources
like working capital funding to meet its long-term funds’ requirements like capital expenditure and
repayment of long-term debt. An investor may note that using short-term funds for long-term purposes
creates cash flow mismatch and usually is the first sign of financial stress in any company.
In FY2013, the auditors reported that the company had used about ₹160 cr of short-term funds for long-
term purposes.
we report that short term funds of ₹ 15989 Lakhs have been used for long term investments.
As the company was investing more money than what it could generate from its internal resources;
therefore, it started delaying repayments to its lenders and it had to raise money by rights issue to repay its
lenders.
Asahi India Glass Ltd had faced similar situations of liquidity crunch in the past as it had used short-term
funds for long-term purposes.
In FY2007, the company used about ₹79 cr of short-term funds and invested it in long-term assets i.e.
capital expenditure.
we report that short term funds of Rs. 7933 Lakhs raised by the Company from banks have
been used for long term investments in capital assets.
In FY2005, the company used short-term funds of about ₹60 cr for long-term investments.
FY2005 annual report, page
we report that the Company has used funds raised on short term basis of Rs. 60 Crores for long
term investment.
Therefore, it becomes evident that Asahi India Glass Ltd has invested money more than what it could
generate from its internal resources in its capital assets to achieve growth. On occasions, the debt has
reached unsustainable levels where it delayed repayments and breached many financial conditions imposed
by the lenders.
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Our Company is in breach of most of these covenants including the financial covenants, for
instance the debt to EBITDA ratio and total debt to net worth ratio.
The company had to dilute equity as a desperate measure to improve its financial position.
An investor may note that the massive ₹1,700 cr – ₹1,900 cr capital expenditure planned by Asahi India
Glass Ltd over 2022-2025 will also involve a significant amount of debt financing.
AIS is actively pursuing on plans to undertake a capex in the range of ₹1,700-₹1,900 crore over
fiscals 2022-2025 for capacity expansion (including capex of ₹250 crore on phase-2 and phase-3
of auto glass plant in Gujarat) to be funded by a mix of debt and internal accrual.
The business of Asahi India Glass Ltd is exposed to cyclical factors of boom and bust. In the past, it has
faced situations where the completion of its large capex coincided with a slowdown in demand leading to
financial strain for the company. Therefore, going ahead, an investor should keep a close watch on the
financial position of the company so that she can adjust her views about the company promptly.
b) Free Cash Flow (FCF) Analysis of Asahi India Glass Ltd:

While looking at the cash flow performance of Asahi India Glass Ltd, an investor notices that during
FY2013-FY2022, it generated cash flow from operations of ₹3,087 cr. During the same period, it made a
capital expenditure of about ₹1,875 cr.
Therefore, it may seem that during this period (FY2013-FY2022), Asahi India Glass Ltd had a free cash
flow (FCF) of ₹1,212 cr (=3,087 – 1,875). However, throughout this period, the company consistently had
a large debt of about ₹1,500 cr for which it had to pay a large amount of interest payments.
Interest in under-construction projects is already reflected in the capital expenditure as it gets capitalized in
fixed assets. However, over and above capitalized interest, the company had to pay interest expense of
₹1,449 cr, which it deducted from P&L.
After factoring in the interest expense of ₹1,449 cr, it comes out that Asahi India Glass Ltd had a negative
free cash flow of (₹237) cr (= 1,212 – 1,449) cr. Asahi India Glass Ltd had to meet this cash shortfall by
doing the rights issue of ₹250 cr in 2013.
Therefore, an investor would note that the business of Asahi India Glass Ltd is capital intensive, which
needs a significant investment in fixed as well as working capital. The funds requirement of the company
is much more than what it is able to generate through its operations. As a result, the business requires
external capital of equity dilution and debt for its growth.
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Going ahead, an investor should keep a close watch on the free cash flow generation by Asahi India Glass
Ltd to understand whether the company continues to consume cash from outside sources or it starts to
generate surplus cash from its business and reduce its debt levels.
Additional aspects of Asahi India Glass Ltd:

On analysing Asahi India Glass Ltd and after reading annual reports, letter of offer, 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 Asahi India Glass Ltd:

Asahi India Glass Ltd is promoted by AGC group, Japan (22.21% stake), Maruti Suzuki India Ltd (Suzuki
group, Japan, 11.11% stake) and the Labroo family and other individuals (India, about 21% stake).
The company has consistently received managerial and technical guidance from its Japanese promoter
groups. AGC group, Japan is one of the largest glass manufacturers in the world and Maruti Suzuki is
India’s largest car company and Asahi India Glass Ltd.’s largest customer.
Until now, the day-to-day management of the company is handled by the Labroo family with the founder
promoter, Mr B. M. Labroo (aged 91 years) as chairman and his son Mr Sanjay Labroo (aged 60 years) as
MD & CEO of the company.
As of now, it seems that no member of the next generation of the Labroo family has joined the company,
as the annual reports do not contain any such details. It seems that the company is relying on professionals
to provide leadership to the company.
An investor may contact the company directly to understand the succession planning of the company. This
is important because apart from the absence of the next generation of promoters in the business, there are a
few other instances as well that gain investors’ attention.
When the company did the rights issue in FY2014, then the promoter-chairman of the company, Mr B. M.
Labroo did not subscribe to the rights issue i.e. decided not to put additional money in the company. As a
result, his stake in the company declined from 8.62% in FY2013 to 5.67% in FY2014.
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An investor would notice that during FY2014, the number of shares owned by Mr B. M. Labroo stayed
constant at 13,783,920 indicating that he did not participate in the rights issue. An investor would note that
when promoters participate in the rights issue, then it indicates their commitment to the company and their
willingness to support the company financially during a crisis.
Moreover, promoters have pledged a part of their shareholding in Asahi India Glass Ltd to lenders for taking
loans for personal purposes. On June 30, 2022, 6.09% of the stake owned by promoters is pledged to
lenders.
When promoters pledge their shares in the company for taking loans for personal purposes, then it is
tantamount to taking away the economic value of shares without selling them.
In such a situation, it is essential for an investor to continuously monitor the promoters’ stake in the
company, pledge levels and signs of succession planning.
2) Managerial remuneration:
Asahi India Glass Ltd seems to reward its leadership generously as the senior management team including
the MD & CEO, Mr Sanjay Labroo, received an increase in remuneration even during FY2012-FY2014
when the company was continuously making large losses; was facing troubles in making repayments to
lenders and had to raise equity by rights issue to repay its lenders.
The remuneration of MD & CEO, Mr Sanjay Labroo during this period is as follows:
 FY2012: ₹6,399,080 (FY2012 annual report, page 30); the company made a loss of ₹95 cr
On many occasions, the remuneration paid by Asahi India Glass Ltd exceeded legal limits, and the company
had to take special central govt. approval to pay those salaries, and at times, it had to recover the excess
remuneration paid to promoters/senior managers.
In FY2009, the company paid a remuneration, which was more than legal limits.
Company has paid Rs. 83 Lakhs as remuneration to managing and other directors which is in
excess of the limits
In FY2013, again, the remuneration of MD exceeded legal limits for which Asahi India Glass Ltd had to
seek central govt. approval.
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remuneration paid of ₹ 68 Lakhs is in excess of limits as per Schedule XIII of The Companies Act,
1956. The Company has made an application to the Central Government for approval of such
excess remuneration
In FY2014, the remuneration paid by the company exceeded legal limits and the company had to ask for
the central govt.’s approval.
In FY2016, one of the subsidiaries of the company paid remuneration above legal limits.
one of the subsidiary companies, the auditors have drawn attention to pending recoverable
directors remuneration of ₹ 18 lakhs
As the company has a history of paying excess remuneration to senior management; therefore, going ahead,
an investor should keep a close watch on the remunerations of promoters/senior management.
3) AGC group, Japan sold its sick company to Asahi India Glass Ltd:
In FY2002, AGC group, Japan sold one of its companies in India operating in the float glass business to
Asahi India Glass Ltd for an equity value of ₹1. This company, Floatglass India Limited (FGI) had about
26% market share of Indian float glass production. It had a manufacturing plant at Taloja (Mumbai) and
annual sales of ₹242 cr.
we acquired financial and management control of Floatglass India Limited, a leading

manufacturer of float glass in India with sales of Rs. 244 crores in 2001-02.
a market share of 26 % of the Indian float glass market
AGC’s equity stake in FGI (amounting to 75 % of FGI’s total equity capital of Rs. 78 crores)
transferred to Asahi India for a consideration of Re.1/- in February, 2002.
From an overview, it seemed like a very good deal for the shareholders of Asahi India Glass Ltd that they
got a leading float glass manufacturing set up for ₹1.
However, on further analysis, one notices that AGC group seemed to be tired of running Floatglass India
Limited by putting in more and more money in it because Floatglass India Limited was finding it difficult
to survive in the intense competition in the Indian float glass industry from domestic players and cheaper
imports. This was despite Floatglass India Limited having a 26% share of the market.
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Over the years, Floatglass India Limited (FGI) had accumulated losses of ₹133 cr; its net worth was down
and it was declared a potentially sick company.
cost overruns and adverse market conditions hurt FGI’s performance in earlier years
accumulated losses of the Company as at March 31, 2002, stood at Rs. 13,311.52 Lakhs. As such,
in terms of Section 23 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), the
Company remains a ‘Potentially Sick’ Company
By selling FGI to Asahi India Glass Ltd, Asahi Group, Japan had ensured the recovery of its investment of
₹231 cr in FGI. This is because, Asahi Group, Japan, asked Asahi India Glass Ltd to repay loans of ₹225
cr given by it to FGI along with ₹6 cr of preference shares (it waived off ₹143 cr out of total preference
shares of ₹149 cr).
Foreign Currency loans of FGI of approximately Rs. 225 crores taken over by AGC and
restructured…USD denominated loan for 10 years, with 0 % interest in the first 8 years and LIBOR
+0.75% in the last 2 years.
Of the Rs. 149 crores preference shares held by AGC in FGI, Rs. 143 crores, together with
accumulated dividend thereon, written off by AGC.
As mentioned earlier, the float glass business continued to face immense competition from the dumping of
cheap float glass by China and other nations. As a result, despite a large market share in the float glass
business, this division could not help in improving the financial position of Asahi India Glass Ltd.
The repayment of foreign currency loans of AGC group, Japan added to the financial troubles of Asahi
India Glass Ltd during FY2011-FY2013 when INR depreciated significantly against USD and contributed
to the losses of the company.
AGC Group, Japan had to bail out the company by putting it more equity in the form of rights issue. In fact,
at that time Asahi India Glass Ltd was in such desperate need of money that AGC group, Japan had to give
an advance of ₹50 cr even before the actual rights issue was opened.
AGCL has paid the Company an amount aggregating to ₹ 50 crore as advance share application
money towards its entitlement under the Issue.
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The float glass furnace in Taloja acquired by Asahi India Glass Ltd as a part of the FGI acquisition had to
be shut down in 2014 as it had become very old and its inefficient operations were leading to losses. It also
had an increased risk of accidents.
in the first quarter of FY15 the operation of this furnace has been stopped. More so, the Taloja
furnace was not operating efficiently over the last few months owing to its age and we did not want
to compromise on safety. This decision will only cut down our losses
The closure of the Taloja furnace was the key reason for the decline in sales of Asahi India Glass Ltd in
FY2015.
Net sales decreased marginally from ₹ 2,138.14 crores in FY 2014 to ₹ 2,096.58 crores in FY
2015. It was due to the shutdown of Taloja glass furnace in May 2014.
In its place, in FY2018, Asahi India Glass Ltd had to install a new float glass furnace.
Our Taloja plant refurbishment with state-of-the-art was completed in Q3 of FY 2017-18 which
has enhanced the production capacity of float glass by 550 metric tons per day
The entire transaction of sale of FGI by Asahi Group, Japan to Asahi India Glass Ltd at an equity value of
₹1 looks like a stress sale. In this transaction, the foreign parent company (Asahi Group, Japan) could get
rid of a sick company and it could recover its ₹231 cr worth of loans from a relatively financially strong
publicly listed company (Asahi India Glass Ltd).
Moreover, Asahi Group, Japan, continued to charge its royalty payments from Asahi India Glass Ltd even
during FY2012, and FY2013 when the company was making large losses and was facing financial stress.
Our Company has recorded/booked ₹ 20.45 crores during Fiscal 2012 and ₹10.40 crore during
Fiscal 2013 as royalty payments to AGCL and its group companies.
Going ahead, an investor needs to be cautious while analysing such sale transactions between foreign
promoter groups and public companies.
In May 2022, Asahi India Glass Ltd announced the acquisition of another promoter Group company, Shield
Autoglass Limited in which the Labroo family (Allied Fincap Services Private Limited) and Auto Glass
Company Limited, Japan each own a 45% stake.
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The corporate announcement at BSE, May 25, 2022, pages 21-22:
The Company and Shield Autoglass Limited are related parties…purchase of 8,24,850 shares,
constituting 45% of the capital of Shield Autoglass Limited from Allied Fincap Services Private
Limited. In this regent, please note that the Company and Allied Fincap Services Private Limited
have common directors, namely Mr. Sanjay Labroo and Mr. B. M. Labroo, who are also the
promoters of the Company.
Asahi India Glass Ltd would pay ₹52.42 cr for a 100% stake in Shield Autoglass Limited, which has a
turnover of about ₹31 cr in FY2021. The announcement does not contain information on the profits of
Shield Autoglass Limited. Therefore, it is not certain whether Shield Autoglass Limited makes any profit
or not.
An investor may do her own diligence in this transaction and may contact the company directly for any
further information and clarifications.
4) Project execution by Asahi India Glass Ltd:

Over the years, Asahi India Glass Ltd has consistently increased its manufacturing capacity. In the early
2000s, the company had a single plant at Bawal in Rewari, Haryana. However, over the last twenty-five
years, the company has established manufacturing in multiple places like Roorkee (Uttarakhand), Chennai,
Taloja (Mumbai), and Patan (Gujarat) in addition to the first plant at Bawal, Rewari.
During this time, Asahi India Glass Ltd has worked on new greenfield plants as well as increasing capacity
at existing locations by adding new manufacturing units and debottlenecking existing capacities.
As per the earliest available annual report of FY1997, Asahi India Glass Ltd had a manufacturing capacity
of 0.75 million laminated windshields and 1.137 million square meters of tempered glass in 1997.
the installed capacity in the laminated plant increased to 7,50,000 windshields and the installed
capacity in the tempered plant increased to 11,37,000 square metres
Over the last 25 years, in FY2022, the manufacturing capacity of Asahi India Glass Ltd for tempered glass
increased more than 11 times to 12.90 million square meters and the capacity for windshields increased
more than 9 times to 6.8 million pieces.
Credit rating report, CARE, August 2022, pages 3-4:
As on March 31, 2022, total installed capacity stood at 12.90 million square metres for tempered
glass, 6.8 million pieces for laminated glass and 78.32 million converted square metres (CSQM)
for float glass.
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In addition, the company had created a significant capacity of float glass by establishing plants in Roorkee
and installing a new furnace at the Taloja plant.
During this period, Asahi India Glass Ltd could complete most of its expansion plans within reasonable
time limits. For example
 It could complete the commencement of its plant in Chennai in January 2005 against an initial
estimated timeline of November 2004.
 In FY2005, it could complete the Architectural Processing Unit at Taloja (Mumbai), which had
December 2004 as the initial estimated date of completion.
 When the company started construction of its plant at Roorkee, then it had estimated the
commencement of commercial production of the float glass unit in December 2006 and it could
start commercial production in January 2007.
 For automotive glass units at Roorkee, the estimated completion date was August 2007, which it
could complete by October 2007.
 The company had to close its float glass furnace in Taloja (Mumbai) in FY2014 as after 19 years
of operation, it had run its life (FY2014 annual report, page 11). When Asahi India Glass Ltd started
building a new furnace at Taloja, then it estimated completion date of December 2017 (FY2017
annual report, page 3). The company could complete the construction of this furnace by December
2017 (FY2018 annual report, page 3).
 In FY2018, the company announced its plans to construct a “bus & truck” furnace at Chennai and
to complete its construction by Q1-FY2020 (FY2018 annual report, page 26). The company could
complete this furnace ahead of schedule in FY2019 itself (FY2019 annual report, page 40).
However, there have been some instances when the company could not meet its stated timelines for project
completion and witnessed delays.
 While starting the work of laminated furnaces in Bawal for 0.7 million laminated pieces for
passenger cars and trucks, the company estimated that it would complete the work by FY2013
(FY2012 annual report, page 7). However, the work was completed in FY2016 (FY2016 annual
report, page 28).
 When Asahi India Glass Ltd started work on its plant at Patan, Gujarat, then it had estimated that
the work would be completed at a cost of about ₹500 cr (FY2017 annual report, page 3) and the
first phase would commence production by June 2019 (FY2018 annual report, page 3). However,
later on, the project witnessed both cost and time overruns. By FY2018, the company had increased
the cost estimates to ₹600 cr (FY2018 annual report, page 26) and phase 1 of the project could start
construction only in February 2021 (FY2021 annual report, page 32).
As delays in projects can lead to significant cost overruns, which can affect the financial position of a
leveraged entity; therefore, an investor should keep a close watch on the ongoing and planned capacity
expansions of Asahi India Glass Ltd.
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 Solar glass plant in collaboration with Vishakha group being constructed at Mundra proposed to be
completed in 2023 (FY2022 annual report, page 27).
 Phase 2 & 3 of the plant at Patan, Gujarat proposed to be completed in FY2024 and FY2026
respectively. (Credit rating report, CARE, August 2022, page 2)
As per CARE, Asahi India Glass Ltd has planned capital expenditure of about ₹1,700 cr – ₹1,900 cr during
2022-2025. An investor needs to monitor the progress of these projects closely.
5) Weakness in internal controls and processes at Asahi India Glass Ltd:

During analysis, an investor notes numerous instances of weaknesses in internal controls and processes at
Asahi India Glass Ltd. These instances relate to noncompliance with legal requirements, nonpayment of
dues etc.
5.1) Noncompliance with legal requirements:
In FY2021, the company had to pay a penalty because it did not meet the requirement of a minimum number
of independent directors on its board. NSE and BSE, which are the first-line regulators, imposed a penalty
of ₹815,000/- each on the company.
company was short of one Independent Director since the date of resignation of an Independent
Director from the Board till 10th September, 2020…hence National Stock Exchange of India Ltd.
and BSE Ltd. had imposed penalties amounting to ₹ 8,15,000 each which was paid by the company
in due time.
In FY2017, Asahi India Glass Ltd was penalized by NSE and BSE for delays in filing results for December
2016 quarter.
company submitted its financial results for the quarter ended 31st December, 2016 after the expiry
of timeline…hence National Stock Exchange of India Ltd. and BSE Ltd. had imposed
penalties amounting to ₹ 5,000 each which was paid by the company in due time.
In the letter of offer, in August 2013, Asahi India Glass Ltd intimated to investors that it has not complied
with the requirement of dematerialization of 100% of promoters’ holding in the company.
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Our Company is in non-compliance with requirement regarding 100% of promoter and promoter
group shareholding to be in DMAT form which may lead to our scrip being shifted for settlement
on trade-to-trade basis.
In the past, govt. authorities pointed out issues in the information disclosed by the company in its annual
reports.
Pursuant to the technical scrutiny of the Annual Report of the Company for the FY 2000-01 carried
out by the Office of Registrar of Companies…a notice was issued…Thereafter, the
Company regularised the alleged technical defaults in the Balance Sheet for the FY 2002-03
and applied suo-moto for compounding of the offence(s)…Taking cognizance, the Hon’ble
Regional Director…compounded the offence. The compounding fees have been deposited by the
Company
In FY2003, SEBI initiated proceedings against the company for making delays in disclosing information
to stock exchanges.
SEBI had launched adjudication proceedings against the Company for non-compliance with the
provisions of Chapter II of the SEBI (Substantial Acquisition of Shares And Takeovers)
Regulations, 1997 for delay in making the disclosures to the stock exchanges.
In FY2014, at the time of the rights issue, Asahi India Glass Ltd intimated to its stakeholders that it is not
able to find some of its important legal records.
Letter of offer, August 2013, pages 21-22:
We are unable to locate records of our required periodic filings with ROC and records relating to
export obligations.
5.2) Instance of noncompliance with accounting standards:
At times, auditors of Asahi India Glass Ltd have highlighted accounting practices by the company, which
are not in line with the prescribed accounting guidelines.
In FY2001, the company reported a higher profit because it followed practices, which were not in line with
the approved accounting guidelines.
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inclusion of value of advance licences in export incentives (which is not in accordance with the
opinion of Expert Advisory Committee of the Institute of Chartered Accountants of India)
Had the Company not shown the above as income and expenditure respectively the profit before
tax would have been lower by Rs. 48.74 Lakhs
In FY2000, the auditor pointed out that the profits of the company are higher than what it should because
the company has not followed the guidelines advised by ICAI.
regarding accounting of leave encashment liability on accrual basis, No.ll regarding inclusion of
value of advance licences in export incentives (which is not in accordance with the opinion of
expert Advisory Committee of the Institute of Chartered Accountants of India) and in purchase of
raw materials, No.13 regarding change in basis of valuation of inventories resulting in aggregate
to profits for the current year being higher by Rs.38.72 Lakhs
Asahi India Glass Ltd had reported higher profits in FY1999 as well by using accounting assumptions,
which were not in line with the ICAI’s approved guidelines.
regarding inclusion of value of advance licences in export incentives (which is not in accordance
with the opinion of expert Advisory Committee of the Institute of Chartered Accountants of India)
and in purchase of raw material resulting in aggregate to profits for the current year being higher
by Rs.14.78 Lakhs,
In FY1998 as well, the company reported higher profits by using accounting assumptions, which were not
in line with the ICAI’s approved guidelines.
regarding interest on acquisition of Fixed Assets capitalised net of depreciation, No. 9

regarding inclusion of value of Advance Licence in export incentives (which is not in accordance
with the opinion of Expert Advisory Committee of the Institute of Chartered Accountants of India)
resulting aggregate to profits for the current year being higher by Rs. 50.23 lacs
The company also reported a higher profit in FY1998 by showing sales in the revenue that was yet to be
approved by the customers.
No. 12 regarding increase in sales on account of price revision of Rs. 14.98 lacs yet to be formally
approved by the customer.
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5.3) Delays in payment of undisputed statutory dues by Asahi India Glass Ltd:
There have been numerous instances where Asahi India Glass Ltd did not pay its dues regarding which
there was no dispute, to govt. authorities on time. At times, such delays were more than 6 months from the
time these undisputed dues were supposed to be paid.
For example, in FY2016, the company had delays in the payment of service tax, sales tax, excise duty and
tax deducted at source (TDS).
except some delays in respect of Service Tax, Sales Tax, Excise Duty and Tax Deducted at Source .
We are informed that there are no undisputed statutory dues as at the year end, outstanding for a
period of more than six months from the date they become payable except Tax Deducted at Source
of ₹ 3 Lakhs.
Asahi India Glass Ltd had similar delays in depositing undisputed dues to govt. authorities in FY2018,
FY2017, FY2015, FY2014, FY2013, FY2012, FY2006, and FY2004.
Nonpayment of undisputed statutory dues indicates that the internal business processes at Asahi India Glass
Ltd have a scope for improvement.
An investor would appreciate that companies with weak processes are exposed to risks of employee fraud.
In fact, Asahi India Glass Ltd had witnessed fraud by employees in the past.
5.4) Frauds on the company:
On occasions, stakeholders of the company could do fraud on the company and misappropriate money,
which might indicate the scope for improvement in the internal processes at Asahi India Glass Ltd.
In the letter of offer, the company intimated that an employee of one of its subsidiaries, AIS Glass Solutions
Limited (AGSL) had conducted financial fraud on the company by altering the account books and stealing
the records.
Accused have committed certain financial bungling and irregularities in AGSL’s accounts
resulting in losses to AGSL of approximately ₹ 56.81 lakhs. Further, AGSL has also alleged that
the Accused…wilfully altered, falsified and misappropriated the account books and records of
AGSL.
Once a sales representative misappropriated funds of about ₹37 lac of the company.
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a sales representative has misappropriated funds to the tune of Rs. 37 Lakhs during the year.
An investor may read another example of a company that faced fraud by its managing director due to
weakness in internal processes & controls in the following article: Analysis: National Peroxide
Ltd
There have been numerous instances where employees of the company have stolen goods from its premises.
At the time of the rights issue in 2013, Asahi India Glass Ltd disclosed many such instances of theft.
Accused had committed the offence of theft of certain raw materials from the factory
premises situated in Roorkee.
As per the letter of offer, August 2013, in the past, Asahi India Glass Ltd had saved duties by utilizing duty
drawbacks from one Mr Manoj Garg who had allegedly availed those duty drawbacks by doing fraud. As
a result, Asahi India Glass Ltd got a notice from the Directorate of Revenue Intelligence (DRI).
notice dated November 5, 2008 issued by the Directorate of Revenue Intelligence, Delhi Zonal
Unit informing our Company that Mr. Manoj Garg has been found guilty of fraudenlty availing
duty draw back…as result of which the duty entitlement pass book scheme purchased by our
Company from Mr. Garg may be considered invalid
Going ahead, an investor should look for signs of weaknesses in the internal controls and processes at Asahi
India Glass Ltd.
6) Investment in equity shares of other companies:

Over time, Asahi India Glass Ltd has made investments in equity shares of other companies, both listed as
well as unlisted. Some of these investments attract investors’ attention.
In FY2000, the company indulged in short-term trading in shares of companies where it sold shares even
before they could be transferred to the company.
The following investments have been purchased and sold during the year before transferring the
same in the name of the company: Satyam Computers Limited, Silverline Industries Limited
In FY2009, the company increased its stake in its associate company, AIS Adhesives Ltd.
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AIS Adhesives Limited 1049895 (349965) equity shares of Rs. 10 each (699930 equity shares
purchased during the year
This investment draws the interest of investors because, in FY2009, Asahi India Glass Ltd was facing a
liquidity crunch and had defaulted to its lenders in payment of about ₹25 cr and had asked them for
rescheduling its loan repayments.
delay of 3 days and 25 days in repayment of two loan instalments of Rs. 417 Lakhs each and
repayment of Rs. 2000 Lakhs due on 31st March, 2009 for which the Company has approached
for rescheduling
Asahi India Glass Ltd has impaired some investments within a very short time after the original investment.
For example, it made fresh investments in Fourvolt Solar Private Ltd in FY2020 (page 90 of FY2020 annual
report). However, in the very next year, in FY2021, it impaired this investment by more than 35% (FY2021
Such instances where recently done investments are impaired in a very short-time raise questions in the
mind of investors about the due diligence done by Asahi India Glass Ltd before making such investments.
7) Information provided in annual reports:

At times, in the annual reports, Asahi India Glass Ltd has disclosed the minimum required information
without considering whether investors would need more details to make better decisions.
For example, Asahi India Glass Ltd makes a large amount of sales to its related parties. In FY2022, it sold
more than ₹530 cr of goods to its related parties. However, it did not provide information about which
related parties are its biggest customers with the amount of sales for each of them.
Only once, Asahi India Glass Ltd had shown such a company-wise breakup for sales and purchases done
from related party entities. It was disclosed in the letter of offer before the rights issue (August 2013) on
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page 295. Other than that, Asahi India Glass Ltd has not disclosed such details in any annual report.
Whereas most other companies show the names of related parties, which are their largest customers and the
sales done to them during the year in their annual reports.
In FY2018, Asahi India Glass Ltd acquired a stake in Timex Group Precision Engineering Ltd., a part of
Timex Group, USA (Source: Asahi India Glass acquires Timex Group Precision
Engineering, December 1, 2017). The media article quoted the MD & CEO of Asahi India Glass
Ltd highlighting it as a strategic investment for backward integration and diversification.
Sanjay Labroo, MD and CEO, AIS said, “This is a strategic and long-term investment for AIS,
which will not only help in securing supply chain integrity through a backward integration, but
also diversify our operations
However, in the FY2018 annual report, the company devote any space to explaining this transaction to
investors in its directors’ report, management discussion & analysis, chairman’s speech or Q&A with ME
& CEO. Instead, it simply included the name of Timex Group Precision Engineering Limited as the
subsidiary of an associate in the related party transactions section.
Similarly, in the FY2022 annual report, Asahi India Glass Ltd has not provided any elaboration on its
proposed acquisition of the promoters’ stake in Shield Autoglass Ltd.
Most of the time, companies elaborate their strategic vision around such acquisitions in their annual reports
so that investors can understand the business decision. However, Asahi India Glass Ltd did not include such
details in its annual report.
In the indirect method of calculating cash flow from operating activities (CFO), companies add interest
expense in their profits to arrive at CFO and then show interest as an outflow under cash flow from financing
activities (CFF). These steps ensure that CFO includes only operating transactions and CFF includes all the
financing transactions.
However, in the past, Asahi India Glass Ltd showed interest expense as an outflow under CFO. For
examples see this section of CFO calculation from the FY2010 annual report, page 94 showing calculations
for FY2009 and FY2010 where interest expenses of ₹129.36 cr and ₹126.98 cr are deducted while
calculating the net cash from operating activities.
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The company stopped this practice in FY2018 when it adopted Indian Accounting Standards (IndAS) and
started showing interest expense as an outflow under CFF.
An investor should read between the lines while going through the annual reports of Asahi India Glass Ltd
so that she may get a good understanding of its business position.
The Margin of Safety in the market price of Asahi India Glass Ltd:
Currently (October 20, 2022), Asahi India Glass Ltd is available at a price-to-earnings (PE) ratio of about
35 based on consolidated earnings of the last 12 months ending June 2022 (July 2021 – June 2022). 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.
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Analysis Summary
Overall, Asahi India Glass Ltd seems a company, which has grown its sales almost consistently over the
last 10 years (FY2013-FY2022) with improving profitability. The fact that it is the largest automotive glass
manufacturer in India with about 75% stake in the OEM market and a large player in the float glass market
may give the impression that the business model of the company is very strong with many competitive
advantages.
However, the historical performance of Asahi India Glass Ltd indicates that its business is cyclical with
alternate periods of boom and bust, which are accentuated by a very capital-intensive business with a long
gestation period, which faces intense price-based competition, especially from cheaper imports from
countries like China and Malaysia.
A glass furnace must be run continuously as it is not possible to switch it on and off at short notice.
Therefore, players in surplus countries like China have to continue producing glass even if there is less
demand leading to the dumping of float glass in India and Indian players have to continue producing glass
whether prevalent prices are economical or not.
This compulsion to keep the furnace running despite adverse market conditions severely hurts
manufacturers and takes away their pricing power. Many players close businesses during downturns and
the surviving ones become larger by buying them out. No wonder only 3-4 glass manufacturers control
about 70% of global glass manufacturing.
Due to capital-intensive business, Asahi India Glass Ltd had to do many debt-funded expansions, which
affected its financial position when the business hit a downturn. During FY2012-FY2014, reported large
losses in consecutive years and it could not repay its lenders. Asahi India Glass Ltd had to raise equity
through a rights issue to survive.
Glass manufacturing is a highly energy-intensive process and therefore, an increase in crude oil prices
significantly affects the business. Over FY2014-FY2016, the profit margins of Asahi India Glass Ltd
increased due to a sharp decline in crude oil prices.
In recent years, the profit margins have increased due to the anti-dumping duty imposed by India on glass
imports from Malaysia and the closure of many float glass furnaces in China due to the pollution control
drive. As a result, there is a shortage of float glass in India, leading to the highest margins for Asahi India
Glass Ltd. However, import restrictions like anti-dumping duty etc. work only for a short period and the
imports find their way into India, which may bring down the profit margins.
In the past, AGC group, Japan has sold off its sick glass unit (Taloja) to Asahi India Glass Ltd and recovered
its loans of ₹250 cr from the company. These repayments added to the financial stress of Asahi India Glass
Ltd during the downturn of FY2012-FY2014. Going ahead, an investor needs to be cautious about the
purchase of promoter group companies by Asahi India Glass Ltd.
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The company has made investments in equity shares of many companies where it has taken decisions like
doing short-term trading, impairing value within a short period of investment etc. Investors should closely
monitor the equity investments of Asahi India Glass Ltd.
The company has a history of paying remuneration over the legal limit to its managers and even giving
increments during years of losses. An investor should keep a close watch on managerial remuneration paid
by the company.
The company has completed most of its expansion projects on time. However, in some cases, there have
been delays. Asahi India Glass Ltd has planned large debt-funded expansions in the coming years. An
investor needs to closely track the progress of these projects.
Many instances indicate scope for improvement in the internal processes and controls at Asahi India Glass
Ltd like noncompliance with statutory guidelines, delays in disclosures and undisputed statutory dues
payments, theft and misappropriation of funds by employees etc. An investor needs to actively look for
signs of weak controls at the company to avoid negative surprises later on.
Going ahead, an investor should keep a close watch on its profit margins, debt levels, the progress of
expansion projects, any disputes in receivables, management succession planning, managerial
remuneration, transactions with promoter groups, noncompliance with statutory guidelines, investments in
equity shares and disclosures in annual reports.
All these aspects should be monitored by an investor to keep a continuous check on the financial
performance of Asahi India Glass Ltd.
These are our views on Asahi India Glass Ltd. However, investors should do their own analysis before
P.S.

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7) Godfrey Phillips India Ltd

Godfrey Phillips India Ltd is India’s second-largest tobacco company making Marlboro cigarettes and
owning brands like Four Square, Red & White, Jaisalmer etc.
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Godfrey Phillips India Ltd publishes both standalone as well as consolidated financials because, on Sept
30, 2022, it has six subsidiaries and three associate companies.
Q2-FY2023 results, page 11:
Investment in subsidiaries:
 International Tobacco Company Limited (100.00% stake)

 Chase Investments Limited (100.00% stake)
 Friendly Reality Projects Limited (92.20% stake)
 Unique Space Developers Limited (66.67% stake)
 Rajputana Infrastructure Corporate Limited (92.20% stake)
Investment in associates:
 IPM India Wholesale Trading Private Limited (24.80% stake)

 KKM Management Centre Private Limited (36.75% stake)
 KKM Management Centre Middle East (FZC) (36.00% stake)
subsidiaries, joint ventures, associates etc. The consolidated financials of a company present such a picture.
Therefore, in the case of Godfrey Phillips India Ltd, during the last 10 years (FY2013-FY2022), we have
analysed consolidated financials.
With this background, let us analyse the financial performance of Godfrey Phillips India Ltd.
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Financial and Business Analysis of Godfrey Phillips India Ltd:

Sales of Godfrey Phillips India Ltd have grown at a pace of 3% year on year from ₹2,096 cr in FY2013 to
₹2,688 cr in FY2022. Further, sales have increased to ₹3,277 cr in the last 12 months ended September
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2022 i.e. Oct. 2021-Sept. 2022). During the last 10 years, Godfrey Phillips India Ltd has seen volatility in
its business performance and its sales have seen multiple periods of decline.
In FY2016, sales of Godfrey Phillips India Ltd declined to ₹2,331 cr from ₹2,586 cr in FY2015. In FY2018,
sales of the company declined to ₹2,326 cr from ₹2,403 cr in FY2017. Recently, in FY2021, the sales of
the company declined to ₹2,525 cr from ₹2,877 cr in FY2020.
On an overall basis, the operating profit margin (OPM) of the company improved from 16% in FY2013 to
24% in FY2022 and in the last 12 months ended September 2022 i.e. Oct. 2021-Sept. 2022). During this
period, in the initial half (FY2013-FY2017), OPM declined from 16% in FY2013 to 11% in FY2017.
Thereafter, from FY2018 onwards, the OPM started increasing and reached 24% in the last 12 months
ended September 2022 i.e. Oct. 2021-Sept. 2022).
The net profit margin (NPM) of Godfrey Phillips India Ltd had seen a remarkable change during the last
10 years (FY2013-FY2022). NPM has more than doubled during this period from 8% in FY2013 to 17%
in the last 12 months ended September 2022 i.e. Oct. 2021-Sept. 2022).
To understand the reasons for such a financial performance of Godfrey Phillips India Ltd, an investor needs
credit rating reports by CRISIL, corporate announcements as well as other public documents. Then she
would understand the factors leading to an overall increase in its sales and profit margins over the years
with fluctuations in between.
The above-mentioned documents indicate that the following key factors influence the business of Godfrey
Phillips India Ltd, which are critical to understand for any investor analysing the company.
1) Excessive regulatory control on cigarettes and other tobacco products:

Consuming tobacco is an addiction. As a result, govt. has put strict controls on almost every aspect of its
trade like other addictive substances e.g. alcohol, drugs etc. Govt. has strict regulations about tobacco
cultivation, import, export, processing, cigarette production, marketing, advertising, labelling, packaging
and sales etc.
The main aim behind such controls is to restrict the prevalence of tobacco consumption and prevent its
harmful impact on society in terms of both health and social issues.
As a result, companies operating in cigarette production usually do not have a free hand to grow their
business through aggressive marketing and sales techniques.
Moreover, over the years, these govt. regulations have become stricter.
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1.1) Restrictions on the sale and consumption of tobacco products:
In addition to regular campaigns to spread awareness against smoking, in 2003, govt. banned the sale of
tobacco products within 100m of educational institutions. At that point, Godfrey Phillips India Ltd
complained that this ban would affect the lives of small retailers.
The imposition of a ban on tobacco sales within 100 yards of educational institutions will create
significant dislocation and affect the livelihood of small retailers in India’s densely populated
environment, and needs to be rethought.
Thereafter, in 2008, the Indian govt. banned smoking in all public places.
Similarly, the Prohibition of Smoking in Public Places Rules, came into effect on October 02, 2008
under which smoking has been banned in public places including work places, shopping malls,
cinema halls and public buildings.
The ban on smoking in public places led to a decline in cigarette consumption.
imposition of smoking ban effective October 2008 resulted in a decline in consumption of premium
hand rolled cigars in Five Star Hotels, Pubs and Restaurants.
At times, the govt. banned the sale of tobacco products like gutkha in FY2013.
Gutkha, a form of smokeless tobacco has been banned under the food laws by almost all the
States across India. But the Gutkha manufacturers are litigating against the ban.
In addition, the govt. has also banned the sale of tobacco products to customers below 18 years of age.
1.2) Restrictions on advertising by tobacco companies:
To restrict the exposure of consumers to tobacco products, in 2003, Govt. of India put strong limitations on
advertising and marketing by tobacco companies.
At that point, Godfrey Phillips India Ltd complained that these regulations put domestic cigarette producers
at a disadvantage over international players.

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Cigarette and Tobacco Product Act imposes further advertising and marketing restrictions,
additional health warnings and product labeling which will adversely affect domestic cigarette
brands against international brands whose promotion and marketing will still be seen on cable
TV, international magazines and on neighbouring country TV.
Until now, the limitations were primarily on advertising in the mainstream media. Whereas in 2004, the
govt. put limitations on the advertising by tobacco companies in retail shops (points of sale) as well.
From May 1, 2004, stringent restrictions on advertising of tobacco products even at the point-of-
sale came into force.
1.3) Health warning on the packaging of cigarettes:
To dissuade the public from consuming tobacco products and to educate them about their harmful effects
on health, govt. has mandated that packets of all tobacco products should have health warnings. Over time,
regulations have made the warning messages stronger.
Initially, companies had to print warning messages as smoking kills and smoking is injurious to health.
However, in 2009, companies had to show pictorial warnings showing lung damage caused by smoking.
…Cigarettes and Other Tobacco Products (Packaging & Labelling) Rules, 2008, has mandated
the tobacco industry to print the prescribed graphic health warnings on its product packages.
These regulations have come into force from May 31, 2009.
In 2011, to keep the warning messages effective, the Govt. issued new warning pictures and mandated that
the warning messages on the packs should be rotated every two years so that consumers do not ignore the
pictorial warning messages.
Government of India, notified…specified health warnings on tobacco packs shall be rotated every
two years. New graphic health warnings have been issued on May 27, 2011
Originally, the warning pictures were required to cover 40% of one side of the cigarette packets. However,
in FY2016, the govt. made the requirement stringent. Now, the pictorial warning messages were required
to cover 85% of both sides of the cigarette packs. In addition, the warning picture was changed from a
damaged lung to those showing mouth cancer.
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most recently implemented regulation is the 85 per cent graphic health warning (GHW) on both
sides of the cigarette package from earlier 40% on one side of the package and substituted the
earlier pictures with more gruesome ones.
As per the company, the requirement of gruesome pictures covering 85% of both sides of a cigarette pack
is one of the most stringent across the world.
With 85% coverage, India has one of the largest pictorial warning size on the packs in the world
when compared with global average of 40%.
However, the govt. believes that these warning messages are still not having the desired impact of reducing
cigarette consumption in the population. One of the reasons is that in India, a lot of cigarette sales take place
in the form of single cigarette sticks instead of packs. In such cases, the consumer does not get to see the
warning message because the seller hands out a single cigarette from the pack to the consumers.
Therefore, to counter this behaviour, the govt. is considering a ban on the sale of loose cigarettes.
government is contemplating ban on sale of loose cigarettes.
However, the cigarette lobby is trying hard to prevent such measures. As a result, despite efforts of the anti-
smoking activists, the ban on the sale of loose cigarettes is still in the works. Nevertheless, anti-smoking
activists are continuously putting pressure on the govt. to put strict measures to control the smoking issue
in society.
Recently, the demand for the sale of loose cigarettes as well as abolishing smoking zones in public places
is gaining strength.
India may soon ban sale of loose cigarettes, smoking zones at airports may go:
WION, December 13, 2022
1.4) No more approvals to increasing cigarette-manufacturing capacities:
In its efforts to restrict the consumption of tobacco products, the govt. of India has put cigarettes under the
sector for compulsory licensing. In addition, the govt is no longer giving any approvals to increase the
manufacturing capacity of cigarettes in the country. (Source).
Cigarette advertsing is banned in India and the government doesn’t allow companies to increase
capacities for manufacturing cigarettes.
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1.5) No foreign direct investment in cigarette manufacturing:
To reduce tobacco consumption in the country, the govt. of India has undertaken many steps to restrict the
production of cigarettes in the country. In addition to blocking any attempt by cigarette manufacturers to
increase production capacity, the govt. has also stopped access to foreign direct investment (FDI) by the
players in the cigarette-manufacturing sector (Source: Reuters).
India in 2010 prohibited foreign direct investment in cigarette manufacturing, saying this would
enhance efforts to curb smoking.
The ban on FDI restricts cigarette manufacturers’ access to capital to sustain or grow their businesses. There
have been multiple instances in India when the govt. has blocked the attempts of foreign tobacco
manufacturers from investing money in India.
In the past, Japan Tobacco Inc. had to close down its joint venture in India when its application to bring in
more FDI was rejected in 2010 (Source: Japan Tobacco’s Indian JV goes up in smoke:
Business Standard, January 21, 2013).
Confronted with a stringent FDI regime in tobacco, the world’s third largest publicly traded
tobacco company, Japan Tobacco Inc, is closing its joint venture in India from December 31. The
venture, JT International Indian Pvt Ltd, has already surrendered its licence to manufacture five
billion cigarettes per annum to the government.
Japan Tobacco has made several attempts to increase its stake in the Indian company from 50 per
cent to 74 per cent and bring in $100 million to address its growing losses. However, with the ban
on FDI in tobacco, its hopes to be a player of note in the Indian market ended. Its application was
rejected in 2010.
As per the same article, Govt. of India did not approve the investment of British American Tobacco Ltd in
ITC.
British American Tobacco had, in the recent past, made an unsuccessful attempt to increase its
shareholding in ITC Ltd.
Even in the case of Godfrey Phillips India Ltd, the Indian govt. is investigating whether it along with its
partner Philip Morris allegedly bypassed the FDI regulations while entering into a contract manufacturing
arrangement to produce Marlboro cigarettes. (Source: Exclusive: India investigating Philip
Morris, Godfrey Phillips: Reuters)
Philip Morris has for years paid manufacturing costs to Godfrey Phillips to make its Marlboro
cigarettes, circumventing a nine-year-old government ban on foreign direct investment in the
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industry, Reuters reported based on a review of dozens of internal company documents, which
were dated between May 2009 and January 2018
Godfrey Phillips India Ltd has also highlighted this investigation to its shareholders in its FY2019 annual
report, page 200:
Subsequent to the year end, the Holding Company has recently been called upon by the Directorate
of Enforcement (‘ED’) seeking certain information including those in connection with the business
arrangements with IPM India Wholesale Trading Pvt. Ltd.,(IPM) an associate of the Holding
Company.
These steps by the govt. of India indicate that the govt. is serious about limiting the expansion of tobacco
and cigarettes within the country.
Even if tobacco companies are making losses and need an infusion of capital to survive, still, the govt. does
not allow them to raise money from foreign partners even risking the closure of their business. In the case
of Japan Tobacco Inc., the govt. caught it when it attempted to circumvent FDI regulations by way of
offering shares to Indian promoters and foreign promoters at different prices. (Source: Japan
Tobacco’s Indian JV goes up in smoke: Business Standard, January 21, 2013).
The Indian JV also came under government scrutiny for bringing in money through the back
door by issuing fresh equity of a face value of Rs 1 each to Japan Tobacco, the parent, but at a
premium of Rs 298 a share, aggregating Rs 293 crore. It also issued an equal number of shares to
the Indian partner, but at par, which meant it paid only Rs 1 crore…That way, Japan Tobacco was
able to bring in the required money, but without changing the equity structure.
Ultimately, the Japanese JV had to shut down operations.
Going ahead, an investor should always keep in her mind that if any tobacco manufacturer faced financial
issues, then govt. will not make it easy for the company to raise money. The company may have to shut
down its operations.
1.6) Govt. regulations about growing tobacco in India:
In India, the govt. does not promote tobacco cultivation actively to increase production. There have been
times when the industry could not get a sufficient quantity of raw tobacco because the govt. had put a “crop
holiday” on tobacco.
As per Godfrey Phillips India Ltd in FY2001, the company faced challenges in sourcing raw tobacco
because the Govt. of Andhra Pradesh had declared a “crop holiday” on tobacco in the state in the year. As
a result, the exports of the company were impacted.
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We have taken some fresh initiatives…in spite of no flue cured tobacco, having been grown in
Andhra Pradesh this year due to ‘Crop Holiday’ declared by the Government
Once again, in FY2016, the business of the company was impacted when tobacco cultivation happened in
a smaller area than expected.
Reduced crop size in Karnataka from where we do have a significant volume has impacted
performance in unmanufactured tobacco exports.
As per Godfrey Phillips India Ltd, tobacco cultivation is drought resistant, is well suited for Indian climatic
conditions, and has the potential to increase the earnings of farmers.
Tobacco farming is drought tolerant, hardy and short duration crop
Moreover, Indian raw tobacco is cheaper than foreign production, which puts India at an advantage.
exportable variety of tobacco – Flue Cured Virginia (which is used in cigarettes), accounts for
only 35% of the total Indian production of tobacco…Indian FCV tobacco is amongst the
cheapest in the world market.
However, despite the favourable climate, India grows tobacco only on about 0.25% of the cultivation area
as compared to 1% of the area in other major countries like China and Zimbabwe.
Global leading tobacco producers like Malawi, China and Zimbabwe have more than 1% of their
arable landmass under tobacco cultivation, while India has only around 0.25% of land under
tobacco cultivation
Therefore, India is attempting to restrict the growth of the tobacco industry by not promoting tobacco
cultivation among the farmers despite favourable climatic conditions.
However, despite these measures, over the years, tobacco consumption in India has increased. This is
primarily because smoking is an addiction where only educating society is not sufficient.
As a result, the govt. continues to take other economic steps as well by increasing taxes on all tobacco
products including cigarettes so that such products become expensive and the public faces constraints in
purchasing them.
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2) High taxes on tobacco products especially cigarettes:

Increasing taxes to make tobacco products unaffordable is one of the strategies adopted by almost all
countries across the globe. Even in India, the govt. has consistently increased the taxes on all tobacco
products including cigarettes.
Year after year, both central govt. as well as state govts. have increased taxes on tobacco products within
their jurisdiction. Previously, in the case of cigarettes, the central govt. used to increase excise duty while
the state govts. used to increase luxury tax, entry tax, value-added tax (VAT) etc.
The extent of taxes on the tobacco industry has been high for a long time. As per the FY1998 annual report,
the tobacco industry contributed almost 10% of the entire excise revenue of India.
It contributes Rs. 56,000 crores to the country’s GNP and about Rs. 5,800 crores of excise revenue,
which is about 10% of the total Central Excise revenue of the country…The high rate of taxation
is the most important factor that impedes the growth of the cigarette industry.
Despite already high taxes, the govt has continuously increased excise duty as well as other taxes like VAT
and entry taxes year on year.
As a result of increase in the excise rates by nearly 15.5% last year, the industry growth began
stagnating…Government this year has again increased the tax rate by about 9.5%
Subsequently, the govt. again increased the excise duty in FY2000 (5%), FY2002 (15%), FY2005 (10%),
FY2007 (6%), FY2009 (142% to 387% on non-filter cigarettes), FY2010 (18%), FY2012 (22%), FY2013
(18%), FY2014 (11-72%), FY2015 (12-22%), and FY2016 (10%).
Apart from the excise duty increase by the central govt., the state govts. have increased their share of taxes
by increasing taxes like value-added tax (VAT), luxury tax, entry tax etc.
In FY2017, when state govts. put 12.5% VAT on the sale of cigarettes, then along with the excise duty
hikes, the tax increase totalled about 30%.
an additional 6% excise duty levied for the second year in a row. In addition, 12.5% VAT is levied
by the States on invoice price. The combined effect of both is equivalent to around 30% increase
in tax incidence on cigarettes.
In FY2009, different state govts. increased the rate of VAT on cigarettes to 20%.
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Governments of Delhi, Maharashtra and Rajasthan have increased the rate of VAT on tobacco to
20%
In FY2011, many states again increased VAT to 40% of the invoice value.
In India many of the States have effected steep rise in the rates of VAT. Current rates of VAT on
cigarette in India vary between 12.5% to 40%.
In fact, whenever any govt. faces revenue shortfall, then tobacco products are one of the first segments
where they increase the taxes to enhance their revenue. In the next year, FY2012, some states increased
VAT on cigarettes to 50%.
more and more States resorting to tax tobacco products to bridge the revenue shortfall. And as an
impact of that, VAT rates in India on cigarettes now vary from 12.5% to 50%
In FY2013, some states increased VAT on cigarettes to 65%.
States resorting to tax tobacco products to bridge the revenue shortfall. And as an impact of that,
VAT rates in India on cigarettes now vary from 12.5% to 65%.
In fact, over FY2015 to FY2014, the incidence of VAT on cigarettes had increased by more than 50% i.e.
from previously 28% of the invoice value to 43% in FY2015.
Share of VAT within total taxes to the cigarettes industry, has increased from 28 per cent in 2010-
11 to 43 per cent in 2014-15.
States also resorted to levying taxes like entry tax and octroi on tobacco products.
the state of Rajasthan introduced an additional levy of entry tax at the rate of 1.5%.
Some states even put a luxury tax on cigarettes, which later on, as decided by Hon. Supreme Court, they
did not have the power to levy. (Source: Go smoke that: Financial Express, Jan 24 2005)
Cigarette and gutka companies may be tempted to rejoice at Thursdays Supreme Court ruling that
states have no power to impose luxury tax on cigarettes and gutka.
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In addition, the govt. put a high customs duty on the import of tobacco products.
FY2009, page 4:
The Government imposed 100% increase in the import duty for cigars in the Budget for 2008-09
which had adverse impact on its sale
A sharp increase in taxes on tobacco products has had the desired impact because, for many years, it had
led to a decline in the sales and profit margins of cigarette manufacturers like Godfrey Phillips India Ltd.
The sharpest impact of an increase in excise duty on the sales of cigarettes was seen in FY2009 when govt.
increased excise duty on non-filter cigarettes by 142% to 387%. As a result, the entire non-filter cigarette
segment was wiped out.
FY2009 annual report page 2:
Unprecedented increase in excise duty on non-filter cigarettes in the Budget for 2008-09 has
virtually wiped out the non-filter segment which nearly constituted 30% of the cigarette market.
In other periods also, even though the increase in excise duty was less steep; however, it led to a decline in
the sales for the industry.
In FY2001, Godfrey Phillips India Ltd intimated to its shareholders that due to a sharp increase in excise
duty, the sales of the entire industry had been declining in the previous three years.
The total volume of domestic cigarette industry has been declining continuously for the last three
years.
In FY2002, when the govt. sharply increased the taxes, then the sales of the cigarette industry declined by
12%.
The domestic cigarette industry witnessed one of the sharpest declines in the sales volume in the
last year when it lost more than 12% of its size as a result of steep hike in the rate of excise duty,
as much as 15% across all segments.
In FY2005 as well as FY2006, Godfrey Phillips India Ltd had to absorb the impact of the increase in taxes,
as it could not increase the prices of cigarettes fearing a decline in sales. As a result, in FY2006, the company
witnessed a decline in its profit margins.

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Inspite of the substantial increase of 10% in excise duty in 2005 Budget no major changes were
effected by the Company on its cigarette prices.
In FY2011, the sales of the cigarette industry declined in India.
India too had a decline of 1.2% in volumes in FY 2010-11.
In FY2012 and FY2013, the profit margins of the company declined because of a sharp increase in the
excise duty, which it could not pass on to the customers.
The continuous increase in taxation on cigarette over the last several years has been adversely
affecting the volumes and therefore, impacting profitability.
Once again, in FY2015, the cigarette industry along with Godfrey Phillips India Ltd witnessed a decline in
volumes due to an increase in taxes.
The domestic cigarette industry continues to reel under pressure of increased indirect
taxes with volumes declining by over 9% in 2014-15…your Company has witnessed decline in
volume,
In FY2016, the company witnessed a decline in sales because, due to an increase in excise duty, when it
increased cigarette prices, then the customers shifted from premium cigarettes (length of 69 mm or more)
to cheaper cigarette segment (length 64 mm or less).
As a result, Godfrey Phillips India Ltd decided that it would focus more on the economical segment of
cigarettes.
Continued tax increases forced your Company to increase the price of its popular brands which
has resulted in consumer churn, part of which is gained by economy segment of
64mm brands…Growth for the Company will be pursued through the brands placed at economical
price points
In the cigarette industry, the 64 mm segment has a lower profit margin than the premium segment of 69
mm.
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the lower margin 64mm and the higher margin 69mm segments.
Higher sales of economical (cheaper) cigarettes (length 64 mm or less) resulted in a decline in operating
profit margins (OPM) of Godfrey Phillips India Ltd in FY2017 to 11% from 14% in FY2016.
Therefore, there have been periods when an increase in taxes by the govt. has had a direct impact on the
sales and profit margins of tobacco players including cigarette manufacturers.
2.1) Cigarettes have the highest taxes out of all tobacco products:
As per Godfrey Phillips India Ltd, when compared to other tobacco products, the taxes on cigarettes are the
highest.
The taxes on cigarettes are so high that even though cigarettes constitute only about 9% of the overall
tobacco consumption in India, still, they contribute about 80% of the overall tax collection from the entire
tobacco industry.
Only 9% of tobacco consumed in India constitute legal cigarettes, while 91% are from traditional
products and illicit cigarettes. This 9% contributes to 80% of the taxes collected from the
industry by the Government of India.
Over the years, despite being the tobacco product with the highest taxes, cigarettes as a category have seen
the highest further increase in taxes. As a result, the share of cigarettes in overall tobacco consumption has
consistently gone down.
As per the FY2004 annual report of Godfrey Phillips India Ltd, page 15, the share of legal cigarettes in total
tobacco consumption used to be about 14% in FY2004 and 23% in FY1973
Small and declining share of Tobacco market: In India only 14% of tobacco consumption happens
through cigarettes and the balance 86% is consumed through bidis, snuff, and chewing tobaccos
like gutka, khaini and zarda. Moreover, this share has been steadily declining (from 23% in 1971-
72).
As per the FY2015 annual report of Godfrey Phillips India Ltd, page 6, the share of legal cigarettes in total
tobacco consumption used to be about 12% in FY2015.
As per Godfrey Phillips India Ltd, cigarettes used to constitute about 21% of the overall tobacco
consumption in India in FY1982, which has now decreased to 8-9% of the overall tobacco consumption in
FY2021.
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share of legal cigarette has declined from 21% in 1981-82 to 8% in 2020-21 despite 50% increase
in tobacco consumption in India,
It indicates that the decline in the share of cigarette consumption is a consistent one over the years from
1972 (23%), 1982 (21%), 2004 (14%), 2015 (12%) to 2021 (8-9%).
This above disclosure also highlights that the policy of govt. to put high taxes on tobacco products has had
the desired impact of limiting the growth of the tobacco industry over the years. As per the above statement,
despite a huge increase in the size of the economy as well as the population in the last 40 years, the size of
the tobacco industry has only grown by a total of 50% from FY1982 to FY2021, which is an annualized
growth rate of about 1.01%.
On multiple occasions, Godfrey Phillips India Ltd had highlighted to its investors the tough business
environment created by the govt. to the cigarettes industry. The industry is not able to grow its volumes
significantly even over long periods. High taxes are leading to customers shifting away from cigarettes.
However, even in the face of appeals by the industry, the govt. further increases the taxes.
The indifferent attitude and short- sighted policies of the Government continue to impede the
natural growth of the Industry which remains stagnant almost at the same level it was some 15
years ago. As a matter of fact, in the year 1999-2000, the Industry lost a volume of 4- 5% over the
previous year. In spite of the declining trend and against the plea the Industry made,
the government again raised the rates of excise duty this year by nearly 5%.
Currently, the share of taxes in the cigarette segment is about 52% of the retail price. However, as per WHO
recommendations, to control tobacco consumption, countries should target a tax rate of 75% of the retail
price for all tobacco products. Therefore, there are continuous agitations from anti-smoking activists to
further increase taxes on cigarettes. (Source: Public health groups, doctors urge govt to hike
excise duty on tobacco products in next Union Budget: Economic Times, Dec. 12,
2021).
The total tax burden (taxes as a percentage of final tax-inclusive retail price) is only about 52.7 per cent
for cigarettes, 22 per cent for bidis and 63.8 per cent for smokeless tobacco. This is much lower than the
World Health Organization (WHO) recommended tax burden of at least 75 per cent of retail price for all
tobacco products, John said.
3) Cigarette producers do not have unlimited pricing power:

The above discussion also proves the popular perception wrong that smoking cigarettes is such an addiction
that an addict will smoke cigarettes even if the price increases significantly. In fact, the demand for
cigarettes is not unlimited or unrestricted.
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Though there have been times when the cigarette could increase its revenue and profit margins despite a
decline in the sales volume because it could increase cigarette prices like in FY2013 when the revenue of
the industry grew by 20% despite a 2% decline in sales volume indicating that the industry had increased
its prices significantly.
Indian cigarette market has shown a decline of around 2% in volume and a growth of 20% in
terms of value over the previous year.
In FY2014 as well, the cigarette industry could increase its revenue by
Indian cigarette market has shown a decline of around 3 per cent in volume, impacted by pricing
pressure and growing health concerns. However, the price hikes taken by the industry have
resulted in a value growth of 14 per cent over the previous year.
In FY2015, Godfrey Phillips India Ltd could increase its revenue by 4.2% despite a decline in sales volume
because it could increase the prices of cigarettes.
Though your Company has witnessed decline in volume, it still was able to register a growth of
4.2% in terms of operating revenue from Rs. 3263 crore in previous year to Rs. 3400 crore.
However, there have been times when cigarette manufacturers could not pass on the increase in taxes and
input costs to the customers because they knew that beyond a limit, the customer would not be willing to
pay a high price.
For example in FY2009, the profit margins of Godfrey Phillips India Ltd declined because it could not pass
on the increase in costs to its customers.
significant cost increases resulting from unprecedented hike in excise duty on non-filter cigarettes
in 2008-09 budget, increase in tobacco prices in 2008 Andhra and Karnataka crops by 60~70%
over last year…All these factors cumulatively have affected the operating margins adversely.
The company faced a similar situation in FY2017 and FY2018 when due to a high increase in taxes, it could
not increase the prices of its premium products (69 mm or more) and it had to focus on low-margin cheaper
products (64 mm or less). It resulted in a decline in the OPM of the company to 11% in FY2017 and FY2018
from 14% in FY2016.
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Godfrey Phillips India Ltd had to suffer a decline in its business performance because it faces intense
competition from other cigarette producers (both domestic and international) as well as from other sources
like illegal and smuggled cigarettes as well as from other tobacco products like bidi, gutkha etc.
4) Intense competition in the cigarette industry:

The cigarette industry faces intense competition from multiple sources.
4.1) ITC Ltd:
In the Indian cigarette market, ITC Ltd is the market leader. As per the credit rating report of ITC Ltd by
ICRA, Nov. 2021, it has about 80% share of the organized domestic cigarettes market.
ITC is the market leader in the organised domestic cigarette industry, with a market share of about
80%.
When an industry has such a large market leader, then other minor players like Godfrey Phillips India Ltd
(11-12% market share) have to take pricing decisions by keeping in mind the pricing strategy of ITC Ltd;
otherwise, they risk losing their market share to ITC Ltd. Therefore, Godfrey Phillips India Ltd cannot
increase the prices of its cigarettes at will.
The company acknowledged the force of ITC Ltd in its annual report for FY2002, page 7:
Your company continues to face formidable challenges not only from the daunting dominant rival
ITC Ltd. but also from the invasion of a spate of cheap smuggled cigarettes entering the country
from neighbouring countries.
4.2) Illegal cigarettes:
At the same time, the cigarette industry faces competition from the illegal cigarettes market, which as per
the company, constitutes almost 25% of the entire cigarette sales in India.
illegal cigarette trade has increased significantly and now accounts for roughly 1/4th of the total
cigarette market in India.
Illegal cigarettes come primarily from two sources; the first of which is smuggling from neighbouring
countries.
Due to very high taxes on cigarettes in India, smuggled cigarettes, which evade all these taxes, are available
at a very cheap price. In addition, these cigarettes offer very high-profit margins to retailers, who attempt
to give a preference to these cigarettes while selling to customers.
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As per the data disclosed by Godfrey Phillips India Ltd in its FY2002 annual report, smuggled illegal
cigarettes are available in the market for approximately 60-80% lower price than legal domestic cigarettes.
As per the company, a packet of smuggled cigarettes is available in the market for about ₹5-10/- whereas
the packet for legal cigarettes sells for about ₹29-30/- (about ₹15 invoice value + ₹14.5 excise duty).
The sharp increase in cigarette prices triggered an unprecedented supply of cheap smuggled
cigarettes in abundance from neighboring countries. Most of them were in king size filter format
selling in the market for Rs. 5 to Rs. 10 for a packet of 10 cigarettes while domestic excise duty
alone works out to Rs. 14.50 for a pack of 10 sticks. Since the smuggled cigarettes offer very high
margin for traders, there is a natural inducement for them to push these products.
As per Godfrey Phillips India Ltd, the second source of illegal supply of cigarettes comes from many Indian
producers who play around with the rules and produce cigarettes without taking the mandatory license for
cigarette production.
As per the company, those players who manufacture cigarettes in small plants with less than 50 employees
do not need to take a license. Therefore, many players register many small firms and show less than 50
employees in each firm to avoid taking a license and in turn, produce and sell cigarettes in the market.
unlicensed manufacture of cigarettes. Many small operators with less than 50 persons in direct
employment are undertaking cigarette manufacturing by merely obtaining State permission.
This breaches the compulsory cigarette manufacturing licensing required under the ID&R Act,
1951 and is likely to lead to revenue leakages. It also creates undesirable unlicensed capacity,
when only 50% of the current licensed capacity is utilised
Such production is an issue because of two reasons; first, it creates unmonitored, unlicensed capacity in the
country when already the organized players have a lot of underutilized production capacity. In addition,
such players also bypass the condition that the govt. is not giving approvals for any additional cigarette
manufacturing capacity in the country.
4.3) Competition from other tobacco products:
Cigarettes have much higher taxes when compared to other tobacco products like bidi and gutkha. As per
some estimates, taxes form about 52.7% of the retail price for cigarettes whereas they form only about 22%
for bidi (Source).
As a result, whenever the prices of cigarettes increase beyond a point, many customers switch from smoking
cigarettes to bidis.
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legal cigarette industry faced yet another challenging year. On one hand, it faces competition from
lightly taxed tobacco products like bidis, chewing tobacco, gutkha, etc.; on the other
hand, the illicit cigarette market continues to grow unabated.
As per Godfrey Phillips India Ltd, high taxes on cigarettes are effectively subsidizing lightly taxed products
like bidi.
The prohibitive and discriminatory tax on cigarettes acts as an effective subsidy to the non-
cigarette tobacco industry including bidis and chewing tobacco.
There is no surprise that the consumption of cigarettes in India is one of the lowest and the consumption of
products like bidi and gutkha is the highest in the world.
In India, cigarettes constitute about 8% of overall tobacco consumption whereas, in the remaining world,
cigarettes constitute 90% of tobacco consumption.
In India, the legal cigarettes account for 8% of the total tobacco consumption and this is in
complete contrast with rest of the world where 90% of the tobacco is in the form of cigarettes.
As a consequence, consumption on non-cigarette tobacco products including bidis and chewing

tobacco has grown to be the highest in the world!
As a result, it does not come as a surprise to an investor when Godfrey Phillips India Ltd enters into both
bidi and chewable tobacco segments.
In FY2010, the company entered the chewable tobacco segment by launching “Pan Vilas” pan masala.
After three years of extensive research on product development and consumer understanding,
Godfrey Phillips India successfully test launched Pan Vilas in four key markets.
In FY2011, it entered the bidi market with “Sonna Bidi”.
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SONNA BIDI: To fulfill its commitment to constantly seek out new opportunities, Godfrey Phillips
India has forayed into the bidi market, which is estimated at Rs. I 2000 to 15000 Crores, with a
production of 700 billion sticks per annum.
In FY2012, Godfrey Phillips India Ltd entered into the zarda segment with the brand “Swarn Vilas”.
Your Company also ventured in the difficult zarda segment with the brand “Swarn Vilas”.
5) Exposure to natural calamities and uncertainties in tobacco souring:

Tobacco cultivation faces all the challenges of the agricultural sector linked to natural calamities and
disease. As a result, at times, Godfrey Phillips India Ltd has faced challenges in getting proper availability
of good quality and sufficient quantity of tobacco.
For example, in FY1999, the tobacco crop suffered from heavy rains and disease. Therefore, the tobacco
available in the market was of poor quality and very costly. As a result, exports of Godfrey Phillips India
Ltd suffered, as foreign buyers did not buy tobacco from it.
The Flue Cured Virginia tobacco crop in Andhra, the main tobacco growing area of the Country
suffered severely in 1998 due to heavy rains…the crop further suffered on account of brown spot
disease which resulted in not only poor quality but also in a sharp decline in the estimated
availability. Prices rose sharply. High price and poor quality made the foreign buyers shy away
from the Indian market
Godfrey Phillips India Ltd faced similar challenges in FY2001 when due to adverse climatic conditions,
the quality, as well as quantity of tobacco in the market, suffered. As a result, its regular overseas buyers
did not buy tobacco from it.
Suffering from the climatic conditions, the quality of tobacco was very low and coupled with very
high prices in the beginning of the season, our traditional buyers shied away from the Indian
market
During FY2021, the operations of the company suffered significantly due to covid-19 pandemic-related
lockdowns resulting in a decline in sales as well as profits.
Credit rating report by CRISIL, September 2021:
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In fiscal 2021, revenues de-grew 13% due to the temporary closure of factories and distribution
points on account of the lockdown imposed and also restrictions on movement mainly in the first
half of fiscal 2021.
6) Major increase in profit margins of the company is due to cost-cutting and

better-operating efficiency:
Over the years, Godfrey Phillips India Ltd has taken many steps to cut its costs, and improve its operating
efficiency to increase the profitability of its operations.
In FY2000, the company reduced its workforce significantly by 26% by offering a voluntary retirement
scheme to its employees.
The Company succeeded in rationalising its work force in its factories at Mumbai as well as
Ghaziabad, belonging to its wholly owned subsidiary, by offering a voluntary retirement scheme
to nearly 26% of its workforce.
Once again, in FY2002, Godfrey Phillips India Ltd reduced its workforce further by letting go of more
employees to reduce its operating costs and lead to savings.
Our efforts in rationalizing the workforce continued and we could reduce the number of people
employed by as much as 84 including the managerial staff.
Thereafter, in FY2014, Godfrey Phillips India Ltd used the opportunity of the commencement of the new
plant at Rabale, Navi Mumbai to reduce its costs when it gave VRS to all the staff at its older factory at
Andheri.
Production at Cigarette plant at Andheri (Mumbai) was discontinued during the year under report.
The exceptional item represents compensation paid to unionized staff and workmen attached to
the Company’s plant at Andheri, Mumbai, pursuant to the voluntary retirement
schemes announced by the Company under the terms of settlement memorandum executed by it
with the workers’ union.
In addition, the company has taken steps to close down its loss-making business units, which has also added
to profitability.
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In FY2020, Godfrey Phillips India Ltd changed its strategy related to the chewing tobacco business. It
decided to stop focusing on the economical segment of the “Raag” brand and increased focus on the
premium brand “Pan Vilas”.
While in FY’19 the chewing business was close to break even, this year business made some
significant restructuring, made investments in Pan Vilas brand in premium segment and gradually
pulled out itself from non performing mid premium segment.
In FY2021, due to continuing operating losses, the company did a thorough assessment of the chewing
tobacco business.
In view of the continuing operating losses, the Group has reviewed the carrying value of its assets
relating to chewing business and estimated the recoverable amount of assets
Thereafter, in Oct. 2022, it sold off the entire chewing tobacco business as it was continuing to make losses
without any sight of profitability.
Corporate announcement to Bombay Stock Exchange (BSE), October 12, 2022:
This sale/assignment is in line with the Company’s decision to exit from its Chewing business
which was incurring losses and constituted less than 2% of the total operating revenues
Similarly, in FY2018, Godfrey Phillips India Ltd closed down its tea division, which was making losses.
Tea has been an insignificant contributor to the Company’s business. During the course of 2017-
18, it was decided to divest from this line of business
These steps of cutting down costs by relieving excess and expensive workforce as well as closing down
loss-making business divisions have cut down costs for the company and over the years, have improved its
profit margins.
The credit rating agency, CRISIL, acknowledged the role of cost-cutting measures taken by the company
in the improvement of its profit margins.
Credit rating report, CRISIL, August 2022:
operating margin also improved to 23.7% owing to various cost-control measures adopted by
GPIL
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Therefore, we note that Godfrey Phillips India Ltd works in an industry, which has many regulatory
constraints and the company cannot take free decisions to grow its business. This is because the high growth
of cigarette/tobacco manufacturers means that the problem of smoking is becoming more severe in society.
Tobacco consumption puts a big burden on any economy in terms of healthcare costs, loss of manpower
and productivity. As per World Health Organization (WHO), in 2018, India had to bear a cost of $27.5
billion due to tobacco consumption. (Source).
According to the World Health Organisation (WHO), the total economic costs from tobacco use
from all diseases in India in 2018 was about $27.5 billion.
This is a humongous cost for a developing country. As a result, the Indian govt. does not support the tobacco
industry in its quest for growth.
The govt. has stopped giving permissions for capacity expansion and banned foreign direct investment. It
has put controls on the sale and consumption of tobacco products, disallowed advertising and marketing,
put big pictorial warnings on packages and controlled tobacco cultivation. Govt. has put high taxes (excise
duty, VAT etc.) to make tobacco products, especially cigarettes very expensive, which has limited the
growth in the demand for cigarettes.
Cigarette manufacturers have requested the govt. for being lenient on them while putting taxes; however,
the govt. has repeatedly increased taxes aggressively on tobacco products, especially cigarettes.
An investor should always keep these aspects of the business of Godfrey Phillips India Ltd while she tries
to make any prediction about its future performance.
The tax payout ratio of Godfrey Phillips India Ltd has largely been in line with the standard corporate tax
rate prevalent in India. Any small differences are primarily due to the differential tax rate of capital gains
on the large amount of investments done by the company in equity and debt assets.
For example, in FY2021 and FY2022, the biggest factor leading to a difference in the standard tax rate and
the tax payout ratio of Godfrey Phillips India Ltd was the “Differential tax rate on long-term capital gain
on sale of investments”.
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Operating Efficiency Analysis of Godfrey Phillips India Ltd:
a) Net fixed asset turnover (NFAT) of Godfrey Phillips India Ltd:

Over the years, the NFAT of the company has been stable in the range of 3.4 to 3.7. In recent years, the
NFAT seems to have declined in the range of 2.5 to 2.7; however, the main reason for this decline is the
change in accounting guidelines for leased assets.
From FY2020, the applicability of new Indian Accounting Standards (lease accounting) has led to the
inclusion of leased assets (right-to-use assets) into fixed assets. Godfrey Phillips India Ltd has included
leased assets/right-of-use assets of about ₹300-350 cr into its fixed assets from FY2020 onwards, which
has led to a decline in the NFAT ratio calculations.
Therefore, the decline in the NFAT during FY2020-FY2022 is due to a change in accounting guidelines. If
an investor removes the impact of the right to use/lease assets, then the NFAT of Godfrey Phillips India
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Ltd stays in the range of 3.6 during FY2021 and 3.8 in FY2022 indicating that the company has maintained
the efficiency of usage of its fixed assets over the years.
use its fixed assets and manufacturing capacity optimally.
b) Inventory turnover ratio (ITR) of Godfrey Phillips India Ltd:

In the past (FY2014-FY2022), the inventory turnover ratio (ITR) of the company has shown cyclical
variations. During the initial years, the ITR of the company declined from 4.4 in FY2014 to 3.1 in FY2016.
Thereafter, the inventory turnover ratio improved year on year and increased to 4.3 in FY2020. However,
in the last two years, the inventory turnover ratio has declined to 3.4 in FY2022. One of the key reasons for
the recent decline seems to be the covid-19 related supply chain problems.
c) Analysis of receivables days of Godfrey Phillips India Ltd:

Over the years, the receivables days of Godfrey Phillips India Ltd have stayed in a range of 10-20 days
during FY2014-FY2022. A level of 10-20 days for receivables collection is good because, in most of the
other industries, companies usually give a credit period of about 30-45 days to their customers.
Moreover, while reading the annual reports of Godfrey Phillips India Ltd, an investor notices that the share
of its receivables more than 180 days overdue is considerably low.
For example, In FY2022, the company had about ₹3.5 cr of receivables overdue for more than 6 months
out of total receivables of ₹157 cr i.e. about 2.3%. In FY2021, the company had about ₹7 cr of receivables
overdue for more than 6 months out of total receivables of ₹129 cr i.e. about 5.5%.
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Similarly, over the years, Godfrey Phillips India Ltd has had a very low percentage of receivables turning
bad i.e. its customers had not paid for the goods purchased from it.
In FY2022, it wrote off ₹0.87 cr of receivables, which is 0.5% of the total receivables of ₹157 cr. In FY2021,
it wrote off about ₹1 cr of receivables out of total receivables of ₹129 cr, which is 0.7%.
Therefore, it seems that Godfrey Phillips India Ltd has managed its receivables position well.
Going ahead, an investor should monitor the trend of receivables days of Godfrey Phillips India Ltd in both
the standalone as well as consolidated financials to assess whether it is able to collect its receivables on
time and keep its working capital position under control.
operations (cCFO) of Godfrey Phillips India Ltd for FY2013-2022, then she notices that over the years
(FY2013-FY2022), the company has converted its profit into cash flow from operations.
Over FY2013-22, Godfrey Phillips India Ltd reported a total net profit after tax (cPAT) of ₹2,455 cr. During
Learning from the article on CFO will indicate to an investor that the cCFO of Godfrey Phillips India Ltd
is higher than the cPAT due to the following factors:

The Margin of Safety in the Business of Godfrey Phillips India Ltd:
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target growth.
Where,

Over the years, Godfrey Phillips India Ltd has reported an SSGR of about 15%, which is higher than the
sales growth rate achieved by Godfrey Phillips India Ltd over the last 10 years (FY2013-FY2022). It
indicates that the company could generate sufficient funds from its internal resources to fund its business
growth.
Therefore, over the last 10 years (FY2013-FY2022), the company did not need to dilute its equity and also
its debt level stayed stable at about ₹300 cr (in FY2013: ₹304 cr and in FY2022: ₹336 cr). Moreover, an
investor may note that at the end of FY2022, the company had cash and investments of ₹1,894 cr indicating
that it has a surplus net cash position.
An investor gets the same conclusion when she analyses the free cash flow position of Godfrey Phillips
India Ltd.
b) Free Cash Flow (FCF) Analysis of Godfrey Phillips India Ltd:

While looking at the cash flow performance of Godfrey Phillips India Ltd, an investor notices that during
FY2013-FY2022, it generated cash flow from operations of ₹3,156 cr. During the same period, it did a
Therefore, during this period (FY2013-FY2022), Godfrey Phillips India Ltd had a free cash flow (FCF) of
₹2,051 cr (=3,156 – 1,104).
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of ₹186 cr. As a result, the company had a net free cash flow of ₹2,513 cr (= 2,051 + 648 – 186). 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 Godfrey Phillips India Ltd over the last 10 years
(FY2013-2022), an investor notices that the company has primarily used its free cash flow in the following
manner:
 Payment of dividends to the shareholders: ₹686 cr excluding dividend distribution tax (DDT).
 An increase in cash & investments of about ₹1,584 cr i.e. from ₹310 cr in FY2013 to ₹1,894 cr in
FY2022.
Going ahead, an investor should keep a close watch on the free cash flow generation by Godfrey Phillips
India Ltd to understand whether the company continues to generate surplus cash from its business and keep
its debt levels under control.
Additional aspects of Godfrey Phillips India Ltd:

On analysing Godfrey Phillips India Ltd and after reading annual reports, credit rating reports and other
1) Management Succession of Godfrey Phillips India Ltd:

Godfrey Phillips India Ltd is a part of the KK Modi group of companies. On September 30, 2022, KK Modi
group, the Indian promoters, hold a 47.73% stake in the company whereas Philip Morris group holds a
25.1% stake. The KK Modi family control the day-to-day operations of the company.
The senior-most member of the family, Mr KK Modi died in Nov. 2019. He is survived by her wife, Ms
Bina Modi, and three children: a daughter, Ms Charu Bharti and two sons, Mr Lalit Modi and Mr Samir
Modi.
In the past, there has been a lot of turmoil in the succession of the KK Modi family’s business assets. During
his lifetime, Mr KK Modi faced challenges in bringing all his children on the same page for succession
planning. (Source: ‘I will sell my biz if kids can’t decide on successor’: Times of India,
May 26, 2011)
Uncertainty over succession continues at the business empire of K K Modi, father of beleaguered
Lalit Modi (the brain behind IPL). With no clear successor in sight among his three children, Modi
senior has said he has made legal provisions to sell his over Rs 4,000-crore empire
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K K Modi, who has tried to buy peace through a new organizational set-up, said the business
would be on the block if the children do not agree on a leader
As a result, in 2011, he implemented an organizational setup by bringing in Mr Sarthak Behuria, ex-IOC

chairman, and setting up three committees for the family businesses. (Source: KK Modi gets Behuria
for professional consolidation: Business Standard, January 20, 2013)
The corporate management council (CMC), which will be the apex decision-making body will act
as a forum to make strategic business decisions in consultation with other promoters.
At the group level, there will be a corporate executive committee (CEC) chaired by Behuria
comprising senior directors, chief executive and operating officers
Bina Modi as chairperson of the family council will have a key role in aligning the long-term
interests of family members.
However, after the death of Mr KK Modi, the differences between the successors came out in the open.
When Ms Bina Modi, wife of Mr KK Modi was appointed President & Managing Director of the company,
then Mr Ruchir Modi, son of Mr Lalit Modi, complained to SEBI challenging her appointment.
(Source: Ruchir Modi flags corporate governance at Godfrey Phillips: Businessline,
December 6, 2021)
Former IPL commissioner Lalit Modi’s son Ruchir Modi has yet again written to the market
regulator SEBI…that his grandmother Bina Modi’s appointment as the company’s President and
Managing Director (MD) is illegal.
Mr Ruchir Modi wrote to other authorities as well citing irregularities in the company’s operations, which
led to the Central government’s inspection of the company’s accounts.
Mr. Ruchir Kumar Modi…has written various letters to the regulatory authorities such as the
Securities and Exchange Board of India, The Ministry of Corporate Affairs and the Stock
Exchanges, alleging certain irregularities by the Company and its officials, and seeking
investigation into the affairs of the Company….Central Government has ordered inspection of the
books of accounts and other books and papers of the Company
It seems that due to these actions, Mr Ruchir Modi was removed from the board of directors of the company
by not reappointing him as a director when his initial term expired.
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“RESOLVED THAT the vacancy caused by the retirement by rotation of Mr. Ruchir Kumar Modi
(DIN 07174133), be not filled by the Company for the time being.
NRC considered various aspects about Mr. Ruchir Kumar Modi such as the repeated concerns
raised by the Board on his conduct in past being unbecoming of a director of the
Company…including leveling unsubstantiated allegations against the Company and its officials
After the removal of Mr Ruchir Modi from the companies, there is no representation of Mr Lalit Modi or
his children on the board of Godfrey Phillips India Ltd.
One news article in December 2021 claimed that the family dispute is nearing resolution and the family
members have worked out monetary compensation to be provided to Mr Lalit Modi and his children.
(Source: Godfrey Phillips promoters work out ₹11,000-crore settlement; Lalit Modi to
get ₹917 crore: Businessline, December 6, 2021)
Lalit Modi, the former IPL Commissioner who is currently ensconced in London, will receive ₹917
crore initially as part of the settlement, the documents show. His son Ruchir Modi, who is at the
helm at Godfrey Phillips, and daughter Aliya Modi, too, will receive ₹917 crore each as part of
the settlement.
Currently, Ms Bina Modi (President, Managing Director & CEO, aged 77 years) and her youngest son, Mr
Samir Modi (Executive Director, aged 52 years) are present on the board of the company.
An investor may contact the company directly to understand the current stage of progress in the succession
planning of the KK Modi group and the plan for any leadership changes at the company.
2) Promoter’s remuneration at Godfrey Phillips India Ltd:

While analysing the remuneration taken by the promoter family members of the KK Modi group, an
investor gets some key observations.
The following table has the data on remuneration taken by different members of promoters’ family from
FY2009 to FY2022. The data is taken from the section “Remuneration to Directors” from the part “Report
on Corporate Governance” from the annual reports of Godfrey Phillips India Ltd.
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2.1) Promoters’ remuneration as a percentage of profit has increased significantly over the
years:
The total remuneration of all the promoter family members used to be about 2% until FY2012. Thereafter,
the promoters started increasing their remuneration and now, the total remuneration of the promoter’s
family members has increased almost 3 times to about 6-7% of the net profit after tax.
If you notice that over FY2009 to FY2022, the net profit of Godfrey Phillips India Ltd has increased to 4
times, from ₹109 cr in FY2009 to ₹436 cr in FY2022. However, during this period, the remuneration of Mr
Samir Modi has increased by more than 53 times i.e. from ₹0.5 cr in FY2009 to ₹26.8 cr in FY2022.
There have been periods when the financial performance of the company declined as reflected in the decline
in the profit of the company over the previous year; however, even during those periods, the total
remuneration taken by the promoters has increased.
For example, during FY2015-2017, the net profit of Godfrey Phillips India Ltd declined by 25% to ₹137 cr
in FY2017 from ₹183 cr in FY2016. However, during this period, the total promoters’ remuneration
increased by 70% to ₹14.4 cr in FY2017 from ₹8.5 cr in FY2015.
Similarly, during FY2013, the net profit of Godfrey Phillips India Ltd declined by 6% to ₹170 cr from ₹181
cr in FY2012. However, during FY2013, the total promoters’ remuneration increased by 33% to ₹5.8 cr
from ₹4.4 cr in FY2012.
An investor will note that in FY2012, when Godfrey Phillips India Ltd had reported a net profit of ₹181 cr,
then the promoters had taken a remuneration of ₹4.4 cr. However, in FY2017, when the company had a
profit of ₹137 cr, then the promoter took home a much higher remuneration of ₹14.4 cr.
2.2) Increase in the remuneration of Mr Samir Modi in FY2018:
In 2017, Mr KK Modi decided that from FY2018 onwards, he would not take any cash remuneration from
Godfrey Phillips India Ltd; he will only take company car, telephone and reimbursement of his travel
expenses.
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W.e.f 1st April 2017, Mr. Modi will not draw any salary and/ or commission from the Company
nor shall he be entitled to any sitting fee during the remaining period of his current tenure.
In the previous year, FY2017, Mr KK Modi had taken home a total remuneration of ₹8.4 cr. Therefore, an
investor may have thought that the money spent on Mr KK Modi’s remuneration may now become an
increase in profit for Godfrey Phillips India Ltd.
However, in FY2018, while Mr KK Modi did not draw any remuneration, the remuneration of his son, Mr
Samir Modi increased sharply by (116%) i.e. becoming more than double from ₹4.9 cr to ₹10.6 cr, an
increase of ₹5.7 cr.
Effectively, most of the benefit to be accrued to Godfrey Phillips India Ltd by waiver of remuneration of
one promoter member was given to another promoter member.
In family-run corporations, an investor will routinely come across such instances where when one member
of the family stops drawing remuneration, then another family member gets into the picture to take a higher
remuneration.
An investor may read another such example in the case of Sharda Motor Industries Ltd in the following
article: Analysis: Sharda Motor Industries Ltd
In the case of Sharda Motor Industries Ltd, when the promoter of the company, Mr N. D. Relan expired in
June 2016, then his wife, Ms Sharda Relan, aged 81 years, was appointed an executive director in August
2016 at a significant remuneration.
For the full year (FY2016), Mr N. D. Relan drew a remuneration of ₹3.06 cr whereas, in the first full year
after his demise (FY2018), Ms Sharda Relan drew a remuneration of ₹4.64 cr.
Moreover, while going through the “Management Team” section of the website of the company, the
investor notices that the name of Ms Sharda Relan does not appear in the list of key management personnel.
The case of an increase in the remuneration of Mr Samir Modi looks like a similar case where the promoter
family does not want its total remuneration payout to reduce significantly when Mr KK Modi decided to
forego his remuneration.
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2.3) Remuneration of Mr Lalit Modi and his son, Mr Ruchir Modi:
From the FY1998 annual report, which is the earliest annual report available freely on the BSE website, an
investor notes that Mr Lalit Modi and Mr Samir Modi, his younger brother, had been working as executive
directors of the company and were drawing almost similar remunerations.
However, in the meanwhile, in FY2011, Godfrey Phillips India Ltd, changed the position of Mr Lalit Modi
from an executive director to an ordinary (non-executive) director.
Mr. Lalit Kumar Modi…has ceased to be in the whole-time employment of the Company as an
Executive Director w.e.f. 1st August, 2010 and thereafter continues as an Ordinary Director…Mr.
Lalit Kumar Modi is entitled to payment of commission…at not more than one percent (1%) per
annum of the net profits of the Company
An investor would remember that this was the period when Mr Lalit Modi was involved in the issues related
to his role in the Indian Premier League (IPL) and around May 2010 he moved to London when the
investigative agencies moved on him. (Source: Govt backs Sushma Swaraj in row over
helping Lalit Modi: Livemint)
Modi, who fled to London in 2010, is wanted by India’s Enforcement Directorate on charges of
financial irregularities.
This change in the type of directorship from an executive director to a non-executive director in August
2010 indicated that he was no longer involved in the day-to-day functioning of the company. Instead, Mr
Lalit Modi would only attend the board meeting of the company, which are usually 4 to 8 during a year.
However, despite this major change in the work profile of Mr Lalit Modi at Godfrey Phillips India Ltd, he
continued to draw a remuneration almost equal to his brother Mr Samir Modi, who continued to work as
an executive director and was actively involved in the day-to-day functioning of the company.
In fact, in FY2012, Mr Lalit Modi earned a remuneration of ₹1.1 cr whereas he did not attend even a single
board meeting out of the 5 board meetings conducted by Godfrey Phillips India Ltd in the year.
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This looked like a case where a promoter who was not involved either in day-to-day active management or
in any occasional board meeting; however, was taking home a significant remuneration. Usually, investors
would expect such promoter family members to earn only dividends from the company for their
shareholding.
Moreover, in the next year, the ceiling of the remuneration payable to Mr Lalit Modi was increased from
earlier ₹1.1 cr to now ₹2.0 cr.
approval of the members be and is hereby accorded for payment of such sum to its non- executive
director, Mr. Lalit Kumar Modi, by way of commission, not exceeding one percent (1%) per annum
of the net profits of the Company…subject to a ceiling of Rs. 200 lacs per annum
Once again, in FY2014, Mr Lalit Modi did not attend any board meeting whereas he took home a
remuneration of ₹1.7 cr.
Until FY2015, both the brothers, Mr Lalit Modi (a non-executive director) and Mr Samir Modi (an
executive director) kept on drawing almost similar remunerations. In FY2015, both Mr Lalit Modi and Mr
Samir Modi had taken home remuneration of ₹2 cr each.
Finally, in FY2016, from May 28, 2015, Mr Lalit Modi resigned from his position on the board of Godfrey
Phillips India Ltd.
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Mr. Lalit Kumar Modi vacated his office as the Director of the Company with effect from 28th
May, 2015 by virtue of the provisions of Section 167 (1) (b) of the Companies Act, 2013.
However, in the same year, FY2016, his son Mr Ruchir Modi, aged 22 years, was appointed a non-executive
director in Godfrey Phillips India Ltd with a remuneration of ₹1.50 cr.
FY2016 annual report, pages 44, 127, 128:
Mr. Ruchir Kumar Modi (DIN 07174133), who was appointed as an Additional Director (Non-
Executive Director) of the Company with effect from March 19, 2016…payment of
remuneration…a sum @ Rs. 1,50,00,000 (Rupees One crore fifty lacs) per annum, subject to a
maximum of one percent (1%) of the net profit
Mr. Ruchir Kumar Modi is son of Mr. Lalit Kumar Modi, formerly Director of the Company.
Mr Ruchir Modi stayed on the board of Godfrey Phillips India Ltd until FY2021 and took home
remuneration of about ₹1.50 each year until he was removed from the company due to his complaints to
SEBI and other authorities against the appointment of his grandmother Ms Bina Modi.
An analysis of the remuneration drawn by Mr Lalit Modi and his son Mr Ruchir Modi from Godfrey Phillips
India Ltd in a sequence looks like a case where Mr Lalit Modi wanted to take a remuneration of about ₹1
cr to ₹2 cr from the company despite not being involved in active management of the company.
When he left India in 2010 for London, then he changed his position at Godfrey Phillips India Ltd from an
executive director to a non-executive director and continued to draw significant remuneration from the
company. Later on, when he resigned from Godfrey Phillips India Ltd, then his son joined the company at
the very young age of 22 years, as a non-executive director, and continued to earn remuneration of about
₹1.5 cr per year.
2.4) Remuneration of Mr Bina Modi:
In the case of Ms Bina Modi, an investor may notice that she is drawing very minimal remuneration of only
a couple of lac rupees from Godfrey Phillips India Ltd. In fact, in FY2021 and FY2022, she has not drawn
any remuneration from the company.
However, when an investor reads her terms of appointment to the board of Godfrey Phillips India Ltd, then
she notices that her remuneration from the company is contingent on the amount of remuneration she draws
from another KK Modi group company, Indofil Industries Ltd.
Dr. Bina Modi shall draw remuneration from the Company in addition to the remuneration drawn
from Indofil Industries Limited, provided that the total remuneration drawn by her from both the
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companies shall not exceed the higher maximum limit admissible from any one of the two
companies of which she is the managerial personnel.
The annual report of Indofil Industries Ltd for FY2022 shows that she took home a remuneration of ₹17 cr
in FY2022 and about ₹14 cr in FY2021.
FY2022 annual report of Indofil Industries Ltd (click here), page 148:
This seems to be an arrangement of promoter family members where they do not want Ms Bina Modi to
take home an excessive amount of money as remuneration from the group businesses. Therefore, she draws
almost nil remuneration from Godfrey Phillips India Ltd because she draws remuneration of ₹17 cr from
Indofil Industries Ltd.
In the above screenshot, an investor would notice that in FY2022, Ms Charu Modi, the daughter of the late
Mr KK Modi has also drawn a remuneration of almost ₹17 cr from Indofil Industries Ltd.
In this light, when an investor observes that Mr Samir Modi, the youngest son of late Mr KK Modi has
drawn a remuneration of ₹27 cr from Godfrey Phillips India Ltd, then she can assess that almost all the
promoter family members are drawing substantial remunerations from one or other group companies.
An investor may do further analysis of KK Modi group companies to find out whether there is any group
company from where the remaining child, Mr Lalit Modi is drawing significant remuneration or not. If not,
then this might be one of the reasons for the discontent of Mr Lalit Modi/Mr Ruchir Modi, which is being
expressed via complaints to regulatory authorities against the appointment of Ms Bina Modi as President
and Managing Director of Godfrey Phillips India Ltd.
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It is advised that an investor should always analyse the remuneration taken by promoter family members in
detail to understand the patterns in the remunerations taken by individual family members as well as the
entire family as a whole.
3) Dealings of Godfrey Phillips India Ltd with promoters about two land parcels:
In FY2008, Godfrey Phillips India Ltd decided to enter into the real estate business when one of its child
entities, Rajputana Developers Projects, an association of persons (AOP), took over possession of two land
parcels in Modinagar, UP for real estate development from one of its promoter-group-companies, Rajputana
Fertilizers Limited.
A subsidiary of the Group, Rajputana Infrastructure Corporate Limited (RICL) had entered into
an agreement with Rajputana Fertilizers Limited (RFL) dated 8th January, 2008, as amended, to
give effect to their understanding and formed an Association of Persons (AOP) under the name
and style of “Rajputana Developers Projects” (a former subsidiary) for carrying on the business
activity of development of certain real estate vested in RFL…In terms of the said agreement, RFL
had vested ownership, possession and title of two land parcels at Modinagar, jointly known as
‘Sikri Bagh Land’ in the AOP and RICL had committed to arrange the requisite financial
resources to develop the said land parcels.
As per the FY2009 annual report, page 10, Rajputana Fertilizers Limited is one of the companies of the
Modi group.
Persons constituting ‘Modi group’ coming within the definition of ‘group’ as defined in the
Monopolies and Restrictive Trade and Practices Act, 1969…include the following:
 Rajputana Fertilizers Limited
It was a joint development project where the promoters brought in the land as their contribution, Godfrey
Phillips India Ltd had to infuse the funds of construction, and both parties would share the profits.
Accordingly, in FY2008, Godfrey Phillips India Ltd invested ₹23.2 cr in Rajputana Developers Projects
(the association of persons, AOP) as interest-free loans.
as on Balance Sheet date, there is an outstanding interest free unsecured demand loan amounting
to Rs. 2320 lacs, granted by a subsidiary company to its wholly owned subsidiary which was given
during financial year 2007-08.

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However, the land parcels contributed by the promoters had some disputes. Because of ongoing litigations,
the real estate developments of these land parcels could not take place.
However, due to continuing litigation in respect of these land parcels and not so conducive real
estate market conditions, not much progress could be made towards developing them for
commercial gains.
It looked like a situation where the promoters did not bring in clear, developable land. As a result,
shareholders of Godfrey Phillips India Ltd were suffering for no fault of theirs because they had already
given invested a substantial amount of money (₹23.2 cr), which was not even earning any interest.
Now, in its commercial judgment, Godfrey Phillips India Ltd, instead of asking its money back with some
penalty/interest, decided to give an exit to the promoters by buying out its share in the AOP (Rajputana
Developers Projects), which was controlling the land.
Therefore, Godfrey Phillips India Ltd slowly started buying out the promoters from the AOP by gradually
increasing its stake in the AOP.
Godfrey Phillips India Ltd used to have a stake of 40.94% in the AOP in FY2015, which increased to
49.90% by FY2017.
By FY2020, Godfrey Phillips India Ltd had increased its stake in the AOP to 63.79% (FY2020 annual
report, page 26).
Moreover, Godfrey Phillips India Ltd intimated to its shareholders that it intends to buy out the promoters
by paying ₹20 cr to the promoters by increasing its stake in the AOP to 95% by FY2025.
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Includes Rs 2000.00 lakhs which the Group has contracted to pay to the other members of the
AOP in order to increase its own share in the AOP to 95% by March 31, 2025
Investors may note that by increasing its stake in the AOP, Godfrey Phillips India Ltd was effectively
buying out the disputed land from the promoters, which could not be developed in the last 12 years.
Further, Godfrey Phillips India Ltd did not wait until FY2025 to buy out 95% of the land parcel. In FY2021
itself, it completely bought out these disputed land parcels from the promoters.
Subsequently, two subsidiaries of the Group, namely Rajputana Infrastructure Corporate Limited
(RICL) and Friendly Reality Projects Limited (FRPL) purchased title, rights, and interest in these
land parcels from Rajputana Fertilizers Limited (RFL)…despite there being some long pending
litigations.
Now, an investor may have her own interpretations about this whole transaction. Some may consider it as
a long-term investment by Godfrey Phillips India Ltd into two disputed land parcels, which may get an
increase in price in the future. Others may see it as a situation where the promoters have sold off two
disputed and undevelopable land parcels to Godfrey Phillips India Ltd.
An investor may choose her pick.
4) Godfrey Phillips India Ltd paid money to promoter entities for their excise duty
liabilities:
In FY2000, the company started outsourcing cigarettes from some companies in Assam. The company was
happy that it has found a source of cigarettes, which is cheaper than its own manufacturing units.
Company has, in the last few months, entered into arrangements with small scale manufacturing
units in Assam for purchase of cigarettes under Company’s brands. These arrangements are
beneficial to the Company, since the prices at which these products are procured are lower.
The next year, in FY2001, the company was very happy that despite increasing taxes by the Govt., it was
able to maintain its cigarette prices because it was sourcing cigarettes at a cheaper price from Assam units.
The Company was able to maintain the price of many of its cigarette brands on account of the fact
that a part of its requirement was being sourced at a lower cost from manufacturing units in Assam.
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However, at the same time, Godfrey Phillips India Ltd disclosed that now these units have stopped business
and its ₹27.7 cr is stuck with these entities because they are not able to refund the advance money given by
it to them.
FY2001 annual report, page
Thereafter these units have closed down their operations. However, there is a net outstanding
amount of Rs.27.7 crores as on date, recoverable from these units against the amount of advances
given to them by the Company
Godfrey Phillips India Ltd intimated to its investors that these units were to get a refund of deposits from
excise authorities, which the govt. has now refused. Therefore, they are not able to repay Godfrey Phillips
India Ltd.
Later on, the govt. retrospectively amended the laws to prevent demands of such refunds and the Hon.
Supreme Court upheld this amendment. Therefore, these entities lost the right to these refunds and instead
had to pay even the previous excise duty refunds that they had taken from the Govt.
The Supreme Court of India upheld the retrospective levy of excise duty that adversely affected
certain cigarette manufacturers who had set up manufacturing facilities in Assam and supplied
cigarettes to your company.
Now, instead of trying to recover its ₹27.7 cr from these entities, Godfrey Phillips India Ltd revised the
price at which it had bought cigarettes from these entities so that they can pay the demands made by the
govt.
Your company had to conclude a settlement with the Assam cigarette supplier companies agreeing
to revise the price in respect of cigarettes supplied by the two Assam supplier companies.
Due to this decision of Godfrey Phillips India Ltd, instead of recovering its dues of ₹27.7 cr, shareholders
of Godfrey Phillips India Ltd had to pay about ₹62 cr to these Assam-based companies, which now turned
out to be promoter-owned-entities.
Disclosure of transactions between the Group and related parties:
Current year figure includes sums of Rs. 2489.76 lacs relating to Assam Cigarettes Company Pvt.
Ltd. and Rs. 3682.02 lacs to R C Tobacco Pvt. Ltd. towards additional consideration for cigarettes
purchased in an earlier year.
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Therefore, instead of getting ₹27.7 cr from promoter-owned-entities, Godfrey Phillips India Ltd ended up
paying them ₹62 cr. It was effectively, a net loss of about ₹90 cr (= 27.7 + 62) for the shareholders of
Godfrey Phillips India Ltd.
5) Capital allocation decisions of Godfrey Phillips India Ltd:

As the govt. regulations do not support unrestricted growth in the tobacco industry; therefore, over the
years, Godfrey Phillips India Ltd has attempted to bring diversification to its business. The company has
attempted to venture into non-tobacco products as well as other tobacco products other than cigarettes.
Over the last few decades, Godfrey Phillips India Ltd has ventured into the following areas:
 Tea
 Confectionary
 Retail (24*7 stores)
 Chewing tobacco products
 Real Estate
However, an assessment of its diversification attempts analysed by the performance of major “non-tobacco”
segments from the section “Segment Information” in its annual reports indicates that Godfrey Phillips India
Ltd has failed to generate any profit from its diversification ever.
In the last 20 years, since FY2002 when Godfrey Phillips India Ltd started disclosing its segment
performance between the tobacco and non-tobacco segments, it has always lost money in the non-tobacco
segments like tea, retail and other segments.
During FY2002-FY2022, Godfrey Phillips India Ltd lost about ₹659 cr.
5.1) Tea:
Godfrey Phillips India Ltd diversified into the Tea segment in FY1998.
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humble beginning on diversifying our business to blending and marketing of our own Teas under
the name of Tea City.
However, the company faced challenges immediately upon diversifying into tea as the govt. imposed excise
duty on packet tea. As a result, the company faced strong competition from loose tea, which was not covered
under the excise duty.
With the imposition of Excise Duty on Packet Tea in this financial year in the Union Budget 1998-
99, packet tea segment can expect strong competition from the loose tea market which has been
left untouched by Excise.
Soon, the tea segment faced an oversupply situation and strong competition from local unbranded players.
Moreover, the overall market started declining.
domestic tea market faced difficult trading conditions due to bearish sentiment in commodity
prices, over supply conditions and aggressive inroads made by local players. The overall market
declined by over 6 %.
As per the company, the tea market continued to decline in subsequent years leading to strong competition
from local players.
Retail audit data pointed to an 8% decline in the domestic branded packet tea market with
further fragmentation due to a plethora of local players.
Godfrey Phillips India Ltd attempted to salvage the tea business by merging its distribution channel with
the cigarette distribution channel.
With the process of integration of tea distribution with cigarettes distribution, your Directors are
confident of higher turnover of tea in the years ahead.
However, the condition of the tea business did not improve. Moreover, in FY2010, the tea business faced
further challenges when one of its key export markets, Kazakhstan, increased import duty on tea making
imports unviable.
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Tea exports, however, registered negative growth mainly on account of loss of business in
Kazakhstan due to their Government raising import duty on packet tea rendering the imports
unviable.
Subsequently, in FY2015, tea exports suffered when excess tea production in Kenya brought down prices.
Tea exports suffered a de-growth of sixteen per cent, owing to the sharp fall in prices of competing
Kenyan teas.
Oversupply from Kenyan tea at low prices continued even until FY2017 and put a big pressure on Godfrey
Phillips India Ltd.
bulk tea exports business faced a challenging year due to unfavorable global market conditions
such as sharp drop in Kenyan CTC prices
After facing all these challenges in the tea business and suffering losses continuously for nearly 20 years,
finally, Godfrey Phillips India Ltd decided to close the tea business in FY2018.
Tea has been an insignificant contributor to the Company’s business. During the course of 2017-
18, it was decided to divest from this line of business
5.2) Chewing tobacco products:
When govt. of India was aggressively increasing excise duty on cigarettes continuously, then it created a
demand shift from consumers to chewable tobacco products, which had a low excise duty burden. To
capture this demand, Godfrey Phillips India Ltd entered into the chewable tobacco business by launching
Pan Vilas in FY2010.
The Company aggressively grew this segment by covering more states and launching new products in this
segment like Raag pan masala for the price-sensitive customer. In FY2013, the company also launched
products in the zarda segment with brands Swarn Vilas and Tarana.
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While ‘Pan Vilas’ continues to be the flagship offering, an economy pan masala variant under the
brand ‘Raag’ is in the process of being launched in the markets like: UP, MP, Jharkhand, Orissa,
and Gujarat…We are operating in zarda segment with the brands ‘Swarn Vilas’ and ‘Tarana’.
However, within a few years, by FY2015, Godfrey Phillips India Ltd realized that the chewable tobacco
business is also tough and is not performing as per expectations.
Your Company suffered a setback in its foray into chewing business during the year despite
investing significant time and money to develop the business.
By FY2019, the company realized that despite the best of its efforts in sales, advertising and marketing, the
chewable tobacco business is not making profits. Therefore, out of the two segments, it decided to focus
only on the premium segment with the brand “Pan Vilas” and close down the economy segment brand
“Raag”.
Chewing products sales declined 25% as company focused on premium Pan Vilas instead of
economy Raag. This trend will continue in coming years.
In FY2020, Godfrey Phillips India Ltd told its investors that it is committed to making the chewable tobacco
segment profitable and therefore, it is only focusing on the premium segment “Pan Vilas”.
this year business made some significant restructuring, made investments in Pan Vilas brand in
premium segment and gradually pulled out itself from non performing mid premium
segment…Going forward, single minded objective is to make the business profitable by focusing
in premium segment
In FY2021, the group reassessed the business as it was continuously making losses.
relating to chewing business and estimated the recoverable amount of assets
Finally, in Oct. 2022, after about 12 years of entering the chewing tobacco business, Godfrey Phillips India
Ltd realized that it is not able to run this business profitably. Therefore, it sold off the business.
Corporate announcement to Bombay Stock Exchange (BSE), October 12, 2022:
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This sale/assignment is in line with the Company’s decision to exit from its Chewing business
which was incurring losses and constituted less than 2% of the total operating revenues
5.3) Retail business Twenty-Four Seven (24*7):
In FY2010, Godfrey Phillips India Ltd entered into the retail business to diversify its business into non-
tobacco segments.
Godfrey Phillips India diversified into retail segment with the launch of Twenty Four Seven Stores.
The company decided to expand the business soon and entered into a tie-up with Indian Oil Corporation to
open stores at its 100 fuel outlets.
Twenty Four Seven has also successfully tied up with Indian Oil Company, for 100 stores across
Northern India. The first test pilot retail outlet was launched in February 2010 at the prime
location, Delhi Golf Club.
In FY2013, the company realized that the retail business is not making profits and it engaged consultants
from Japan to evolve its business model and grow further.
35 stores spread across NCR and expects to more than double this number during the current
year. New business models are currently under evaluation with the help of Japanese consultants
By FY2019, the company had grown its retail business to more than 100 stores.
The 24Seven chain of convenience stores had shown a rapid growth during FY 19 and opened 43
new stores…number of stores increased from 61 to 104
However, despite the growing number of retail stores, the business was not making profits. Therefore, in
FY2020, Godfrey Phillips India Ltd decided that instead of increasing the number of stores, it should focus
on making its existing stores profitable.
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As a part of our core strategy, we are focused on enhancing operational efficiency at store
level and therefore limiting ourselves from adding new stores. The total number of stores count
was 103 at the end of March 2020.
In FY2021, the company closed down about 10 stores and it reported 93 stores in comparison to 103 stores
in FY2020.
Godfrey Phillips operates the 24Seven convenience store chain with 93 stores in northern part of
India.
In FY2022, the company again added more stores to have 105 stores. However, an investor may note from
the table shared earlier that the retail business of Godfrey Phillips India Ltd has never made profits ever
since its start in FY2010.
Moreover, in FY2021, Godfrey Phillips India Ltd reassessed its investments in the retail business in light
of continued losses.
relating to retail business and estimated the recoverable amount of the assets.
Apart from these segments, Godfrey Phillips India Ltd also attempted to enter into the confectionaries and
real estate business; however, none of these businesses could bring any profits to the shareholders of
Godfrey Phillips India Ltd.
Over the years, there have been instances where Godfrey Phillips India Ltd has written off entire
investments done by it in different companies and subsidiaries. For example, in FY2019, it wrote off its
entire investment in the subsidiary Flavors & More Inc. and suffered a loss of about ₹15 cr.
The Company identified impairment in carrying value of investment in one of its subsidiary
‘Flavors & More Inc.’ owing to its decision for closure of business operations of the said
subsidiary. Impairment charge of Rs. 1,508.50 lakhs has been recorded in the current year.
In addition, there have been instances when Godfrey Phillips India Ltd decided to sell some assets; however,
it could not sell them for a couple of years and during which time the assets lost their entire remaining value
and had to be written off to almost entire loss.
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At the start of FY2016, Godfrey Phillips India Ltd had identified assets of about ₹9 cr to be sold. However,
out of these, over the next three years i.e. FY2016, FY2017 and FY2018, the company could sell assets of
only ₹1.15 lac. Therefore, almost all the assets of about ₹9 cr were written off by the end of FY2018.
It might be a case where taking prompt actions by the company to sell these assets might have salvaged
some value and would have prevented the loss to the shareholders.
6) Raids on Godfrey Phillips India Ltd by tax authorities:

The company has multiple times had raids on its premises by different tax authorities. In a recent instance,
income tax authorities search its offices. Dept. officials took away some records of the company.
The Income Tax Department had searched the office premises of the Company in February 2021
in connection with search carried out by them under Section 132 of the Income Tax act, 1961 on
a promoter of the Company. The tax officials have taken custody of certain records of the
Company and recorded statements of some of the Company officials.
In the past also, the company had been subjected to search & seizure operations by Income Tax authorities.
After one such operation, the govt. authorities had put up a demand of ₹56 cr on the company for which it
settled for a payment of about ₹25 cr in FY1999 under “Kar Vivad Samadhan Scheme, 1998”
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Company availed of the benefit of “Kar Vivad Samadhan Scheme, 1998” with a view to voluntarily
settle the disputed excise demands aggregating to Rs. 56 crores on the Company…the necessary
adjustments for the amounts paid have been made in the books, and a sum of Rs. 2516.89 lacs (net
of tax) has been charged to the profit and loss account
In FY2022, under contingent liabilities, Godfrey Phillips India Ltd has disclosed tax demands of about ₹84
cr, which it has not accepted (FY2022 annual report, page 182). Apart from it, demands of about ₹160 cr
are under dispute and litigation is still going on at different forums (FY2022 annual report, pages 65-66).
Out of these, for demands of about ₹142 cr, the company has received decisions in its favour; however, the
govt. authorities have challenged it in courts or higher forums.
An investor should note that if the company has received a decision in its favour in one forum, then it cannot
rest assured that it will not have to pay the tax demand. There have been cases where in the courts or higher
forums, the tax authorities have won the appeal. For example, in FY2020, the tax authorities won a case
against the company in the High Court.
Out of this Rs.1366.56 lakhs relates to an order received during the current year from
the Allahabad High Court upturning the earlier order of the CESTAT in favour of the subsidiary
company.
Therefore, always while assessing the amount of tax demands, an investor should keep in her mind that
decisions can go against the company as well and it may be a significant hit to the financial position of any
company.
7) Accounting and governance by Godfrey Phillips India Ltd:

In the past, there have been occasions when the company has not followed the established accounting norms
and the auditors and tax authorities have pointed it out.
For example, previously, while determining the value of unsold finished goods in the inventory, Godfrey
Phillips India Ltd did not include the excise duty applicable to them. As a result, the value of inventory
would be lower on the balance sheet. This would reduce a lower amount from the cost of goods sold in the
profit & loss account (P&L) and effectively, would increase expenses in P&L and reduce profits leading to
a lower tax outgo.
The auditor of Godfrey Phillips India Ltd had pointed it out in its annual reports. For example in FY1998,
the auditor pointed out that the company’s method of valuing finished goods inventory is not in line with
the official guidelines and the company has shown such an inventory at a lower value by about ₹36 cr.
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in accordance with the accounting policy consistently followed by the Company, excise duty is not
considered as an element of cost for valuation of finished goods inventory (Refer Note 7). The
amount of excise duty relating to the closing stock of finished goods as at March 31, 1998 and not
considered for valuation is Rs. 3579.90 lacs. Had the Company followed the method of including
excise duty for valuation of finished goods as at March 31, 1998 as recommended in the guidance
note…the profit after tax for the year would have been higher
However, in response, Godfrey Phillips India Ltd simply stated that it does not agree with the views of the
official authorities and therefore, it has not included excise duty in the finished goods inventory.
Research Committee has revised its earlier opinion and suggested that excise duty should form
part of the inventory valuation. The Company does not agree with the views so expressed by the
Research Committee and therefore, the same have not been given effect to while valuing the
finished goods inventory.
However, even the Income Tax dept. did not appreciate the company’s refusal to follow the official
guidelines and raised tax demands against the company.
Therefore, finally, Godfrey Phillips India Ltd decided to reverse its stance and follow the official accounting
guidelines and paid an additional tax of about ₹12 cr using the ‘Kar Vivad Samadhan Scheme, 1998’.
Since the tax department did not accept the basis of valuation…the Company considered it prudent
to provide for the consequential and disputed liability…Company also sought to avail…‘Kar Vivad
Samadhan Scheme, 1998‘…resolved the matter for the assessment years 1984-85 to 1991-92 for
Rs.879.65 lacs. For other assessment years…provision of Rs.306.30 lacs has been made in the
accounts.
the Company has decided to change its method of valuation to be in line with the Income-tax
provisions.
In the next year, FY2000, Godfrey Phillips India Ltd had to make another change in its accounting policies
related to the valuation of finished goods. Previously, the company did not include the value of production
overheads related to the production of cigarettes in its valuation of unsold cigarettes (finished goods). A
lower valuation of unsold cigarettes had an impact of reducing profits and tax payout, as explained earlier.
Therefore, in FY2000, the company had to again update its valuation method of unsold cigarettes (finished
goods) to include production overheads.

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the Company has changed its method of valuation from direct costing to absorption costing
by including appropriate share of production overheads in their valuation.
Due to this change in accounting policy, Godfrey Phillips India Ltd had to make provisions for payments
to tax authorities.
Among all these instances of accounting changes, in the next year, FY2001, Godfrey Phillips India Ltd
suffered from a fire in its office in which all its accounting records from its inception in 1981 were
destroyed.
A fire took place at the 3rd floor of the Corporate Office of the Company…As a result, almost all
the books of account, supporting vouchers and other accounting records maintained at this
office since its inception in 1981…were destroyed.
Due to the destruction of records, the quality of the audit work suffered as the auditor no longer could see
the original records for doing the audit. For example, the auditor pointed out that it could not confirm
whether the personal expenses of directors/employees are charged to the company.
According to the information and explanations given to us, no personal expenses of employees or
directors have been charged to revenue account…However, we are unable to comment on the
expenses, if any, incurred at corporate office during the period April 1, 2000 to December 5, 2000
as the original supportings have been destroyed in fire.
At times, Godfrey Phillips India Ltd has faced instances of fraud by employees, which indicates that the
internal controls and processes at the company leave room for improvement. For example, in FY2009 and
FY2011, certain employees did fraud against the company.
no fraud on or by the Company has been noticed or reported during the year ended March 31,
2009, other than defalcation by employees of Rs. 0.30 lacs.
no fraud on the Company has been noticed or reported during the year, other than defalcation of
Rs. 2.47 lacs by an employee
Apart from the above, the auditor also pointed out instances when the company did not follow the applicable
guidelines of corporate governance; for example, in FY2015, the company conducted meetings of the audit
committee even when the required number of independent directors were not present in the meetings.
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One out of two Independent Directors were not present at the audit committee meetings held on
28th May, 2014 and 09th November, 2014.
At times, the information provided by the company in the annual reports seems insufficient, for which an
investor may need to contact the company directly for further clarifications.
One such instance is the consolidation of profits of IPM India Wholesale Trading Pvt. Limited (IPM), an
associate of the company (24.8% shareholding), which it had formed with Philip Morris group for the
marketing of Marlboro cigarettes.
@relates to transactions with IPM India Wholesale Trading Private Limited…on account of sale/
purchase of Marlboro cigarettes manufactured by the Company.
In 2021, IPM reported a net profit of about ₹275 cr. As per the 24.8% shareholding of the company in IPM,
its share of profit would be about ₹68 cr, which is a substantial amount. However, none of it was included
in the financial reporting of Godfrey Phillips India Ltd.
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The reason given by the company for the non-inclusion of its share of profits of IPM in the consolidated
financials is that the losses incurred by IPM are more than the investment of ₹4.96 cr made by the company
in IPM.
Upon analysis of profits earned by IPM since FY2015, from the time, Godfrey Phillips India Ltd started
reporting the data of profit of IPM in its annual report, an investor gets to know that IPM has earned a total
profit (after factoring in losses in FY2015-FY2017) of ₹440 cr.
Now, an investor is not able to assess why despite making a profit of more than ₹700 cr from FY2018 to
FY2022, still IPM is not able to overcome the losses incurred in the previous years. This question will stay
unanswered forever until Godfrey Phillips India Ltd discloses the amount of losses that IPM had made,
which need to be recovered before it can start consolidating its share of profit from IPM in its consolidated
financials.
Until the share of profits from IPM is consolidated in the financials of Godfrey Phillips India Ltd, the
shareholders are not able to assess the benefit that the company is earning by making and distributing
Marlboro, the largest-selling cigarette brand in the world.
An investor may contact Godfrey Phillips India Ltd directly to seek any more clarifications in this regard.
In FY2009, the company disclosed that it has received a notice of termination of the lease of a land parcel
from the Govt. of UP, for which the company has filed a case in the High Court.
in respect of land for which a notice for termination of lease has been received from Government
of U.P., which notice has been disputed by the Group in a petition filed before the Allahabad High
Court
The same dispute has continued until now as the company has made such disclosure in the
FY2022 annual report on page 183 as well.
From the limited information shared by the company, an investor is not able to know which this land parcel
is. Is it the land on which one of the key cigarette manufacturing plants of the company is situated in UP?
If this is the case, then any adverse decision from the court may have a significant impact on the operations
of the company.
An investor may contact the company directly for further clarifications related to this land parcel.
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Other than the above, there are certain small instances, which also indicate that internal controls including
the process of maker-checker leave scope for improvement at Godfrey Phillips India Ltd.
For example, in the AGM notices of 2018 and 2021, while presenting the details of Mr Samir Modi under
the directors seeking reappointment, in 2021 the company simply copied and pasted details from 2018. As
a result, the age of Mr Samir Modi in both the FY2018 annual report, page 209 and the FY2021 annual
report, page 215 is published as 48 years.
Similarly, on the website of Godfrey Phillips India Ltd, in the section “ABOUT US > THE LEAF
DIVISION” (click here), the same paragraph is repeated twice.
An efficient system of maker-checker and good process controls would have avoided such errors.
In light of instances of all the above instances, an investor should always apply a high level of due diligence
while analysing the company.
The Margin of Safety in the market price of Godfrey Phillips India Ltd:
Currently (December 19, 2022), Godfrey Phillips India Ltd is available at a price-to-earnings (PE) ratio of
about 17.4 based on consolidated earnings of the last 12 months ending September 2022 (Oct. 2021 – Sept.
2022). An investor would appreciate that a PE ratio of 17.4 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, Godfrey Phillips India Ltd seems a company, which has grown its sales at a moderate pace of 3%
year on year for the last 10 years (FY2013-FY2022). The pace of growth has been slow because the govt.
wants to restrict the spread of smoking in society and to achieve this objective; it creates many limitations
for the growth of cigarette and tobacco manufacturing companies.
The govt. has banned the sale of tobacco to customers below 18 years of age and sale within 100m of
educational institutes. Govt. has banned smoking in public places. It has banned advertising by tobacco
companies in the mainstream media as well as at the point of sale in retail shops. Cigarette-making
companies have to show pictorial warnings of health damages caused by tobacco consumption, a picture of
oral cancer on 85% area on both sides of the packets.
Govt. has put cigarette manufacturing under compulsory license and has stopped giving approvals for any
manufacturing capacity expansions. Govt. has also banned foreign direct investment (FDI) in the cigarette-
manufacturing sector to limit its access to capital. In addition, govt. does not promote tobacco cultivation
in the country.
In addition to these regulatory controls, govt. has put high taxes on tobacco products especially cigarettes
to make them expensive and out of reach for most of the population. An increase in taxes has restricted the
growth rates of tobacco consumption and the entire industry has grown at a rate of about 1% year on year
for the last 40 years.
The increasing tax burden has affected Godfrey Phillips India Ltd significantly because the customers shift
to cheaper alternatives like bidi, and gutkha, which are lightly taxed. The company is not able to increase
prices at its will because of intense competition from the market leader, ITC Ltd, and illegally smuggled
cigarettes. This has put pressure on the profitability of Godfrey Phillips India Ltd.
Nevertheless, the company has worked hard to reduce its costs and bring in more efficiencies in its
operations. As a result, Godfrey Phillips India Ltd has improved its profit margins over the last 10 years.
The company has managed its working capital well and has generated a lot of free cash flow from its
operations. Therefore, it has a lot of surplus cash.
Godfrey Phillips India Ltd has attempted to diversify into many other segments like tea, retail,
confectionary, real estate, chewing tobacco etc. However, none of these steps resulted in profitable growth
for the shareholders. Godfrey Phillips India Ltd has lost money in all these initiatives and over the years, it
closed down tea and chewing tobacco businesses.
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The promoters of Godfrey Phillips India Ltd, the KK Modi family, are undergoing a lot of struggle related
to succession planning. The attempts by the late Mr KK Modi to bring in a smooth succession by way of
family organization failed and after his death, the succession struggle erupted. Now, as per some media
articles, the family plans to solve this by distributing cash to family members. Nevertheless, an investor
needs to contact the company to understand the exact status of succession planning.
Over the years, Godfrey Phillips India Ltd has given increasingly high remunerations to promoter family
members where some of the members have got substantial remuneration without seemingly proportionate
contributions to the company. In one instance, it appears that Godfrey Phillips India Ltd has bought out a
troubled land parcel from its promoters, which it could not develop in the last 12 years.
Once, Godfrey Phillips India Ltd purchased cigarettes from promoter-owned entities and when the govt.
withdrew the excise benefits from the promoter entities, then it revised the payment terms and paid a
substantial amount to promoter entities for cigarettes purchased in the past so that they could pay the excise
duty demands to the govt.
Godfrey Phillips India Ltd has been involved in tax-related disputes with authorities many times in the past.
There have been multiple instances of IT raids on the company and at times, it has taken benefits of tax
amnesty schemes to resolve tax disputes.
There have been many occasions when the company did not comply with the required accounting and
governance norms. The auditors of the company pointed out these discrepancies and the tax authorities
raised disputes. Later on, the company had to comply with the correct accounting principles.
On many occasions, the information provided by Godfrey Phillips India Ltd in the annual report proved
insufficient for proper conclusions. As a result, an investor needs to do in-depth due diligence while
analysing the company.
Going ahead, an investor should closely monitor regulatory developments related to the tobacco sector
especially cigarettes because there are consistent demands from anti-smoking activists about increasing the
tax rates, the minimum age of smoking and the closure of smoking zones at public places. She should focus
on the transactions of the company with the promoter’s family members and their companies because such
transactions can be a way to transfer economic benefits from public shareholders to the promoters.
An investor should analyse all the diversification decisions as well as the performance of the retail division
to assess whether these diversification steps are able to generate a profit for the company ever. She should
read the accounting policies and the auditor’s comments carefully to know if there are any deviations from
the accepted accounting norms.
These are our views on Godfrey Phillips India Ltd. However, investors should do their own analysis before
P.S.
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Videos
Analysis Excel
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8) Sharda Cropchem Ltd

Sharda Cropchem Ltd is a trading company focusing on agrochemicals, conveyor belts etc. that has taken
registrations for selling agrochemicals in many countries.
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While analysing the history of Sharda Cropchem Ltd, an investor notices that over the years, the company
had many subsidiaries both in India and overseas to conduct its business. As per the Q4-FY2022 results
announcement, pages 3-4, on March 31, 2022, Sharda Cropchem Ltd had 41 subsidiaries.
Therefore, in the case of Sharda Cropchem Ltd, we have analysed the consolidated financials of the
company.
With this background, let us analyse the financial performance of Sharda Cropchem Ltd.
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Financial and Business Analysis of Sharda Cropchem Ltd:

Sales of Sharda Cropchem Ltd have grown at a pace of 18% year on year from ₹778 cr in FY2013 to ₹3,580
cr in FY2022. Moreover, sales have increased every year since FY2013.
The operating profit margin (OPM) of the company has fluctuated within the range of 17% to 23% during
this period with periods of declining OPM like FY2015 when the OPM decreased to 17% from 20% in
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FY2014 and FY2018-FY2020 when the OPM declined to 17% in FY2020 gradually from 23% in FY2017.
During the same period, the net profit margin (NPM) of Sharda Cropchem Ltd decreased from 14% in
FY2017 to 8% in FY2020.
To understand the reasons for the financial performance of Sharda Cropchem Ltd, an investor needs to read
the publicly available documents of the company like its annual reports, conference calls, credit rating
reports, and red herring prospectus (click here), as well as its corporate announcements. Then she would
understand the factors leading to the increase in its revenue and the fluctuations in its profit margins as well
as the reasons for the decline in profitability in certain periods.
influence the business of Sharda Cropchem Ltd, which she needs to keep in her mind before making any
predictions about the performance of the company.
1) No pricing power over its customers (distributors):

Sharda Cropchem Ltd sells off-patent (generic) agrochemicals. However, despite being off-patent, most of
the market share of these agrochemicals is still with the innovator, large-multinational companies (MNCs).
As per Sharda Cropchem Ltd, about 75% of the market share is held by large multinational innovator
companies.
Due to the market dominance of MNCs, Sharda Cropchem Ltd has to sell its products at a discount to MNC
products. The company does not have the power to price its products higher or equal to the prices of MNC
products because then the customers would simply buy the products of MNCs.
Ramprakash V. Bubna:…Sharda is a very small player in the entire international market.

So, we cannot determine the prices, we have to follow. In most of the markets innovators are still
having 70%-75%-80% of the market share…and after we get the registrations we follow the
multinational. We offer a price of about 10% to 15% as a discount to the multinational
Ramprakash V. Bubna:…we do not decide our selling prices independently on our own. We
are only following the footsteps of multinationals…we cannot increase the prices beyond certain
limits because we cannot exceed the prices of the multinational. The market always gives
preference for the multinationals
Due to this lack of pricing power, Sharda Cropchem Ltd suffered significantly during FY2018-FY2020.
The cost of its raw material was increasing due to supply chain disruptions in China; however, it was not
able to increase prices to its customers. This is because the MNCs did not want to lose market share and
refused to increase the prices of their products.
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Rohan Gupta:…we have been able to pass on to the end customer or not?
Ramprakash V. Bubna: Not in all the cases…Because we are to follow the footsteps of the
multinationals and multinationals are also very conscious of not losing their market share and
they do not pass and they do not increase
During FY2018-FY2022, Sharda Cropchem Ltd suffered a lot of pressure on its profit margins because
despite increasing costs, the MNCs instead of increasing their prices, decided to decrease them to maintain
their market share.
Ramprakash V. Bubna:…They are not increasing their prices…even at making a loss or no

profit situation, they continue to choose their prices downwards rather than upwards. These are
very strange situation, but it is a fact.
While listening to the management of Sharda Cropchem Ltd, the frustration of the company clearly comes
out due to its lack of pricing power and near-total dependence on MNCs for its pricing.
Ramprakash V. Bubna: Sir this is very unfortunate. Innovators are not increasing. I was
travelling to some country last week and I am told by my customers that companies like Syngenta
and BASF they are trying to reducing the prices, which is very discouraging…I cannot understand
why. I am sure they are also taking a big hit, but then that is their strategy and our strategy is
purely a followup on their strategies.
Therefore, an investor is not surprised to see that the operating profit margins of Sharda Cropchem Ltd
declined significantly from 23% in FY2017 to 17% in FY2020. The biggest role in this decline was of the
European market where due to the refusal of MNCs to increase prices, its profit margins declined from 45%
to 30%.
Chetan Thakkar: Europe gross margins that you mentioned, earlier we used to operate at 40%
to 45% range, it has now shifted to 30%, so is it purely on account of higher raw material cost or
there is some pressure on pricing also?
R V. Bubna: Sir, it is both put together, the pricing is not increasing there, unfortunately because
of the approach of multinational companies and on the other side the costs are going up, so that
is impacting the gross margins.
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As a result, an investor would appreciate that even though Sharda Cropchem Ltd is among the few generic
players holding registrations for any molecule in these markets, still, the pricing power is in the hands of
innovators/multinational companies who continue to hold about 75% market share.
In fact, at times, the MNCs buy active ingredients (AI) for their final products from the company at a
cheaper price and then give Sharda Cropchem Ltd strong competition in its target markets.
Ramprakash Bubna: The AIs have increased in the last year or before last year mainly because
of the demand from many multinational companies who were not able to secure the AIs on their
own and we were able to supply them at competitive prices
Therefore, the pricing and business strategy of Sharda Cropchem Ltd is highly dependent on the large MNC
competitors.
Further advised reading: How to do Business Analysis of Agrochemical (Pesticide)

Companies
2) Sharda Cropchem Ltd works mainly with smaller distributors:

The market situation faced by Sharda Cropchem Ltd is such that the large distributors do not encourage
generic players. This is because the MNCs provide them with many financial incentives, which makes it
difficult for smaller generic players like Sharda Cropchem Ltd to convince them to stock their products.
In FY2018, Sharda Cropchem Ltd attempted to break into large distributors; however, they asked for low
prices, which hit the profit margins of the company.
Conrad Fernandes:…we have started being little more aggressive and proactive. We were
finding that the potential is very huge, only if we are able to match up the price requirements to
the distributors…So we have changed our approach to this extent that we have become more
aggressive at the cost of the margins
Nevertheless, its attempts did not seem to succeed and it communicated the challenging situation to its
shareholders in June 2020. The company found that large distributors are content with the business from
MNCs and do not eagerly await the business from smaller players.
R.V. Bubna: Opening the door for the distributors it is not so easy Sir, because most of the
distributors are fairly well off, multinational companies reward them …We have to push ourselves
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into their office, they do not come to us and then they are not so much dependent upon small
molecules or small companies, multinationals take care of them.
Another challenge that Sharda Cropchem Ltd faced while dealing with distributors was that the large MNCs
were willing to give them extended credit periods without pushing them to make payments, which small
companies find difficult to match.
Ramprakash V. Bubna: The MNCs are not very keen and they do not press the customers for
the payments and are very liberal, they give very liberal extensions and on the contrary, smaller
companies like us, we are having pressure on cash flow so we put the pressure on them to make
the payments
Moreover, Sharda Cropchem Ltd also realized that it could not match the MNCs in terms of very long credit
periods to distributors even if it wants to. This is because Sharda Cropchem Ltd being an Indian company
is not allowed to give very long credit periods.
R.V. Bubna: No, we cannot match with them because they are in a different atmosphere, we have
lot of regulations and we have to comply with our regulations in India. So we cannot give very
long credit even if we feel that the customer is safe.
Therefore, Sharda Cropchem Ltd is caught in a difficult situation where it is not able to get a large
opportunity with big distributors as the MNCs have created strong barriers due to their existing relationships
with them.
An investor may estimate the restrictions faced by Sharda Cropchem Ltd in the business environment when
she gets to know that in the USA, the big 4 distributors hold about 75% of the market share. The generics
companies are only fighting for the remaining 25% share.
R.V. Bubna: …somehow the market is very complicated. The big four distributors control more
than 75% market and the generics are fighting for the balance 20%-25% market share.
Therefore, when any investor estimates the future growth of Sharda Cropchem Ltd, then she should keep
in her mind the difficult distribution situation present in its key markets of Europe and North America.
3) Almost complete dependence on China for its business:

China is the world’s largest agrochemical producer and supplies about 75% of the world’s demand for
agrochemicals.
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Ramprakash V. Bubna:…I think China is meeting the demands of more than 75% of the world
agrochemical demands.
Sharda Cropchem Ltd sources more than 95% of its material from China and is almost completely
dependent on it. As per the company, there is no alternative to sourcing from China. India does not produce
even half of the chemicals required by Sharda Cropchem Ltd. Moreover, the price of Indian producers is
not as competitive as the prices of Chinese producers. Therefore, it is either source material from China or
stop doing business altogether.
Ramprakash Bubna: At present, that alternative does not exist. The local industries are not
able to produce the quantities that are required for the international market and also the product
mix. Our portfolio is much bigger not more than 45% of those are not manufactured in India, so
we have to either not supply or supply it from China.
R. V. Bubna: …the Indian prices are not as competitive as Chinese in terms of dollars.
During one interaction, the company intimated to the shareholders that for a few chemicals, China alone
has a manufacturing capacity, which is much larger than the entire world’s demand.
RHP, September 2014, page 115:
There is also an excess of capacity for agrochemicals in China. For example, China now has 60
companies registered to manufacture imidacloprid with a total capacity of 25,000 tons of AS,
however actual output in 2009 in the region of 12,000 tons with 8,000 tons exported for a world
market of 18,000 tons.
As a result, in the rest of the world, not many agrochemical-manufacturing capacities have developed in
the last few decades.
Ramprakash V. Bubna: See, those alternatives do not exist in our opinion as of now. China is
the factory to the world and everybody is sourcing from China. There are no new capacities or
new alternatives in terms of hardware that has been added significantly in the last 10-15 or 20
years.
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As there are no other alternatives for sourcing agrochemicals when the Chinese govt. started its crackdown
on the industry to control pollution, then there was a shortage of agrochemical raw material and Sharda
Cropchem Ltd faced significant cost pressure as well as challenges in availability of material.
Ramprakash V. Bubna: See today it is a sellers’ market so increasing the quantity does not
excite the supplier because he is already stressed up with his and he has more demands than what
he can produce.
The situation was further complicated by the fact that Sharda Cropchem Ltd had not entered into any long-
term supply arrangement with its suppliers. It deals with both its suppliers as well as customers on a
transaction-to-transaction basis.
R.V. Bubna: No, we don’t enter into any supply agreement, we negotiate them with them
from order to order basis because this is to our advantage.
The company avoids long-term supply agreements with its suppliers because it thinks that in a long-term
agreement it would have to accept delivery of products even if its customers’ demand declines due to poor
weather etc. The company fears that in such a situation, it would be stuck with unsold inventory.
Conference call, June 2015, pages 25-26:
Gautam Arora: Also I would be put at a disadvantage if I enter into long term supply
arrangements with supplier because the products that we deal in are very sensitive to
weather conditions across the globe so in case I have any kind of a tie up for specific volumes to
be picked up from my supplier and the weather turns bad in a particular region then I will be tied
down with this inventory and with nowhere to go.
However, such a strategy relies on everything being normal in the entire supply chain. During FY2018-
FY2020, when the Chinese govt. came down heavily on polluting industries, which disturbed entire Chinese
production, then this strategy of only doing spot buying hurt Sharda Cropchem Ltd. This was because it
had to accumulate excess inventory that too at higher prices and it had no other alternative.
Moreover, once registration is granted, then it becomes difficult for Sharda Cropchem Ltd to change the
supplier country because it has already mentioned China as the supplier country in the registration
application form.
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R V. Bubna: If Sharda wants to import the product from any other country, it is being prohibited
by the registration law. As per the registration rules, we have to source the products only from the
registered source, which is declared in our registration application or registration document and
this is applicable to every supplier in USA.
In addition, once a source country is finalized in the registration, then it becomes difficult to change it later
on because, at times, it may involve repeating the entire trial. Moreover, in almost all cases,
changing/adding a new supplier is a time-consuming process.
Vishnu Kumar:…how easy is it for you to add another supplier let us say coming from India or
some other countries
R V. Bubna:…in Europe, it is not so easy, it does take time, in USA, it is possible to add that
process is not so lengthy, but it takes time there also.
Vishnu Kumar: Is it costly or is it like just a procedural aspect we are going to spend too much
money.
R V. Bubna: In some countries we may have to repeat the trials then it becomes costly, other
countries if they accept the laboratory results then it is not so costly…
Therefore, Sharda Cropchem Ltd is almost completely dependent on China without any alternative.
R V. Bubna: We have to depend upon China, and it is very difficult to find an alternative.
As a result, when the Chinese supply chain faced challenges, then the complete dependence of Sharda
Cropchem Ltd on China affected its costs, which coupled with its inability to increase prices to its
customers, hurt its profit margins during FY2018-FY2020.
Gross margins and EBITDA margins (excluding foreign exchange impact) were
marginally lower at 33.2% and 20.2% respectively on account of higher procurement cost and
supply constraints in China due to the clamp on manufacturers in view of environment issues.
4) Vulnerability to foreign exchange fluctuations:

Sharda Cropchem Ltd does almost its entire business in overseas locations where it sources most of its
material from China and sells it primarily in Europe, North and Latin America and a bit in the rest of the
world.
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Almost all of its purchases from China are in US Dollars (USD) whereas the majority of its sales are from
Europe, which is in Euro (EUR). Therefore, Sharda Cropchem Ltd is highly vulnerable to the movement of
the Euro and USD relative to each other.
The dependence of Sharda Cropchem Ltd on the EUR/USD is such that during FY2015 when the Eurozone
was under crisis and the value of the Euro declined significantly, then its profit margins were impacted
significantly. The OPM of Sharda Cropchem Ltd declined from 20% in FY2014 to 17% in FY2015.
Gautam Arora: Gross margins as a percentage of total income from operation in the fourth
quarter ended March 2015 was at 34.84% and the same was lower as compared to 39.60% in the
fourth quarter of the previous finical year, decline of 476 basis points. Primarily due
to depreciation of the Euro against the dollar during this period.
The company is not able to escape this dependence on the volatility of EUR/USD because the Chinese
suppliers quote their prices in USD. When Sharda Cropchem Ltd requested the Chinese suppliers to accept
payments in Euro, then they quoted an exchange rate, which was not good for the company.
Gautam Arora: No normally the sourcing in China is in US dollars. Some suppliers after lot of
pursuance can accept sourcing currency to Euros but no other currencies and even that they want
to use a very favorable exchange rate to their advantage.
Moreover, as the business of Sharda Cropchem Ltd is in foreign countries where its customers also have to
convert their local currencies into US Dollars (USD) to make payments to the company; therefore,
whenever, the local currencies of its customers decline in value against USD, then the company faces
trouble. This is because with the devaluation of the local currency, the agrochemicals sold by Sharda
Cropchem Ltd become costly for the customers, as they had to pay more local currency to buy the same
number of USD. As a result, the purchasing ability of the customers decrease and they start asking for
discounts from Sharda Cropchem Ltd, which hurts its business.
Ramprakash V. Bubna: Sir not only LATAM, all the countries where the currencies have
devaluated even in say Canada, Mexico, South Africa we have to take the price reduction.
As a result, the volatility of cross currency pairs is one of the key risks highlighted by the company to its
investors.
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Ramprakash V. Bubna: One of the biggest risk factors for our business is the cross currency
foreign exchange rate, Euro versus US Dollars, Canadian Dollar versus US Dollars and some of
the European currencies and the Central American currencies versus US Dollar
An investor should always keep this risk in her mind whenever she analyses Sharda Cropchem Ltd.
5) The demand for agrochemicals is seasonal and cyclical:

The agrochemicals sold by Sharda Cropchem Ltd are relevant for specific crops/pests etc.; therefore, their
demand peaks up during the season when a particular crop is grown. As a result, the business performance
of Sharda Cropchem Ltd is seasonal. The Jan-March (Q4) is usually the best quarter for the company
followed by April-June (Q1) and July-Sept (Q2). The Oct-Dec (Q3) quarter is the weakest quarter in its
business performance.
R. V. Bubna: See our business is a seasonal business, and this has been the practice for the last
8 to 10 years. But the Q4 is the best quarter for our business, Q1 is the second best, Q2 is the third
best and Q3 is the weakest
One problem in a highly seasonal business is that if the company is left with an unsold inventory of any
chemical, then it has to wait for almost 8-9 months for the next season before it can sell it. Therefore, if
there is any problem in inventory sourcing/logistics and the products arrive late in the season, then the
company is stuck with inventory for a long time.
Ramprakash V. Bubna: …it does take time to get rid of the inventories in agrochemical
business these are seasonal businesses for some reason because of the weather or any other impact
there has been a less demand, the companies are compelled to carry their inventory forward and
then the next time is possibly after six or eight months.
The company faced this issue in FY2019 when due to supply chain issues in China, its suppliers delayed
sending the products and it was saddled with unsold inventory.
Ramprakash V. Bubna: Mr. Resham, last year has been a little bit of an aberration because of
very difficult situation in China and late deliveries by the suppliers. So by the time we shift the
goods and landed in the various regions, it was bit late for that season. So we are left with the lot
of unsold inventories.
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When a company has unsold inventories from the previous season, then it carries the risk of inventory losses
because of the volatility in the product prices.
Apart from regular seasonality, the sale of agrochemicals is also cyclical in nature due to its high
dependence on weather, monsoon, soil conditions, drought etc., which lead to periods of good harvest
followed by poor harvests and vice versa. These factors make the demand for agrochemicals unpredictable.
agrochemical business is primarily dependent on appropriate weather conditions. Weather

conditions are cyclical in nature and dependent on factors such as amount of rainfall, varying soil
conditions, climatic conditions, varying seasons and temperature changes. These factors make the
overall performance of the agricultural sector unpredictable.
The unpredictability of demand affected Sharda Cropchem Ltd multiple times; however, the most severe
was in Q2-FY2019 when the company reported a loss. As per the company, reduced demand due to adverse
weather was the key reason for losses.
R V. Bubna: The main reason has been adverse weather factor. In NAFTA region, the winter
was very much extended which has resulted into contraction of the spring season and application
of agrochemicals. Similarly, in Europe region also there was some adverse weather
In FY2016, the entire global agrochemical industry witnessed a decline contributed by adverse weather
conditions including a weaker monsoon due to El Nino.
The global agrochemicals market declined by 8.6% YoY to US$51.8 billion at the distributor level
in 2015 driven by…variable weather patterns including a weak monsoon as a result of the El Nino
phenomenon. Crop protection sales in almost all regions declined, with the deepest falls occurring
in Europe and Latin America.
Once again, in 2019, the global agrochemical industry declined due to adverse weather conditions.
global market for crop protection products contracted by 0.8% to US$59.8 billion in 2019 owing
to extreme global weather conditions from severe flooding in North America to dry conditions
and drought across major areas of Europe and the Asia Pacific.
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Therefore, an investor should always remember that the business of Sharda Cropchem Ltd is dependent on
weather conditions and would contain an element of unpredictability. She should keep it in her mind before
assigning any certainty to her projections about its future performance.
6) Agrochemicals industry shows the potential of only moderate growth:

Agrochemicals are known to enter the food chain and affect all consumers. Therefore, there are continuous
studies to assess the harmful impacts of agrochemicals on humans, other animals and the environment. This
leads to a frequent ban on various agrochemicals, which has become a routine practice in the industry.
In May 2022, Sharda Cropchem Ltd also intimated to its shareholders that a ban on the products is a very
normal occurrence in the agrochemicals industry and investors should not be surprised by it.
Ramprakash V. Bubna: it is a normal process, the process of banning will continue because
as and when the product becomes older the technical experts find some weaknesses in those
products which affect the quality of the application on the agri products and they are slowly getting
banned
To reduce the harmful impacts due to the use of agrochemicals, nowadays, research is driven towards
genetically modifying seeds/crops in such a way that they do not need agrochemicals for a good harvest.
As a result, after the introduction of GM crops, the agrochemicals industry witnessed a long-term decline,
which was evident from 1998 to 2006.
Following the initial introduction of GM crops in 1996, the market experienced a period of decline
in real terms between 1998 and 2006. This reflected the increase in uptake of GM technology,
particularly in North America and Latin America where a rapid switch to crop varieties containing
traits conferring glyphosate tolerance and insect resistance led to declines in selective herbicide
and insecticide applications
Genetically modified (GM) seeds have achieved a significant share in some key crops like cotton, corn and
soybeans.
As of 2013, GM seed weightings in the US have reached 90% for corn, 90% for cotton, and 93%
for soybeans.
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Therefore, an investor should note that due to the harmful effects of the use of agrochemicals on the food
chain and environment, there would be frequent bans on products and in general a trend to reduce their use
in the crops. She should have an open mind while projecting the demand for agrochemicals in the future.
Overall, Sharda Cropchem Ltd seems to be highly dependent on MNCs for its pricing and China for its
sourcing. It does not seem to have any pricing power over its counterparties. The business is exposed to
seasonality, cyclicity, vagaries of nature/weather as well as the movement of foreign exchange. An investor
must assess all these aspects in her analysis of Sharda Cropchem Ltd.
Over the years, the tax payout ratio of Sharda Cropchem Ltd has been in the range of standard corporate
tax rate except in a few instances where the payout ratio was low because of the business conducted by the
Dubai subsidiary, which is in a tax-free zone.
Ramprakash V Bubna: The effective tax rate, the only thing that we can off hand guess is that
may be last year the volume on our subsidiary in Dubai that have been higher where there is no
tax liability
Sharda Cropchem Ltd reported a low tax payout ratio of 11% in FY2020, which was primarily due to
choosing the new corporate tax rate for its deferred tax liabilities.
Company has applied the lower income tax rates on the deferred tax assets / liabilities to the extent
these are expected to be realised or settled in the future period when the Company may be
subjected to lower tax rate and accordingly reversed net deferred tax liability of INR 3,522.84
lakhs.
As per the company, it may continue with the old tax rate regime for a few more years until it exhausts its
minimum alternate tax (MAT) credit entitlements.
R.V. Bubna: Not for the next two years because we have a lot of minimum alternative tax (MAT)to
be recovered for which we have credit entitlement. So, we will not adopt the new tax regime atleast
for the next one or two years.
Operating Efficiency Analysis of Sharda Cropchem Ltd:
a) Net fixed asset turnover (NFAT) of Sharda Cropchem Ltd:
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Sharda Cropchem Ltd follows a very asset-light business model where it focuses only on getting the
registrations/approvals to sell agrochemicals in different countries. The company has completely avoided
investing in any manufacturing or R&D facility. Its business model involves taking registrations for off-
patent agrochemicals and then sourcing them from outside third parties in countries like China and then
selling them into its target markets.
Therefore, it is primarily a trading company with the rights to sell agrochemicals in different countries.
The Company does not conduct any manufacturing activity and is a trading company
Net fixed asset turnover (NFAT) does not provide any significant insights for such a trading business, which
does not depend on fixed assets for its sales.
b) Inventory turnover ratio of Sharda Cropchem Ltd:

The inventory turnover ratio (ITR) of Sharda Cropchem Ltd has declined from 9.1 in FY2013 to 5.0 in
FY2022. A declining ITR indicates that the inventory utilization efficiency of the company is declining
over the years.
The ITR witnessed a sharp decline over FY2017-FY2018 when it reduced to 4.2 in FY2018 from 8.2 in
FY2016. The company increased its inventory in FY2017 in anticipation of high sales as it had received
new registrations in the USA.
Ramprakash V. Bubna: We have received number of new registrations in United States of

America and we wanted to prepare ourselves with sufficient inventories because in many of these
countries when they give the order they want the product yesterday. This has built up the
inventories and we are very happy
However, the inventory levels continued to stay high and did not come down even in the next 6-months.
The company stated that it is now accumulating inventory as there are supply disruptions in China and the
prices are increasing every week. It said that in the previous 3-months, the prices of its raw material had
risen by 50%.
Ramprakash V. Bubna: The uncertain situation in China, we have been predicting that Chinese
prices will go up and the Chinese prices are going up every week. We are trying to cover and there
is no availability of the product. So we are very happy with the strategy.
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Ramprakash V. Bubna: We will be in a better position compared to competition, who would

be buying in the normal course only. The prices have gone up by 50% in the last three months.
Moreover, the company was also forced to buy excess inventory at a high price because due to its strategy
of remaining a completely trading company, it had lost control of its supply chain. The crackdown of the
Chinese govt. on polluting industries had disrupted the supplies of agrochemical. Chinese suppliers were
taking 3-4 times more to ship the goods. If Sharda Cropchem Ltd had to meet its customers’ expectations,
then it did not have any other option but to buy goods at a high price.
Ramprakash V. Bubna: we are increasing the level of inventories keeping in mind the time lag
or delay in the supplies from China. Earlier we used to get the products shipped within two to
three weeks of our order. Today it takes about one and half to two months.
The company seemed very happy with its strategy of accumulating excess inventory. However, carrying
excess inventory exposes companies to write-downs when prices fall. This risk is increased in the case of
agrochemicals, whose sales are seasonal in nature and a company is stuck with unsold inventory for 6-8
months during which time, the prices can be very volatile.
Within a year, Sharda Cropchem Ltd faced the risks of excess inventory and suffered a drop in its profit
margins as it had accumulated inventory at high prices whereas now the prices had come down.
Rohan Gupta: Actually, rather than we benefiting from the inventory gain, we actually have lost
Ramprakash V. Bubna: I will not say we have had a loss. We had lesser margins.
In FY2019, the company had to write off about ₹4.28 cr of inventory (FY2019 annual report, page 177).
The effect of inventory buildup was also seen in FY2020 when players were trying to get rid of the inventory
even at lower prices.
R.V. Bubna: I would say an element of frustration on the part of many players who want just to
get rid of their stocks at beaten down the prices.
In FY2020 as well, the company had to write down some of its inventory.
Nevertheless, the business model of Sharda Cropchem Ltd is such that it has to keep a lot of inventory as it
has obtained many registrations, which it claims to supply. As a result, to meet customers’ expectations of
immediate delivery, the company ends up maintaining an inventory of a large number of products.
Otherwise, it would lose its customers.
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R.V. Bubna: Most of our customers in North America, if they want a product they want it
immediately and if you tell them that the goods are in transit and it will be coming after a week
then they do not call up next time and they get it from somebody else.
As a result, to keep an inventory of numerous agrochemicals, the company ends up having a large inventory
with itself, which makes its business working capital intensive.
Credit rating report by CRISIL, July 2021:
Working capital-intensive operations: Sharda group’s working capital requirement is

typically higher than that of its peers because of wide product portfolio and geographic reach.
Inventory is large due to numerous stock-keeping units and seasonality in the geographies that the
group operates in.
Going ahead, an investor should keep a close watch on the inventory utilization efficiency of Sharda
Cropchem Ltd to understand if it is able to bring any improvement in the same.
c) Analysis of receivables days of Sharda Cropchem Ltd:

Receivables days of Sharda Cropchem Ltd have improved from 180 days in FY2013 to 138 days in FY2022.
Even though in FY2022, receivables days have declined to 138 days; however, over most of the last 10-
years, the receivables days have been in the range of 155 to 170 days, which is high.
From the above discussion on the business analysis of Sharda Cropchem Ltd, an investor would remember
that the key competitors of the company, which are MNCs, give very liberal credit periods to the
distributors. As a result, generic companies like Sharda Cropchem Ltd also need to provide the longest
possible credit period to their distributors; otherwise, the distributors would source all of their requirements
from MNCs.
In addition, especially the business done by Sharda Cropchem Ltd in Latin American (LATAM) countries
exposes it to significant delays in receivables collection. This is because the economies of most of the Latin
American countries are stressed by high inflation and declining currencies. As a result, the customers in
LATAM countries ask for a long credit period and then delay payments further.
The company intimated to its shareholders that in LATAM and Mexico, the credit period for collection is
about 240 days.
Gautam Arora: So Europe is roughly about 135 days, US is close to about 90-100 days, NAFTA
and LATAM is close to about 240-odd days
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As per the credit rating agency, CRISIL, outstanding receivables in LATAM countries make its business
model working capital intensive.
Credit rating report by CRISIL, July 2021:
Working capital-intensive operations:…Additionally, there are substantial receivables from

certain overseas markets, especially Latin America.
In fact, during FY2018, the working capital requirements of Sharda Cropchem Ltd increased so much that
it had to urgently take unsecured loans from its promoters.
R. V. Bubna: See this is only because we don’t have any borrowings in the company. So, this is
only to meet the temporary requirement of working capital which has been inflated due
to inventories and receivables…the funds have come from the promoters, which came in at a notice
of one or two days.
The working capital requirements of the company increased so much that in FY2019, the company reduced
its investments in filing registrations so that it could spare money to fund its working capital.
Resham Jain: Is there any flexibility for us to reduce some of the CAPEXs to ease out the working
capital requirement that is what I wanted to understand?
Ramprakash V. Bubna: That is the strategy exactly which we have been working on.
In FY2019, Sharda Cropchem Ltd reduced its expenditure on registrations to about ₹105 cr from ₹214 cr
in FY2018.
The situation of a long credit period to customers by Sharda Cropchem Ltd becomes risky because most of
its receivables are not backed by sureties like a letter of credit or bank guarantees.
majority of our agrochemical and non-agrochemical sales are not supported by letters of credit
or bank guarantee.
In the past, after facing challenges in the collection of receivables from LATAM countries, the company
had done a course correction and reduced its business there.
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Ramprakash Bubna: We will be mainly focusing on US and Europe. LATAM countries are not
very comfortable in terms of their economies and the receivables are also under pressure.
However, as per the recent disclosures, Sharda Cropchem Ltd again intends to increase its exposure to
LATAM countries.
Ashok Vashisht: The major focus earlier was on Europe. Now we have been putting equal
focus on NAFTA and Latin America regions as well.
Going ahead, an investor should keep a close watch on delays in receivables beyond 6-months and the
write-off of bad debt to assess whether Sharda Cropchem Ltd is able to collect its money on time.
operations (cCFO) of Sharda Cropchem Ltd for FY2013-2022, then she notices that over the years
(FY2013-FY2022), the company has converted its profit into cash flow from operations.
Over FY2013-22, Sharda Cropchem Ltd reported a total net profit after tax (cPAT) of ₹1,794 cr. During
Learning from the article on CFO will indicate to an investor that the cCFO of Sharda Cropchem Ltd is
higher than the cPAT due to the following factors:
 Depreciation expense of ₹903 cr (a non-cash expense) over FY2013-FY2022, which is deducted

The Margin of Safety in the Business of Sharda Cropchem Ltd:

target growth.
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Where,

SSGR estimation depends significantly on net fixed asset turnover (NFAT). However, in the case of Sharda
Cropchem Ltd, which is a pure trading company without any manufacturing facility, NFAT is not a very
significant parameter. Therefore, while analysing the business of Sharda Cropchem Ltd, SSGR does not
provide best of the results.
Therefore, an investor should focus on the free cash flow (FCF) analysis of Sharda Cropchem Ltd.
b) Free Cash Flow (FCF) Analysis of Sharda Cropchem Ltd:

While looking at the cash flow performance of Sharda Cropchem Ltd, an investor notices that during
FY2013-FY2022, it generated cash flow from operations of ₹1,813 cr. During the same period, it did a
Therefore, during this period (FY2013-FY2022), Sharda Cropchem Ltd had a free cash flow (FCF) of ₹296
cr (=1,813 – 1,517).
of ₹105 cr. As a result, the company had a total free cash flow of ₹313 cr (= 296 + 122 – 105). Please note
that any capitalized interest is already factored in as a part of the capex deducted earlier.
Sharda Cropchem Ltd has used this money primarily to pay dividends to its shareholders.
Going ahead, an investor should keep a close watch on the free cash flow generation by Sharda Cropchem
Ltd to understand whether the company continues to generate surplus cash from its operations.
Additional aspects of Sharda Cropchem Ltd:
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On analysing Sharda Cropchem Ltd and after reading annual reports, RHP, 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) Registration requirements prove to be a strong entry barrier for companies:

Sharda Cropchem Ltd has stated in multiple disclosures that its key business strength is its
registrations/approvals in different countries. As per the company, getting registration is a costly and time-
consuming process where the outcome is very uncertain.
Even if a company invests a lot of money to gain registrations, then it may not get an appropriate value if
it decides to exit the business by selling the registrations.
Ramprakash V. Bubna: Mr. Sonal please understand that the process of registrations requires
a lot of patience and a heavy amount of capital and a lot of time. These three factors reduce the
competition very considerably…The risk involved in the intangible asset registrations is very
high and uncertainty of getting any value if they want to get out
Another factor related to the registration process, which is very time consuming is getting access to the
laboratory & field studies’ data related to the product that a generics company wants to register. Either the
company can conduct fresh laboratory tests and field trials, which would be very expensive and time-
consuming or it can purchase data from someone else who already owns it. Most of the time, these data
owners are the innovators, the large MNCs.
Therefore, to save on time, the generics companies purchase the data from the data-owners and use it in
their registration application. In return, the generics companies pay data compensation charges to the data
owners. However, gaining access to the data is not a simple and quick negotiation. At times, these
negotiations with the data owners can take even up to 12 years.
Ramprakash V. Bubna: As I told you for some molecules it took us about 11 to 12 years to
complete the negotiation. In some of the cases we did in a matter of 1, 2 to 3 years. It all depends
how fast the data owner responds to our reply and how our experts and data owner experts have
time to meet and progress the negotiation.
Therefore, an investor may appreciate how uncertain and prolonged a registration process can be.
Moreover, in key European markets like Germany, the success rate of getting a registration even for a
seasoned player like Sharda Cropchem Ltd is very low.
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Ramprakash Bubna: in Germany the things are very difficult. Our rate of success of
registrations in Germany is very, very low.
Moreover, nowadays, the cost of registrations is going up because the governments have started looking at
them as a revenue-generating activity.
Ramprakash Bubna: The cost of registrations is exponentially high. The government

authorities, the sourcing authorities, who used to charge nominal fees, they now started at looking
some more kind of profits in these regions because they feel the operators and players in the market
are getting profits then why not the government
In fact, Sharda Cropchem Ltd has mentioned the increasing cost of registrations as one of the key reasons
for a decline in ratios like return on equity.
Tushar Sarda: What steps are we taking to address the reason for decline in the ROCE and
ROE?
Ramprakash Bubna: The reasons are increase in the capex and surge in the cost of
registrations.
As a result, registrations become a critical entry barrier for new companies.
the process of preparing dossiers and seeking registrations is fairly time consuming. In
addition, capital investment required for preparing dossiers and seeking registrations is also
a critical entry barrier for a generic agrochemical company.
An investor learns about the difficulties in obtaining registrations when Sharda Cropchem Ltd intimated to
its shareholders that it has decided not to renew the registration of Quizalofop-Ethyl in Europe. This
agrochemical was a very profitable product for the company bringing in revenues of about EUR 1.5 million
per year. However, looking at the challenges in obtaining the registration, Sharda Cropchem Ltd decided
that it would be too much of an effort and the company would be better off pursuing other opportunities.
Conference call, July 2017, pages 8, 9:
Ramprakash Bubna: We lost one registration of Quizalofop-Ethyl, which was selling very well
with good margins. This registration was open through some me-too registration based on some
registration in other country. The original registration was expired and we also lost that
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registration…The cost of investment on this molecule would have been very high and it is not just
a question of spending, it also is a factor of time. If we renew it, it will take us at least three, four
years to generate all the data
Ramprakash Bubna: Well it must have generated about 1.5 million Euros approximately
The instance of Sharda Cropchem Ltd giving up on a significantly profitable product because the renewal
of its registration would be a highly cumbersome & time-consuming process tells an investor that the
process of registration is a real entry barrier for generic agrochemical companies.
In fact, the difficulty in obtaining registrations becomes a benchmark for the profit margins earned by the
agrochemical companies in different geographies.
The registration process is the most difficult in Europe; therefore, companies earn maximum profit margins
in Europe. This is followed by North America and then Latin America and the rest of the world.
Ramprakash V. Bubna: See in the financial year 2022 the gross margins in Europe is
35.7%, NAFTA 29%, LATAM 15.4% and rest of the world 22.6%.
In fact, when different countries in Latin America and the Rest of the world relaxed their registration
requirements, then the increased competition made these markets non-attractive for Sharda Cropchem Ltd.
As a result, the company reduced its focus on these markets.
Ramprakash V. Bubna: You see the rest of the world is getting slowly and slowly less
important for us because the registrations barriers are not so strong and the margins are less and
it requires an equal amount of efforts so it is receiving lesser attention from us.
Sumant Kumar: The third question is the revenue declined by 16.8% in LATAM region
Ramprakash Bubna: There the registration process is getting little simpler and more
competition is entering the field
Therefore, the tough process of obtaining registrations for agrochemicals is acting as a good entry barrier
and a source of decent profit margins for the industry in key geographies.
In fact, the tough process of obtaining the registration motivated Sharda Cropchem Ltd to focus solely on
registrations and getting other approvals and remove its entire focus from manufacturing. The company
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now operates as a completely trading company that has approvals for selling multiple products in different
countries.
As per the company, outsourcing entire manufacturing saves it from being tied to any particular product.
The company wants to keep its business highly flexible and does not want to be in a situation where it has
to manufacture a product even if there is no demand for the same. In case, the demand for any one product
declines or is banned altogether, then Sharda Cropchem Ltd wants to quickly move over to other products,
which have a strong demand instead of being stuck with a plant manufacturing a product that no one wants
to buy.
Gautam Arora:…most of the other serious player in the market are also manufacturers of these
products so they would largely want to focus on those products which they have a
manufacturing capability for because they would like to recover the plant overheads by way of
getting registrations for these products. Now, players like us who don’t have any
manufacturing capabilities of our own have a strong operating leverage here because we are not
tied down to any one particular product nor are we under any kind of a compulsion to sell any
kind of a product if its’ a loss making product we can always pick and choose those products which
we want to deal in.
Sharda Cropchem Ltd could take such a strategy of outsourcing entire manufacturing and instead specialize
in getting registrations only because the registration process is very cumbersome and acts as an entry barrier.
As per the company, the manufacturing process is the least value-adding step in the entire agrochemical
value chain. Most of the value in the entire supply chain is enjoyed by the marketing entities.
Ramprakash V. Bubna: Mr. Gandhi if you take the total margin from the stage of manufacture
in the factory or from the raw materials to the consumer the manufacturing stage contributes very
small part from the total margin. Most of the margins come from marketing and from sales so
there could be some saving in the cost for the manufacturing but the manufacturing has also lot
of disadvantages mainly to continue their factory running during off season.
However, Sharda Cropchem Ltd faced the downside of the strategy of total outsourcing of manufacturing
during FY2018-FY2020 during the Chinese crackdown on polluting units. The company could not be
certain of getting its products ready for shipment to customers. As a result, it had to store an excess
inventory that too at high prices and the promoters had to infuse loans in the company because no bank
would be willing to give money to a company, which does not have any physical assets.
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Ramprakash V. Bubna: Yes, for fund-based limits the company should have some tangible
assets to give us a collateral, which our company does not have.
Nevertheless, Sharda Cropchem Ltd is relying on its extremely asset-light strategy of outsourcing all
manufacturing due to the strong entry barriers provided by the capital-intensive, time-consuming and
cumbersome registration process.
2) Not all registrations are profitable investments for Sharda Cropchem Ltd:
From the above discussion, an investor would feel that getting registrations is difficult; therefore, getting
as many of them as possible should be a great strategy. However, the case of Sharda Cropchem Ltd indicates
that a lot of its investment in the registrations did not bear fruit. Instead, a significant amount of money
spent by it on registrations was written off when it did not provide requisite returns. In fact, many of the
registrations were written off even during the process of pendency of a grant of the registration i.e. in the
capital work in progress (CWIP) stage.
Conference call, January 2019, pages 3-4:
Ramprakash V. Bubna:…there have been a lot of changes in the agrochemical environment in

the world, many products, which were considered good are getting banned or they are getting
faced out and the ministries have also stopped registering many of these products. Some of the
products, which when picked up for registration were appearing to be very attractive and then
slowly down the line, we found that the margins are getting depleted and there is a lot of crowding
and the products were becoming commodities. Considering these factors, we have a written off
that CWIP of those products and we do not want to spend more money on this.
In fact, during FY2019-2022, the company wrote off almost ₹135 cr of investment done on registrations.
 In FY2020, it wrote off about ₹55 cr of intangible assets (FY2020 annual report, page 194)
The write-off of the investments done for the registration process was one of the key reasons for the decline
in the profit margins of the company during FY2019 and FY2020.
Ashish Lodha: Profit after tax declined by 7.6% from Rs.191 Crores to Rs.176 Crores in
FY2019. This was mainly on account of CWIP write off of Rs.42.2 Crores in FY2019.
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PAT declined by 6.61% from last year due to Intangible Assets & Intangible Assets under
Development write off & higher depreciation
Sharda Cropchem Ltd has mentioned that going ahead; every year, it may have to keep writing off about
₹30-50 cr of its investments in registrations.
Himanshu Binani:…intangible write offs which has been now a constant feature…So, going
forward how one may look at this number?
Ramprakash V. Bubna:…it will be in the same range of Rs. 30 to 50 Crores. Sometimes, the
government authorities ban some registrations while we have already made the investments.
Such a substantial write-off of the investment done in registration indicates that the due diligence done by
Sharda Cropchem Ltd for its product selection leaves scope for improvement. The company highlighted
that while selecting products for registration, it primarily relies on the feedback of the market participants.
Sonal Minhas: Just want to understand how do you qualify filing in some molecule or let us say
a product success and what gets defined basically so is there like internal metrics of return on
capital…
Ramprakash V. Bubna: Mr. Sonal we do not do so much of analysis from the feasibility front
or return on capital because the final prices that we will get from the market or we will sell at are
never defined that whenever fixed…All we go and select the product after getting a feedback from
our customers or distributors and the market…
Going ahead, an investor should keep a close watch on the write-offs done by the company from its
intangible assets. It is necessary to track whether the company is allocating its capital efficiently or not.
3) Regulatory risk is the biggest risk faced by Sharda Cropchem Ltd:

Regulators play a very important role in the business of agrochemical companies. Their decisions play a
very important role in the fate of companies’ businesses. Regulators’ decisions related to grant of
registration, the process of registration, approving or banning products as well as their thought process
about the priority of statutory protection to companies seen in the light of greater public good significantly
influence the companies.
In the earlier discussion, we noted instances like the relaxation of registration requirements in Latin
American countries that led to increased competition in those markets and a decline in the profit margin for
existing agrochemical companies.
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We also noted that when regulators increased the registration fees to generate profits from the registration
process, then the return on equity of Sharda Cropchem Ltd declined.
We would also want to highlight another incidence in the case of Sharda Cropchem Ltd when the change
in the approach of the regulators affected two different companies. In the case of Quizalofop-Ethyl, despite
it being a good profitable product, Sharda Cropchem Ltd had decided to let go of its registration because
the process of renewal would prove to be too cumbersome and time-consuming.
Sharda Cropchem Ltd mentioned that it did not own the original registration for Quizalofop-Ethyl. Instead,
one of its competitors owned a registration for it. Luckily, for a brief period, to ensure easy availability of
Quizalofop-Ethyl, the regulators allowed other companies to get registrations for Quizalofop-Ethyl at a
very low cost even if they do not own the original registration.
As a result, Sharda Cropchem Ltd got the approval to sell Quizalofop-Ethyl in Germany and earn good
profits for almost 6 years before the registration came for renewal and the company realized that it could
not renew it without the special concessional window by the regulator.
Conference call, July 2017, pages 8, 10:
Ramprakash Bubna: Quizalofop, which I mentioned this was based on somebody else’s
registration where some window was open and we were able to make an entry… so we got this
registration about six years back at a very low cost and it was a very good opportunity that we
were enjoying.
The above incidence shows the regulatory risk, which worked out negatively for the original registered
owner of Quizalofop-Ethyl, who had to lose a lot of sales and market share to generic players like Sharda
Cropchem Ltd who got easy registration due to a temporary change in regulations. Similarly, when the
regulatory window expired and regulators did not allow the concessional registration, then Sharda
Cropchem Ltd had to let go of its registration.
Therefore, any investor should always be aware of the significant impact that regulators can have on the
business of any agrochemical company like Sharda Cropchem Ltd (“stroke of a pen” risk).
For example, in FY2017, the European regulators decided to go slow on registrations of agrochemicals. It
led to a significant impact on the growth plans of Sharda Cropchem Ltd in Europe and its growth rate in
the region declined significantly.
Europe…we faced certain challenges unique to this region. Generally, we faced more than normal
delays in getting registrations approved through respective regulators and agencies.
This decelerated our growth rate for this region during the year.
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Regulatory risks for agrochemical companies also arise in the form of liabilities for damage to the
environment.
Sharda Cropchem Ltd faced two different instances where it faced litigations when it was alleged that its
products damaged crops and trees. In July 2013, it settled a case in South Africa where it was claimed that
its product damaged trees and crops.
RHP, September 2014, pages 330-331:
a claim filed by Plaaskem Pty Limited, South Africa…in respect of the generic active ingredients
supplied by Hockley International Ltd. (“Hockley”) alleging that the said formulation
caused damage to the trees and crops of its end users. The generic active ingredients used by
Plaaskem to formulate the formulations were supplied to Hockley by the Company….this matter
was settled in July 2013
Another case against the company’s subsidiary in Europe claiming damage to plants from its products was
pending at the time of IPO.
Societa Agricola Allasia Plant s.s. (“SAAP”) has filed a case…in relation to damage caused to its
plants cultivated, by the use of Dessicash 200 SL (the “Product”) provided by Sharda
Europe…This matter is pending.
An investor may contact the company directly to know the status of this case.
Going ahead, an investor should keep in mind the risk of failing to meet regulations as well as changing
regulations while she assesses Sharda Cropchem Ltd. This is because even if the company is able to
successfully defend a case against it, it still consumes a lot of resources of the company in terms of money,
management’s time and brand value.
Even unsuccessful product liability claims would likely require us to incur substantial expenses on
litigation, divert management’s time, adversely affect our goodwill and impair the marketability
of formulations.
To make the matters worse, agrochemical companies are not able to get proper product liability insurance.
So the risk of loss of resources due to litigations whether successful or unsuccessful remains high.
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From time to time, the agrochemical industry has experienced difficulty in obtaining desired
product liability insurance coverage.
Another way in which the regulatory risk expresses itself is through trade barriers. At times, the
governments in the target markets of Sharda Cropchem Ltd may decide to reduce imports from specific
countries by imposing various duties or increasing import tariffs. In such instances, Sharda Cropchem Ltd
may have to bear the cost of such high import duties, if its customer is not willing to pay them.
Sharda Cropchem Ltd was affected by high import duties in FY2020 during the US-China trade war when
under the leadership of President Donald Trump; the USA imposed high duties on imports from China
including agrochemicals. At that time, the customers of Sharda Cropchem Ltd refused to absorb the impact
of these high duties and as a result, the company had to take a hit on its margins.
Credit rating report by CRISIL, April 2020:
Recently in USA, higher import duties were imposed on goods originated from China. Since SCL
imports about 97% of the goods from China, the gross margins were impacted by 200 basis points
Therefore, the entire strength of the business model of Sharda Cropchem Ltd comes from the cumbersome
and time-consuming registration process, which dissuades many competitors from entering this field. The
business strength is not due to any proprietary technology or any difficult-to-manufacture product, which
no one else can produce.
This business strength is effectively granted to Sharda Cropchem Ltd by regulators due to their difficult
approval process. Therefore, the regulators can take away this business strength overnight, by making the
registration process easy and simple (“stroke of a pen” risk).
An investor should always remember this fragility in the business model of Sharda Cropchem Ltd while
projecting its financial performance.
4) Management Succession of Sharda Cropchem Ltd:

Sharda Cropchem Ltd is a part of the Bubna family and currently, the founder-promoter couple, Mr
Ramprakash V. Bubna, CMD. (aged 75 years) and Mrs Sharda R. Bubna, WTD, (aged 69 years) along with
their sons, Mr Ashish R. Bubna, WTD, (aged 49 years) and Mr Manish R. Bubna, WTD, (aged 47 years)
are present on the board of directors.
Mr. Ramprakash V. Bubna: Husband of Mrs. Sharda Bubna, Father of Mr. Ashish Bubna and Mr.
Manish Bubna
Therefore, an investor would note that currently, the next generation of promoter-brothers has also joined
the company and been working for Sharda Cropchem Ltd for a significant amount of time.
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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.
Going ahead, an investor may keep a close watch on the relationships among the sons of the founder-
promoters to understand whether any ownership issues arise between them.
Until now, the promoters have managed the equations between the two brothers; Mr Ashish R. Bubna and
Mr Manish R. Bubna, by making them draw an exactly equal salary from the company every year.
 In FY2016, both the brothers took home a salary of ₹22,995,405 each (FY2016 annual report, page
60)
55)
61)
61)
58)
63)
An investor may contact the company directly for any clarifications about any ownership issues between
the promoter-family members.
5) Risks/Scope for improvement in relation to brands, trademarks and

registrations:
Sharda Cropchem Ltd disclosed in the RHP in September 2014 that it has not registered its brands in the
foreign countries and as a result, there is a risk that some competitors may launch products under the same
brand name. The company only believed that the regulators would not grand registration to any competitor
under the same brand name.
While we believe that the authority granting us registration for a particular formulation or generic
active ingredient would not grant a registration for such formulation or generic active ingredient
under the same label and name to another applicant, the said label or name is not registered under
any specific intellectual property rights.
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It seems that by not registering the brand names, Sharda Cropchem Ltd is exposing itself to avoidable
litigations.
In the RHP, Sharda Cropchem Ltd also intimated that it has taken registrations in the names of its
distributors, consultants and other third parties. The company has done all the spending for these
registrations and it derives economic benefits from them; therefore, it sells its products under the licenses
received in the names of consultants and distributors. However, the company does not have any binding
agreement with such third parties.
we also undertake sale of formulations and generic active ingredients pursuant to registrations
owned by third parties being our distributors, consultants and our Group Company, Sharphil
Inc.. We have incurred expenditure towards obtaining such third party registrations and we
currently derive beneficial interest from sales based on such registrations. However, we do not
have any agreements with such third parties for availing the beneficial interest of sales based on
such registrations. There can be no assurance that such third parties will not engage with our
competitors
Such an arrangement exposes it to the risk where any deterioration in the relationship of the company with
the third party i.e. consultant or distributor would deprive it of the sales channel as well as the right to sell
the product in a market.
Therefore, it seems that the arrangements done by Sharda Cropchem Ltd regarding its brand names,
trademarks, registrations etc. leave scope for improvement. An investor may contact the company directly
to know the current status of these trademarks and registration agreements with third parties.
6) Weaknesses in the internal processes and controls at Sharda Cropchem Ltd:

In the past, there have been many instances where Sharda Cropchem Ltd has been found lacking in its
internal controls and processes.
As per the RHP, September 2014, pages 27-28, the company failed to make necessary filings with RBI
when it received foreign investment. At the same time, it also failed to comply with FEMA regulations
while incorporating subsidiaries and making investments outside India.
In accordance with the requirements of the FEMA Regulations, we were required to make the
prescribed filings with the RBI at the time of making remittance and certain annual filings in
relation to the overseas investments. In the past, there have been instances of delay and failure in
making the necessary filings with the RBI…We have also received foreign investment in our
Company…in this regard, there has been a delay in making the necessary filings with RBI.
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The RHP on pages 31-32, also states that from FY2010 to FY2013, the company did not have an internal
audit system. The RHP did not comment on the presence of an internal audit before FY2010; therefore, an
investor may contact the company directly for any clarifications in this regard.
In 2011, Sharda Cropchem Ltd was penalized by customs officials for wrongfully taking the duty-free
clearances of imported goods.
Our Company has, in 2011, paid a penalty imposed by the Commissioner of Customs (Export),
Jawaharlal Nehru Custom House, Nhava Sheva, Maharashtra, in relation to wrongful availment
of duty free clearances of imported goods
Previously, in 2007, Sharda Cropchem Ltd did a delay of one year and 10 months in appointing a full-time
secretary.
Pursuant to an increase in our paid-up capital in March 2007…we were required to appoint a
whole-time secretary of our Company. However, the Company appointed a whole-time secretary
in January 2009 resulting in delay in the appointment of the whole-time secretary for a period of
one year and 10 months.
In addition, there have been multiple instances where Sharda Cropchem Ltd failed to make timely
disclosures to stock exchanges and directors, which have been pointed out by the secretarial auditor of the
company in its annual reports.
In 2015, the company did not timely disclose to the stock exchanges that in its board meeting, it would also
consider a declaration of dividend.
Board meeting held on 30th May, 2015…proposal for recommendation of dividend was considered
by the Board of Directors. However…Company has inadvertently missed out this information in
the prior intimation made to Stock Exchange(s) with regard to recommendation of dividend and
the same was clarified later on to National Stock Exchange of India Limited.
The company repeated the same mistake in FY2021 and the stock exchanges penalized the company with
a fine.
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The Company had conducted a Board Meeting on October 28, 2020…to consider and declare the
interim dividend…the company was required to intimate the stock exchanges at least two working
days in advance…however the Company intimated to the stock exchanges only 1 working day
prior…hence the Company was non-compliant…for which the Bombay Stock Exchange (“BSE”)
and National Stock Exchange (“NSE”) levied fine on the Company
In FY2017, Sharda Cropchem Ltd delayed sharing the signed minutes of its board meeting to its directors.
The certified copy of the signed Minutes of Board meetings and its committee meetings…has not
been circulated to all the Directors of the Company within the period of 15 (fifteen) days after the
minutes were signed.
In the FY2017 annual report, the company did not provide the Board’s response to the secretarial auditor’s
observations.
The report of Board of Directors for the financial year ended 31st March 2017 did not contain
the explanation or comments by the Board in respect of the qualification made by the company
secretary
In addition, the company did not furnish a required declaration needed as a part of the audited financial
result and therefore, the stock exchanges issued notices to the company.
The Company has not furnished a declaration…for which the Company had received the notices
from BSE Limited and National Stock Exchange of India Limited
In FY2020, the company delayed the disclosure of related party transactions to stock exchanges by 117
days.
There was a delay of 117 days in filing of disclosure of related party transactions for the half year
ended September 30, 2019
In addition, there was a delay in submitting the annual report to the stock exchanges.
There was a delay of 1 day in submission of copy of the Annual report to the stock exchanges
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During FY2010, FY2012 and FY2013, the company had delayed the deposit of undisputed statutory dues
to the govt. authorities (RHP, September 2014, pages 31-32).
An investor may contact the company directly for clarifications about the steps taken by the company to
reduce such instances of noncompliance.
Another instance of weakness comes across when an investor visits the website of Sharda Cropchem Ltd.
The website of the company does not have a security certificate. It is opened via an “HTTP” connection
instead of an “HTTPS” connection. As a result, it is labelled “Not secure” by the web browsers. The cost
of a security certificate for a website to make it secure is about ₹1,000/- per year, though various open-
source free alternatives also exist.
Going ahead, an investor should keep a close watch on the signs indicating weaknesses in the internal
controls and processes of Sharda Cropchem Ltd.
The Margin of Safety in the market price of Sharda Cropchem Ltd:

Currently (May 31, 2022), Sharda Cropchem Ltd is available at a price to earnings (PE) ratio of about 19
based on consolidated earnings of FY2022. An investor would appreciate that a PE ratio of 19 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, Sharda Cropchem Ltd seems a company, which has grown its sales at a decent rate of 18% year
on year for the last 10 years. The growth has been associated with fluctuating profit margins; however, until
now, the operating profit margins have not fallen below 17%.
Sharda Cropchem Ltd has modelled its business around obtaining more and more registrations to sell
agrochemicals in many countries and has completely avoided owning any manufacturing facility. It is a
pure trading company, which sources all of its products from third parties, mainly from China. The business
strength in relying only on registrations comes from the cumbersome and time-consuming registration
process, which acts as an entry barrier for generics agrochemical companies.
Nevertheless, this business strength is a direct result of procedural obstacles in obtaining registrations and
it can vanish if the regulators make the approval processes smooth and simple. Sharda Cropchem Ltd faced
this situation in Latin America when the regulators made the registration process easy leading to higher
competition and declining profit margins.
In addition, not all the registrations lead to profitable outcomes. Sharda Cropchem Ltd has written off a
significant amount of money invested in the registration process where it could not realize any significant
profits.
Generics agrochemical players including Sharda Cropchem Ltd do not have any pricing power over their
customers. They only follow the pricing strategy of large MNCs that own 75% of the market share. When
MNCs refuse to increase prices even when costs are going up, in order to maintain their market share, then
Sharda Cropchem Ltd suffers significantly on its profit margins. The MNCs pamper large distributors with
incentives and rewards and as a result, they do not entertain generics players; therefore, companies like
Sharda Cropchem Ltd have to primarily rely on smaller distributors limiting their market reach.
Sharda Cropchem Ltd is stuck with suppliers in China for its products because there is no alternative. Even
if it wants to switch to a new supplier, the registration regulations do not allow an easy switch. Therefore,
it is like either supply from China or do not supply. As a result, when Chinese agrochemical production
came under stress in FY2018-FY2020, then Sharda Cropchem Ltd had to buy an excess inventory at high
prices to ensure that it does not lose its customers. In the end, the company suffered due to excessive unsold
inventory when prices declined later on.
Sharda Cropchem Ltd has a high receivables days due to twin factors of MNCs giving very long credit
period to distributors, which puts pressure on Sharda Cropchem Ltd as well to match and secondly, due to
long-stuck receivables in Latin America where many economies and their currencies are performing poorly.
The company has a succession plan where the sons of the promoter are playing an active role in the
company; however, it remains to be seen whether the two brothers would keep on collaborating.
There seem many weaknesses in the internal processes, controls, management of trademarks etc. of Sharda
Cropchem Ltd. The company has not registered its brand names in its target markets exposing it to disputes.
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It has taken registrations in the names of distributors, consultants etc. without having any binding agreement
with them. They can easily collaborate with its competitors and shut the doors on Sharda Cropchem Ltd.
Sharda Cropchem Ltd has numerous instances of delaying important disclosures to stock exchanges, RBI,
the deposit of undisputed dues to authorities, employment of secretary, sharing of documents with the board
etc. Even the website of the company is “not secure”. The internal controls and processes at Sharda
Cropchem Ltd seem to leave scope for improvement.
Going ahead, an investor should keep a close watch on the regulatory developments regarding registrations
in its target markets because any adverse change can take away its business advantages (“stroke of a pen”
risk). She should closely monitor its profit margins as well as write-offs of intangible assets to ascertain
whether Sharda Cropchem Ltd is able to allocate capital efficiently. She should keep a watch on its
inventory and receivables days to see if the company is able to keep its working capital under control. The
investor should look for signs whether its internal processes and controls show weakness.
These are our views on Sharda Cropchem Ltd. However, investors should do their own analysis before
P.S.

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9) Safari Industries (India) Ltd

Safari Industries (India) Ltd is a company selling luggage, backpacks etc. under brands like Safari, Genius,
Genie, Magnum etc.
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Safari Industries (India) Ltd published both standalone as well as consolidated financials because, on March
31, 2022, it has two wholly-owned subsidiaries (WOS), Safari Lifestyles Limited and Safari Manufacturing
Limited. The company started publishing consolidated financials for the first time in FY2015 after it formed
its first WOS, Safari Lifestyles Ltd.
The wholly owned subsidiary of the Company, Safari Lifestyles Ltd., was incorporated on 30th
October 2014
As a result, Safari Industries used to publish only standalone financials until FY2014 and from FY2015
onwards, it started publishing both standalone as well as consolidated financials.
Therefore, in the case of Safari Industries (India) Ltd, during the last 10 years (FY2013-FY2022), we have
analysed standalone financials for FY2013-FY2014 and consolidated financials from FY2015 onwards.
With this background, let us analyse the financial performance of Safari Industries (India) Ltd.
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Financial and Business Analysis of Safari Industries (India) Ltd:

Sales of Safari Industries (India) Ltd have grown at a pace of 25% year on year from ₹92 cr in FY2013 to
₹706 cr in FY2022. The sales of the company have increased every year since FY2013 except FY2021
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when the sales declined to ₹328 cr from ₹686 cr in FY2020. However, in the next year, FY2022, the sales
of the company increased sharply to ₹706 cr.
On an overall basis, the operating profit margin (OPM) of the company has improved from 5% in FY2013
to 8% in FY2022. However, the OPM has seen a fluctuating pattern with periods of decline in FY2014,
FY2019 and FY2021. The company reported net losses in FY2013 and FY2021.
To understand the reasons for the financial performance of Safari Industries (India) Ltd, an investor needs
credit rating reports, corporate announcements as well as other public documents. Then she would
understand the factors leading to an overall increase in its sales and profit margins over the years with
fluctuations in between.
influenced the business of Safari Industries (India) Ltd, which she needs to keep in her mind before making
any predictions about the performance of the company.
1) Change of management of Safari Industries (India) Ltd in 2012:

The management of Safari Industries changed in April 2012 when Mr Sudhir Jatia purchased a majority
stake in the company from its founding promoters, the Mehta family.
Mr. Sudhir M. Jatia (Promoter) and Mrs. Neeti S. Jatia (PAC) have directly and
indirectly acquired, on 18th April, 2012, 22,95,933 equity shares of the company, aggregating
to 76.79% of the paid up capital of the Company.
This change in the management of the company has been the single biggest factor, which led to sharp
improvements in the sales and profits of the company.
Data on the financial performance of Safari Industries since FY1993 is present in the public domain
(FY1997 annual report, page 2). From FY1993 to FY2012, the company was in the control of the Mehta
family and thereafter, Mr Jatia controlled it.
Under the Mehta family (FY1993 to FY2012), the net sales of the company increased from ₹26 cr to ₹62
cr at compounded annual growth rate (CAGR) of 4.7% whereas, under Mr Jatia (from FY2012 to FY2022),
the sales increased from ₹62 cr to ₹706 cr at a CAGR of 27.5%.
Let us see some of the steps taken by Mr Jatia to increase the growth of Safari Industries.
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1.1) Expanding sales channels, focus on advertising and discounts by Safari Industries:
It seems that the Mehta family did not push the company for growth. They relied mainly on one customer,
the canteen stores department (CSD) for sales. The dependence of the company on CSD was so much that
any factor influencing sales of CSD items had a significant impact on the performance of Safari Industries.
In FY2006, the company witnessed a decline in revenue and a net loss. The company intimated to its
shareholders that the poor performance including losses was due to lower sales from CSD due to the
introduction of taxes (value-added tax, VAT) on sales at CSD.
Sales and other income have been more or less stagnant…as sales to Canteen Stores Department
were significantly affected due to imposition of VAT on their sales, which were hitherto exempted
from Sales Tax, which has also affected profitability.
Sales of Safari Industries were so much concentrated in CSD that even under the new management, in
FY2015, CSD constituted 55% of its sales.
Credit rating report by India Ratings, June 2015:
The ratings are constrained by demand off-take risks with a large concentration of sales to a single
counterparty (CSD)…In FY15, sales to CSD accounted for around 55% of the turnover
Nevertheless, the moment Mr Jatia took over Safari Industries, he focused on expanding the sales channels.
Immediately after the management change, in FY2013, Safari Industries started focusing on alternate
channels like hypermarkets.
The Company is also exploring various new channels of marketing and retail and has tied up with
renowned hypermarket chains such as D’mart, Reliance Retail, Big Bazaar, Bharti Walmart, etc.
For the first time, in FY2014, Safari Industries opened its exclusive showrooms.
The Company has also opened almost 50 exclusive retail stores and plans to add further in the
years to come.
In FY2015, the company began selling its products on various online portals like Amazon, Flipkart etc.
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Company has also begun its ecommerce play with listing & selling the products in marketplace
websites such as amazon.in, snapdeal.com, myntra.com, jabong.com & flipkart.com
The company began spending aggressively on advertising including offering discounts to increase its sales.
In the first full year under Mr Jatia, in FY2014, the advertising spending of the company increased to about
2.5 times from ₹2.8 cr in FY2013 to ₹6.9 cr in FY2014. Similarly, the discounts given by the company
increased in FY2014 to 3.5 times from ₹1.5 cr in FY2013 to ₹5.1 cr in FY2014.
1.2) Expanding product range and brands of Safari Industries:
In addition, Mr Jatia expanded the product range of Safari Industries from luggage to other related
categories like backpacks, laptop bags etc., which were low-ticket items but needed frequent replacements
than traditional luggage bags.
The Company also introduced new product lines such as laptop bags, back packs, etc. which
are fast selling items
A timely entry into the backpacks segment led to a significant increase in the market share of Safari
Industries.
Credit rating report by CRISIL, October 2017, page 1:
improvement in market share is backed by the company’s foray into the backpack segment in fiscal
2017.
In FY2016, the company acquired many brands like Genius, Genie, Magnum, Gscape etc. to offer products
to different sub-segments of consumers.
Corporate presentation, August 2021, page 8:
FY2016: Acquired Genius, Activa, Magnum, Orthofit, DBH, Egonauts, Gscape and Genie brands
It also acquired distribution rights of a UK brand, Antler to target the premium luggage segment.
Company is becoming multi brand as during the year it acquired brands like Genius &
Magnum and also signed a distribution agreement for India with ANTLER, a popular luggage
brand in UK.
In addition, Mr Jatia led Safari Industries to introduce polycarbonate-based hard luggage, which was the
consumers’ preference by creating a manufacturing unit for polycarbonate-based luggage at Halol.
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Company is currently in the process of setting up a Poly Carbonate Plastic luggage project at its
factory at Halol, Gujarat, which will facilitate manufacturing of Poly Carbonate Plastic luggage.
Poly Carbonate Plastic luggage is the new trend in the luggage industry and is increasingly
gaining popularity.
Company has successfully launched the poly carbonate luggage range in the month of March,
2014.
Therefore, an investor would note that under the founder-promoters, the Mehta family, Safari Industries
was a slow-moving company with a limited product range focusing solely on CSD sales. No wonder it grew
only at an annual rate of 4.7% over 20 years (FY1993-FY2012).
However, the moment, Mr Jatia took over the company in April 2012, he expanded the focus of the
company in all aspects like new trendy luggage types (polycarbonate), new product categories (backpacks,
laptop bags), sales channels (exclusive stores, hypermarkets, online stores) and also did aggressive
marketing combined with discounts.
Such an aggressive growth strategy by the new management increased the annual sales growth of Safari
Industries to more than 25% every year.
After understanding the huge impact created by Mr Jatia on Safari Industries, an investor would want to
know about what skills Mr Jatia brought with him that he could bring massive changes in the business
performance of Safari Industries.
When Mr Jatia took over Safari Industries, he was already an industry veteran and had worked as the
managing director of VIP Industries Ltd, a Dilip Piramal Group company, which is the market leader in the
luggage industry in India. He had to leave VIP Industries to vacate the leadership position for Radhika
Piramal, a member of the Piramal family. (Source: Former VIP Industries MD Sudhir Jatia
Buying 56.55% In Safari Inds: VCCircle, Sept 7, 2011)
Therefore, when Mr Jatia left VIP Industries, then he took over a small player in the industry, Safari
Industries and applied his leadership skills to refine its business model to grow it at a brisk pace. In FY2022,
Safari Industries managed to acquire about a 20% share of the luggage market in India.
Credit rating report by CRISIL, January 2022, page 1:
Safari has also gained in market share within the organized segment by around 800 bps in the past
three fiscals, strengthening its market share to over 20-22%.
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Therefore, over the last decade, the single biggest factor that has led to a change in the business fortunes of
Safari Industries is the change in management of the company from the Mehta family to Mr Jatia.
2) Intense competition in the luggage industry:

The luggage industry in India faces severe competition both from the unorganized sector as well as within
the organized sector.
The unorganized sector constitutes a major portion of the luggage sales where many traders import bags
from China, Bangladesh etc. and sell them in Indian markets. These bags are priced cheaper than the
products of the organized sector. As a result, they put strong pricing pressure on the organized players.
One of the reasons for the large presence of the unorganized sector in the luggage industry is a very low
requirement for research and development (R&D). In fact, even organized players like Safari Industries do
not spend any money on R&D.
The expenditure incurred on Research and Development: Nil
Because of low R&D and simple manufacturing processes, many players from the unorganized sector are
able to establish luggage bag manufacturing units or import readymade bags from countries like China,
Bangladesh etc. and sell them in the market at low prices.
Among the organized sector, the Indian luggage industry is dominated by three players: VIP, Samsonite
and Safari. Among the organized sector players as well, there is intense competition with aggressive
marketing and discounts to gain market share. Recently, VIP Industries Ltd ran an offer where it announced
a free stay at a 5-star hotel for one night on purchasing luggage bags of ₹5,999/- and above (Source: VIP
Impossible Offer. It is Impossible. And it is back).
Safari Industries has highlighted unfair competition among luggage manufacturers as one of the key risks
that it faces.
The major risks as identified by the Company are overdependence on China for purchase of soft
luggage, risk of exchange loss associated with imports, unfair competition, brand positioning, etc.
Such industry dynamics where numerous unorganized players compete with low-priced offerings, as well
as intense competition among organized players, creates a tough situation for players in a price-value-
conscious consumer market.
The direct result of such intense competition is a lack of pricing power in the hands of luggage players.
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3) Low pricing power of Safari Industries (India) Ltd:

Due to intense competition, Safari Industries (India) Ltd is not able to freely increase its product prices
when it faces an increase in its raw material costs. As a result, on numerous occasions in the past, Safari
Industries has to take a hit on its profit margins, which, at times, has even resulted in net losses for the
company.
In FY2001, Safari Industries suffered a net loss and intimated to its shareholders that it could not pass on
the increase in raw material costs to its customers.
The profitability was further adversely affected due to cost escalation of major inputs like plastic
and aluminium during the year, which could not be passed on due to drop in demand for moulded
luggage.
In FY2004 as well, Safari Industries highlighted that it suffered, as it could not pass on the increase in input
costs to its customers.
The year under review has been a difficult one with profitability being adversely affected due
to cost escalation of all major raw materials like Plastic, Aluminium and other inputs during the
year, which had been absorbed by the Company due to sluggish demand for Moulded luggage.
In FY2007, the company worked hard to increase its sales; however, its profits declined as it could not pass
on the increase in raw material costs to its customers.
Despite substantial improvement in sales, the margins remained under pressure due to
unabated increase in the cost of all raw materials on the back of increase in crude oil and
commodity prices.
In FY2012, Safari Industries suffered losses. It intimated to its investors that one of the reasons leading to
losses was an increase in raw material costs.
The loss for the year is mainly on account of exchange loss of Rs.130.87 lacs and significant
increase in raw material cost due to rising commodity prices.
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In FY2017, Safari Industries highlighted that due to intense competition it had to absorb a part of the cost
increases, as it could not fully pass on the increase in input costs. The company also highlighted that the
intense competition in the luggage industry would continue to put pressure on its profit margins.
Further, due to intense competition, only some increases were passed on to customer through price
increases which partially but not fully offset these increased costs….margins may continue to
experience pressure on account of intense competition
In FY2019, when the profit margins of the company declined, then it highlighted the increase in the cost of
purchases from China as the reason why these increased costs could not be passed on to the customers.
During the year, there was increased upwards pressure on buying costs of imported products from
China
Therefore, an investor would note that over the last 20 years, the business of Safari Industries has
continuously faced challenges in passing on the increase in input costs to its customers. At times, it had to
suffer and face losses. Intense competition in the luggage industry is the primary reason for the low pricing
power of Safari Industries.
4) Foreign exchange fluctuation risk is significant for Safari Industries (India)

Ltd:
A significant part of the overall costs of Safari Industries is influenced by fluctuations in the foreign
exchange (forex) i.e. movement of the Indian Rupee (INR) against foreign currencies especially the US
Dollar (USD). Foreign exchange fluctuations influence its business in two aspects.
First, Safari Industries imports most of its soft luggage bags from either China or Bangladesh, which are
priced in USD. Any fall in the value of the Indian Rupee against the USD increases the cost of these bags
for Safari Industries in INR.
In FY2017 when INR depreciated against USD, the profit margins of Safari Industries were impacted as
the cost of imports increased for the company.
Imported Soft luggage across product categories is the major contributor to the sales of the
Company. During the year, rupee remained weak and the Company’s buying costs of imported
products remained high in rupee terms due to depreciation of rupee against USD which has put
pressure on margins.
Similarly, in FY2019, Safari Industries faced margin pressure due to INR depreciation against USD.
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China due to increase in import duty and adverse exchange rate movements.
Second, the company makes hard luggage from plastic like polycarbonate or polypropylene whose prices
are linked to crude oil prices. Prices of these products are based on import parity and whenever the value
of INR declines against USD, then the cost in INR for all these raw materials derived from crude oil
increases.
Despite substantial improvement in sales, the margins remained under pressure due to
unabated increase in the cost of all raw materials on the back of increase in crude oil and
commodity prices.
Therefore, the profit margins of Safari Industries remain vulnerable to adverse movements of INR against
USD.
Credit rating report by CRISIL, January 2017, page 1:
Exposure to volatility in raw material prices and foreign exchange rates: Profitability is
susceptible to prices of imported raw material, which account for over 45% of operating cost.
On multiple occasions, Safari Industries has suffered significant losses due to foreign exchange fluctuations.
In FY2012, the company reported losses when it suffered a large foreign exchange fluctuation loss.
The loss for the year is mainly on account of exchange loss of Rs.130.87 lacs
In FY2014, Safar Industries reported forex losses of ₹3.75 cr (FY2014 annual report, page 10). In FY2020,
it suffered a forex loss of ₹2.1 cr (FY2020 annual report, page 146).
Safari Industries has identified forex/currency risk as one of the key risks to its business.
The major risks as identified by the Company are demand-risks due to any resurgence in the
COVID 19 pandemic, currency risk associated with imports, unfair competition, etc.
5) Adjustment of product mix as per markets’ preferences:
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Over the years, Safari Industries has changed its product mix in line with ongoing customer preferences.
For example, previously, it used to make primarily hard luggage that too without wheels. However, the
customers started preferring wheeled luggage bags with a preference for soft luggage.
As a result, in FY2012, the company’s business performance suffered and the company reported losses
when the demand for hard luggage declined sharply.
The drop in sales is mainly on account of 30% degrowth in sales of Hard Luggage due to falling
demand.
Credit rating report by India Ratings, February 2013:
Operating profits declined to INR39m in FY12 (FY11: INR61m) on account of a rise in input costs
due to INR depreciation and a revenue decline in the hard luggage segment which contributed
over 50% of the turnover in FY12.
In FY2012, despite a 30% decline in sales of hard luggage, it still constituted more than 50% of revenue.
However, the company quickly changed its product mix and within the next 3 years, by FY2015, soft
luggage contributed 80% of its sales and hard luggage was reduced to 20% of sales.
sale of soft luggage accounts for around 80% of the company’s turnover, followed by hard luggage
which accounts for the remaining sales
This major change was led by changing consumer preferences in the market.
Major growth is observed in soft luggage uprights and polycarbonate uprights,

whereas traditional hard luggage, made of Poly Propylene saw a steep drop in Sales. This shift is
due to change in consumer preferences towards the convenience of light and wheeled travel
products and away from heavier products without wheels
The rise in the share of soft luggage also added to the profitability of Safari Industries.
increased contribution of soft luggage sales to overall sales volumes led to a sustained
improvement in the EBITDAR margins (FY15: 7.6%, FY14: 5.9%, FY13: 4.4%).
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Another key change effected by Safari Industries was the start of manufacturing of polycarbonate zipped
luggage bags immediately after the takeover by Mr Jatia. It was also in line with the upcoming consumer
preferences.
Investors noticed that over FY2012-FY2015, consumer preferences changed from hard luggage to soft
luggage. Once again, over the next 4 years, consumer preferences changed again and now instead of soft
luggage, the market started preferring trendy-looking lightweight polycarbonate hard luggage.
Major growth was observed in Polycarbonate Uprights, due to shifting consumer preference from
Soft Luggage to more durable and premium looking hard luggage.
Therefore, the product mix of Safari Industries shifted from 20% soft luggage in FY2015 to 33% soft
luggage in FY2020 (FY2020 annual report, page 38).
Moreover, the company continued to invest to increase the manufacturing capacity of zippered
polycarbonate hard luggage.
To meet the overall growth objectives, the Company has increased its manufacturing capacity of
polycarbonate luggage at its Halol Plant
The company increased its manufacturing capacity for polycarbonate luggage in FY2021 and then again in
FY2022.
Company continued to invest in Zippered Hard Luggage by continuing to expand its range of
Polycarbonate zippered cases as well as enhancing production capacity at its manufacturing plant
in Halol, Gujarat.
In 2022, the company further expanded its manufacturing capacity of polypropylene zippered hard luggage
by creating a new manufacturing unit in a newly bought property.
Company is also setting up a new manufacturing plant through its wholly owned subsidiary in
Halol, Gujarat for additional capacity for polypropylene zippered hard luggage.
The plant was completed in June 2022. The corporate announcement, BSE, June 17, 2022:
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Safari Manufacturing Limited, the wholly owned subsidiary of the Company has
successfully commenced its commercial production/manufacturing of luggage today i.e. 17th June
2022 at its newly set up factory situated at Halol, Gujarat
The company has continued to invest as per the changing preferences of the consumers.
The trend of rising consumer preference for zippered hard luggage category continued as it is
perceived to be more premium and durable. This trend was also accelerated by relatively higher
availability and lower pricing for zippered hard luggage compared to soft luggage.
The company has also discontinued its products, which did not get sufficient consumer attention. For
example, it stopped the production of non-wheeled-framed hard luggage.
Company discontinued its product ranges of framed hard luggage, made of Polypropylene given
the lack of consumer demand in this category.
Therefore, the ability of the company to switch from hard luggage to soft luggage during FY2012-FY2015
and then again to hard luggage in line with the market’s preference has helped Safari Industries to grow its
business significantly during the last 10 years.
6) Shifting of sourcing of soft luggage by Safari Industries:

Safari Industries manufactures only hard luggage in its production units. It sources all of its soft luggage
products including backpacks and laptop bags etc. from third parties, primarily from imports. Previously,
it used to rely solely on China to meet its requirements for soft luggage.
Soft luggage is imported from Chinese manufacturers and is sold by the company under its own
brand name, while hard luggage is manufactured in-house at the company’s facility located at
Halol, Gujarat.
The company had identified its overdependence on China for soft luggage, which constituted a majority of
its sales, as a major risk.
The major risks as identified by the Company are overdependence on China for purchase of soft
luggage
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This risk materialized later on when the Chinese govt. started a crackdown on polluting units. In addition,
the Govt. of India imposed a customs duty on the import of soft luggage from China.
China due to increase in import duty
Safari Industries started diversifying its sourcing for soft luggage from China to India and Bangladesh.
Company is also increasing its outsourcing of soft luggage and backpacks from India and
Bangladesh.
By FY2022, the company had tied up with manufacturing units in Bangladesh for production exclusively
for Safari Industries.
Corporate presentation, August 2021, page 16:
Captive 3rd party capacity in Bangladesh
As a result, of this shift, the company could diversify its supply chain, make it more secure as well as
achieve cost benefits.
The Company has significantly enhanced its sourcing from manufacturing bases in India and
Bangladesh reducing its dependence on Chinese imports. This shift has helped improve supply
security as well as relative cost savings given the continued global supply chain disruptions.
The ability of the company to change its sourcing model in light of challenges faced from China has helped
it to grow its business profitably.
7) Risk of recessions, reduced travel and wedding expenditure:

The demand for luggage products made by Safari Industries is primarily dependent on travel undertaken by
the public. Therefore, during recessions when companies, as well as public, cut down their travels, then the
sales of Safari Industries suffer.
For example, during the dot com bubble in FY2001-FY2002, the recession coupled with reduced travel
following the 9/11 attacks, the Indian parliament attack (December 13, 2001) led to a sharp decline in the
sales and losses for Safari Industries.

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Production and sales were significantly affected as demand for consumer durable goods has been
sluggish due to recessionary conditions in the economy.
The events of the 11th September, 2001 and 13th December, 2001 adversly affected Travel and
many other industries…Sales and other income decreased from Rs. 5393.13 lakhs to Rs. 3912.58
lakhs. The net loss of Rs. 111.08 lakhs
Once again, in FY2009, the sales of the company declined due to the global recession.
Net Sales and other income has been stagnant at Rs.61,06 crores compared to Rs.62.45 crores in
the previous year mainly due to slow down in the economy.
Similarly, in FY2021, when there was a lockdown in India due to coronavirus and travel as well as wedding
spending declined, then the business of Safari Industries suffered significantly. Its sales declined by more
than 50% over FY2020 and it reported operating losses.
However, in FY2022 when the lockdown was lifted and travel resumed, then the business of the company
revived and it reported all-time high sales of ₹706 cr in FY2022.
travel industry is seeing an unprecedented boom with consumers looking to get out of their houses
after long period of lock-downs. Marriage demand has also been strong led by the opening of the
economy and easing of restrictions
Similarly, in FY2016 when the travel industry recovered as well as the wedding season did well, then the
business performance of Safari Industries improved.
Company witnessed a good growth in the topline during the year under review, owing to good
wedding season and increase in domestic and international travel.
Therefore, an investor should note that any event affecting travel, holidaying, and social gatherings like
weddings etc. would have a significant impact on the business of Safari Industries.
Going ahead, an investor should keep a close watch on the profit margins of Safari Industries to understand
how it is managing the increase in raw material costs and competition as well as monitor forex losses. She
should track the changing product mix of the company to understand whether it is able to utilize its
manufacturing capacities well.
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In recent years (FY2016 onwards), the tax payout ratio of Safari Industries (India) Ltd has been in line with
the standard corporate tax rate prevalent in India. The tax payout ratio has declined since FY2020 in line
with the new corporate tax regime implemented in India.
Operating Efficiency Analysis of Safari Industries (India) Ltd:
a) Net fixed asset turnover (NFAT) of Safari Industries (India) Ltd:

Over the years, the NFAT of the company has declined from 20.0 in FY2014 to 8.7 in FY2022. Moreover,
during this period, the NFAT of the company has fluctuated significantly.
First, NFAT declined sharply to 14.4 in FY2017, which coincided with the investments done by Safari
Industries in the acquisition of brands like Genius, Genie, Magnum etc. as well as the expansion of hard
luggage manufacturing capacity. As these investments took some time to contribute to the revenue of the
company; therefore, in the interim, the NFAT of the company decreased.
As these investments started adding to the revenue, then the NFAT increased to 19.0 by FY2019. In
FY2021, the NFAT declined to its lowest level of 4.5, which is due to a decline in the business of the
company because of Covid-lockdowns.
In FY2022, the NFAT of the company recovered to 8.7; however, it is still lower than the historical levels
due to two factors. First, in recent years, the sale of zippered hard luggage made of polycarbonate is
increasing, which is made by Safari Industries in-house at Halol. Previously, almost 80% of sales were soft
luggage, which was imported/traded. An increase in the share of trading/imported items in the sales
increases the NFAT of the company whereas an increase in the in-house manufactured items decreases the
NFAT.
Secondly, in FY2022, Safari Industries India Ltd created a new manufacturing unit by buying out a land
parcel with the existing structure. This new plant became operational in June 2022. This new investment,
which is yet to contribute to sales, has also led to a decline in the NFAT in FY2022.
Going ahead, an investor should keep a close watch on the NFAT of the company to assess whether it is
able to use its newly created manufacturing capacity in an optimal manner.
b) Inventory turnover ratio (ITR) of Safari Industries (India) Ltd:

Over the years, the inventory turnover ratio (ITR) of the company has increased from 4.3 in FY2014 to 5.4
in FY2022. However, before improving to 5.4 in FY2022, the ITR of Safari Industries declined significantly
to 3.7 in FY2019 and then to 2.4 in FY2021.
The consistent decline of ITR from 4.3 in FY2014 to 3.7 in FY2019 is mainly linked to the expansion of
sales channels by the company during this period along with a wide product range consisting of multiple
brands. The inventory needs of the company increased as it opened exclusive showrooms as well as in the
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hypermarkets. The company had to keep more inventory in its warehouses to meet demand from e-
commerce websites.
Company continued its focus on building the Safari brand via launches of innovative new
products and a new advertising campaign to drive visibility. The Magnum brand was strengthened
with a larger product portfolio and wider channel availability.
In order to ensure that the sales channel has sufficient stock of its products, Safari Industries increased its
inventory levels. In FY2019, the company was carrying an inventory of ₹187 cr up from ₹29 cr in FY2013.
In addition, the sales of the company show some seasonality with sales increasing in the first quarter of the
financial year in line with the wedding season. The company needs to keep a high inventory to meet the
seasonal demand.
Credit rating report by CRISIL, October 2017, page 1:
inventory holding is high at 103 days since the company needs to maintain higher inventory due
to seasonality of sales, especially for the first quarter of the fiscal.
Moreover, the company used to import almost all of its soft luggage/backpacks etc. from China. It opened
two offices in China starting 2015 to meet its demand for soft luggage. In the import process, a large amount
of inventory is consumed in the supply chain/transit, which lowers the inventory turnover ratio.
As a result, when in recent years, Safari Industries diversified its sourcing of soft luggage from China to
India and Bangladesh as well as increased the sales of hard luggage, which it makes in-house, and its
inventory requirements declined.
Credit rating report by CRISIL, March 2020, page 2:
The improvement in inventory is backed by lower import of luggage from China and higher
revenue contribution from hard luggage, which is manufactured in India and has lower inventory
levels.
Going ahead, an investor should keep a close watch on the inventory levels of the company. This is because,
as discussed earlier, the luggage industry faces frequent changes in consumer preferences. As a result,
current inventory may become unsaleable in the future.
In the past, there have been instances when Safari Industries had to write down its existing stock of luggage
bags, as it could not sell them in the market.
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In FY2013, Safari Industries wrote down stock/inventory of about ₹2.8 cr (FY2013 annual report, page 24).
Again, in the next year, FY2014, the company further wrote down stock/inventory of ₹0.27 cr (FY2014
Therefore, going ahead, an investor should keep a close watch on the ITR of the company to assess whether
it is using its inventory efficiently.
c) Analysis of receivables days of Safari Industries (India) Ltd:

Over the years, the receivables days of Safari Industries (India) Ltd have improved from 72 days in FY2014
to 53 days in FY2022.
One of the major reasons for this improvement seems to be diversification of sales channel from an earlier
focus solely on canteen stores department, which is run by army/govt. to now a broad-based sales channel
including exclusive stores, hypermarkets, e-commerce websites etc.
Most of the time, businesses face delays in receiving money from govt. agencies. However, with increasing
sales from other channels, the recovery of money by Safari Industries seems to have improved.
In FY2021, the company reported receivables days of 132 days, which is primarily due to Covid-lockdown-
related difficulties faced by businesses. As a result, the company had to provide for/write off a significant
amount of receivables.
In FY2022, Safari Industries wrote off receivables of about ₹10.5 cr and further provided for ₹5 cr worth
of receivables (FY2022 annual report, page 146).
While assessing the receivables position of Safari Industries on March 31, 2022, an investor notes that it
has impaired about ₹14.4 cr of receivables, which includes more than ₹9 cr of receivables due for more
than one year. It also impaired receivables, which are less than 6 months old. These might be due from
customers, which suffered a lot during Covid restrictions.
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Going ahead, an investor should monitor the trend of receivables days of Safari Industries (India) Ltd to
assess whether it is able to collect its overdue receivables and keep its receivables position under control.
operations (cCFO) of Safari Industries (India) Ltd for FY2013-2022, then she notices that over the years
(FY2013-FY2022), the company is not able to convert its profit into cash flow from operations.
Over FY2013-22, Safari Industries (India) Ltd reported a total net profit after tax (cPAT) of ₹103 cr. During
In the case of Safari Industries, the cCFO is less than cPAT because of its working capital-intensive business
operations. Due to its higher inventory requirements, a lot of cash generated by the company from its
operations is stuck in additional inventory required for business growth.
The ratings are also constrained by the working capital intensive nature of SIIL’s operations. The
firm has a long cash conversion cycle (FY15: 179 days), primarily due to its large inventory
holding requirement. Furthermore, cash flow from operations has remained negative (FY15:
negative INR342.6m, FY14: negative INR80m) due to the incremental working capital
requirements arising from the high growth in scale.
Therefore, going ahead, an investor should keep a close watch on the working capital position of the
company to understand whether it is able to manage its inventory and receivables position well.
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The Margin of Safety in the Business of Safari Industries (India) Ltd:

target growth.
Where,

While analysing the formula of SSGR, an investor would note that it is dependent on NFAT, which indicates
the efficiency with which a company is able to manage its plants & machinery. In the case of Safari
Industries, a major portion of sales is achieved by soft luggage, where production is fully outsourced.
As a result, in the case of Safari Industries, SSGR may not provide the best results and we have to rely on
the assessment of free cash flow to assess the margin of safety in the business model of the company.
b) Free Cash Flow (FCF) Analysis of Safari Industries (India) Ltd:

While looking at the cash flow performance of Safari Industries (India) Ltd, an investor notices that during
Therefore, during this period (FY2013-FY2022), Safari Industries (India) Ltd had a negative free cash flow
(FCF) of (₹118) cr (=84 – 202).
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of ₹48 cr. As a result, the company had a total negative free cash flow of (₹164) cr (= -118 + 2 – 48). Please
note that any capitalized interest is already factored in as a part of the capex deducted earlier.
To meet this shortfall of ₹164 cr, Safari Industries (India) Ltd had to raise debt as well as additional equity.
The company primarily relied on equity dilution as the total debt of the company increased only by ₹19 cr
during FY2013-FY2022 from ₹37 cr to ₹56 cr.
In the past, the company had the following instances of equity dilution:
 FY2021: ₹75 cr by issuing Compulsorily Convertible Debentures (CCDs) to Investcorp Private

Equity Fund II (FY2021 annual report, page 16)
 FY2018: ₹50 cr by allotting shares to two Malabar Funds (FY2018 annual report, page 36)
 FY2015: about ₹70 cr by issuing shares to Tano India Pvt Equity Fund II (₹49.8 cr) and warrants
to the promoter Mr Jatia (₹19.8 cr) (FY2015 annual report, pages 11-12)
Moreover, the requirement for additional money is not a recent phenomenon for Safari Industries. Even in
the previous decade, in FY2007, under the founder-family, Mehtas, the company had to dilute its equity to
raise ₹1.4 cr to meet its business requirements (FY2007 annual report, page 8).
Therefore, an investor would note that the business of Safari Industries is capital intensive, which needs a
significant investment in working capital. The funds’ requirement of the company is much more than what
it is able to generate through its operations. As a result, the business looks like a cash-guzzling machine.
At times, Safari Industries had to raise equity by issuing shares at a discount to the ongoing market price.
 In March 2021, Safari Industries raised ₹75 cr by issuing CCDs at a price of ₹570 whereas the
prevalent market price was in the range of about ₹650.
 On October 31, 2017, the company raised ₹50 cr at a price of ₹340 per share whereas the market
price then was about ₹410.
 In FY2015, the company raised about ₹70 cr at a price of ₹600 per share (FV ₹10, pre-split) whereas
the market price was in the range of ₹750-800 per share (FV ₹10, pre-split).
Therefore, an investor would note that the company was in urgent need of equity dilution and had to
incentivize the investors by offering them shares at a discount to the ongoing price in the market.
It seems that in FY2014, the company’s need for funds to an urgent situation and it had to raise ₹14.75 cr
via intercorporate deposits.
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The company had to dilute its equity the next year, FY2015, to repay these intercorporate deposits.
reduction in debt levels was achieved through the part use of equity funds (INR621.7m) received
in FY15 from the issuance of shares to a private equity fund and the conversion of warrants issued
to SIIL’s sponsor.
This shows that the business growth of the company had been highly dependent on the additional money
infused by investors and is difficult to sustain from the cash generated by the company from its operations.
Such a situation indicates that the business model of Safari Industries India Ltd does not have a great margin
of safety.
Going ahead, an investor should keep a close watch on the free cash flow generation by Safari Industries
(India) Ltd to understand whether the company continues to consume cash from outside sources or it starts
to generate surplus cash from its business.
Additional aspects of Safari Industries (India) Ltd:

On analysing Safari Industries (India) Ltd and after reading annual reports, credit rating reports and other
1) Management Succession of Safari Industries (India) Ltd:

Safari Industries (India) Ltd is run by Mr Sudhir Jatia (age 53 years), Chairman & Managing Director of
the company.
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As per the disclosures by the company under related party transactions, currently, two daughters of Mr
Jatia, Ms Shivani Jatia and Ms Tanisha Jatia draw remuneration from the company indicating that they
work for the company.
As per related party transactions disclosure for H2-FY2022, from Oct. 2021 to March 2022, Ms Shivani
Jatia took home a salary of ₹10.6 lac indicating an annual remuneration of about ₹21 lac. During the same
period, Ms Tanisha Jatia took home a salary of ₹8.1 lac indicating an annual remuneration of about ₹16 lac.
An investor may contact the company directly to understand more about the role played by Ms Shivani and
Ms Tanisha in the company. Thereafter, she may make an opinion about the succession planning of the
company.
The presence of the next generation of Mr Sudhir Jatia in the company in an active role when he is still
handling active responsibilities might indicate a good succession plan. It allows the next generation to learn
the nuances of the business under the guidance of senior members who are still actively involved in the
business.
An investor should look for signs of any ownership-related differences between the two daughters or sons-
in-law either currently or in the future as it might have a significant impact on the affairs of the company.
2) Dividends funded by debt:

In the last 10 years, Safari Industries has paid dividends from FY2015 to FY2022, totalling about ₹6 cr
excluding dividend distribution tax (DDT). During this period, the company had a negative free cash flow
of (₹102) cr (FY2015-FY2022). This is because, during FY2015-FY2022, it generated a total cash flow
from operations (CFO) of ₹91 cr whereas it made a capital expenditure of ₹193 cr.
Therefore, it consumed its entire CFO during FY2015-FY2022 for making capital expenditures and still
was short of funds (negative free cash flow). As a result, it had to raise funds from additional sources like
equity dilution (₹195 cr: FY2015: ₹70 cr, FY2018: ₹50 cr and FY2021: ₹75 cr) and incremental debt of
₹23 cr (FY2015 debt: ₹33 cr and FY2022 debt: ₹56 cr).
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If a company has a negative free cash flow and is using debt and equity dilution to meet its capital
expenditure, then if it payout out dividends to its shareholders, then the dividends are funded by debt. This
is because money is a fungible commodity.
We believe that companies should use their resources for capital expenditure and if any surplus is left then
should repay debt. In the situation of deficit (i.e. negative free cash flow), the companies should raise only
that much debt, which is needed to meet its business requirements and avoid raising extra debt in order to
enable it to pay dividends. Such dividend outflows put an extra burden of interest payments on the company,
which could have been avoided.
3) Warrants to the promoters of Safari Industries India Ltd:

In FY2015, Safari Industries allotted 330,000 warrants to the promoter of the company at ₹600/- per
warrant, which could be converted into one equity share each within a period of 18 months.
As per the terms, the promoter paid 25% of the total consideration i.e. 25% of ₹19.8 cr = ₹4.95 cr on the
allotment of warrants. The remaining 75% of the amount, ₹14.85 cr was to be paid any time within the next
18 months when the promoter decides to convert the warrants into equity shares. Irrespective of the market
price on the date of the promoters choosing, the company would issue him shares at a fixed price of ₹600
per share whenever he decides to convert these warrants into shares.
On March 31, 2015, the promoter converted half of the total warrants i.e. 165,000 warrants into equity
shares.
The Company has also issued 3,30,000 convertible share warrants to Mr. Sudhir Jatia, the
Promoter of the Company. Each share warrant is convertible into one equity share of ₹10/- each
at a premium of ₹590/- per share. As on 31st March 2015, out of the above share
warrants, 1,65,000 share warrants have been converted into fully paid equity shares.
On March 31, 2015, the market price of shares at BSE was ₹ 801.50 (closing price).
The promoter converted the remaining 165,000 warrants into equity shares in FY2016 at ₹600 per share.
During the entire FY2016, the share price of Safari Industries had been almost above ₹750 and at times,
exceeded ₹1,000.
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Therefore, an investor would notice that even though the promoters got the warrants at a price of ₹600, they
could convert them into shares at times when the share price was higher than the conversion price. This is
almost always true because the promoters usually convert warrants only when they make money on
conversion otherwise they let the warrants expire.
Stock warrants are like call options where the holder has paid a premium of 25% of the value. She would
convert the warrants into equity shares by paying the balance 75% only if at the time of conversion the
price of the equity share of the company is such that the holder of the warrants makes money over her
warrant allotment price.
We believe that the warrants are 25% beneficial to the company and 75% beneficial to the promoters.
Before February 2009, this ratio was 10% beneficial to the company and 90% beneficial to the promoters
because; then the promoter had to pay only 10% of the total money upfront.
The key reason that led SEBI to increase the upfront payment for warrants was that the promoters used
warrants to enrich themselves when the stock markets rose while their loss was limited to only 10% if the
markets fell. (Source)
There were complaints that promoters allotted warrants to themselves and select investors at a
pre-determined price, but didn’t buy them when the due date came if the prevailing stock prices
were lower than the decided price. If the prices were higher, they would convert those warrants
and at least make a paper profit, and in some cases encash the gains.
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It is to discourage promoters from trading profits. Warrants are seen as an instrument that gives
an advantage to promoters above retail investors, who have all other rights equal to company
founders.
When the markets melted during 2008 and early 2009, promoters of many companies such as
Hindalco Industries, Tata Power, GE Shipping and Pantaloon Retail did not convert those
warrants, regulatory filings show.
After similar complaints, in February 2009, the regulator had raised the up-front margin to be
paid by warrant subscribers to 25% from 10% since the payment lost was insignificant compared
with the losses one would have made if forced to buy.
Common logic says that no one holding stock warrants would exercise them to get shares at a price, which
is higher than the price at which he/she can get shares from the market.
More so, if the promoters intend to infuse money into the company, then they should simply get all the
shares at the current market price and give the entire money to the company upfront so that the company
may use it for the purpose for which it needs money.
If the promoters pay 25% now and let the stock warrants expire due to the market price being consistently
lower than the exercise price in future, then it effectively means that the promoters did not have the true
intention of infusing 100% of the money or that the company did not need 100% of the money.
Moreover, warrants also allow a promoter to increase her shareholding in the company without facing the
market impact i.e. the cost of increasing her stake at a higher price when the market gets to know that the
promoter is increasing her stake in the company by buying them from the market.
In the case of warrants, the promoter is able to increase her stake in the company at the fixed price of
warrant allotment.
In the case of Safari Industries, in FY2014, the shareholding of Mr Jatia was 59.78%, which fell to 49.00%
on March 31, 2015. The primary reason was the allotment of new shares to Tano India Pvt Equity Fund II
which got about a 20% stake in the company for its investment. The shareholding of 49.00% of Mr Jatia in
FY2015 was despite the conversion of 165,000 warrants on March 31, 2015, i.e. the entry of Tano India
fund had brought the stake of Mr Jatia in Safari Industries below the majority mark.
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Please note that the company “Safari Investments Pvt Ltd” is a part of the original founder-promoter family,
Mehta and not a part of Mr Jatia’s family.
In FY2016, Mr Jatia exercised the remaining 165,000 shares and could increase his stake in the company
above the majority mark.
Therefore, after the complete conversion of warrants, Mr Jatia could retain his majority shareholding in the
company and for it; he could get additional shares at a fixed price of ₹600 and not face the market cost of
buying shares from the open market.
It might be a situation where the number of warrants allotted to Mr Jatia was arrived at after doing all the
calculations that only that many warrants should be allotted so that he could achieve his targeted 51% stake.
That is why the stake after warrants conversion increased to 51.02%. In addition, no warrants were allotted
to the original founder promoters Mehta family who own a stake in the company via Safari Investments Pvt
Ltd, classified under promoters.
Therefore, we believe that investor should increase their due diligence whenever they come across a case
of allotment of warrants to the promoters. For any further clarifications, an investor may contact the
company directly.
4) Scope for improvement in internal controls and processes at Safari Industries

India Ltd:
An investor notices many instances, which indicate that internal controls could have been improved.
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In FY2021, the company did not comply with required guidelines while holding its board meeting. As a
result, the Bombay Stock Exchange (BSE), as well as National Stock Exchange (NSE), imposed a fine on
the company. Later on, BSE agreed to waive the fine. However, NSE has not waived the fine until now.
During the preceding Financial Year i.e. 2020-21, BSE limited and National Stock Exchange of
India Limited had issued notice to the Company for non-compliance with Regulation 29 of the
Listing Regulations with respect to its Board Meeting held on 12th February 2021 and
subsequently both stock exchanges had levied fine of ` 10,000/- each exclusive of taxes. The
Company had applied for waiver of fine before both the Stock Exchanges, however only BSE
Limited has approved the waiver application.
Previously, in FY2011, the company had raised deposits from the public; however, it did not comply with
the RBI requirement of maintaining sufficient liquid assets within stipulated time limits.
The Company has complied with the provisions …and directives issued by the Reserve Bank of
India…with regard to the deposits accepted from the public, save and except maintaining liquid
assets
In the past, there had been two instances of fire at the company’s premises, which led to losses. First, in
FY2003, the company faced a fire in its depot.
Insurance Claim of Rs.17.85 Lacs represents settlement of claim in respect of loss of goods due to
fire at the Company’s depot.
Thereafter, in FY2016, the company faced another fire in its manufacturing unit at Halol.
During the year, there was a fire at the Halol plant of the Company and Properties & Inventories
lying there were damaged.
An investor should be cautious if such instances of fire are repeated because these can lead to a significant
loss of life and business.
In FY2013, Safari Industries did not pay its undisputed due for service tax to govt. authorities within the
stipulated time. The same was outstanding for more than 6 months from the due date for payment.
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There are undisputed arrears of Service tax amounting to ₹46,831 outstanding as at March 31,
2013 for a period of more than six months from the date they became payable.
Delays in depositing undisputed service tax dues continued in FY2014 as well.
There are undisputed arrears of Service tax amounting to ₹1.75 lacs outstanding as at March 31,
2014 for a period of more than six months from the date they became payable.
In FY2015, when the company initially sent its annual report to shareholders on July 10, 2015, then it did
not include companies auditor’s report order (CARO) in its annual report, which is an important part of the
auditor’s observations of the company’s financial statements. Later on, the company had to revise its annual
report on July 15, 2015, to include CARO and publish it in newspapers. (Source: FY2015 annual report,
pages 1-2).
In FY2009, while reappointing the managing director of the company, it did not file the required
information with the authorities.
The company has during the year under review re-appointed the Managing Director. Save
and Except filing of form 23, 32 and filing of Agreement defining terms of re-appointment…has
complied with the provisions of the Act in respect of the same
In FY2018, the company diluted its equity when it raised ₹50 cr from Malabar Funds by issuing new shares.
As a result, the shareholding of all the existing shareholders declined even though they did not sell any
shares. However, while disclosing the change in shareholding of promoters during the year, the company
made an error and did not consider the impact of equity dilution on their holding at the end of FY2018.
The following table from the FY2018 annual report, page 40 indicates that the shareholding of Mr Jatia did
not go down during FY2018 and stayed constant at 51.02%. The only change is the increase in the number
of shares due to the split of shares from face value (FV) of ₹10 to FV of ₹2.
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However, at the same time, in a different table, Safari Industries has correctly mentioned the decline in the
shareholding of Mr Jatia in FY2018 by 3.44% from 51.02% at the start of the year to 47.58% at the end of
the year.
Such instances of errors indicate weakness in the processes like lack of oversight/maker-check mechanisms.
In FY2009, the company disclosed that it had many tax-related disputes with govt. authorities going back
to the years FY2003 to FY2006. However, it had not disclosed these disputes in any of the previous annual
reports until FY2008.
According to the information and explanations given to us, there were no disputed dues of sales
tax, income- tax, customs duty, wealth-tax, service tax, excise duty and cess
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An investor may contact the company directly to understand the reasons for nondisclosure of the tax
disputes in the annual reports until FY2008. Was it because these disputes arose in FY2009 only? However,
some of the disputes were already at the appeal stage indicating that they had been continuing for a while.
In FY2010, Safari Industries published an advertisement in the English language whereas it needed to
publish it in the Marathi language.
The Company closed its Register of Members and Share Transfer of Register from 10.07.2009 to
25.07.2009…However, Advertisement in Navshakti edition dt. 15th June, 2009 in English
Language instead of Marathi Language.
On one occasion, Safari Industries disclosed that the resignation of a professional was effective from a date
different from the date mentioned in the letter of resignation.
The Company has accepted the resignation of Mr. Y. P. Trivedi vide Resignation letter dt.
31.01.2009 in the Board Meeting held on 25.04.2009 and mentioned that the said resignation is
effective with close of business hours on 25.04.2009, however the resignation letter mentions the
resignation is effective with close of business hours on 31.01.2009.
Therefore, it is advised that investors should pay enhanced attention while going through the disclosures of
Safari Industries India Ltd.
The Margin of Safety in the market price of Safari Industries (India) Ltd:
Currently (July 27, 2022), Safari Industries (India) Ltd is available at a price-to-earnings (PE) ratio of about
82 based on consolidated earnings of FY2022. An investor would appreciate that a PE ratio of 82 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, Safari Industries (India) Ltd seems a company, which has grown its sales almost consistently at a
rate of 25% year on year for the last 10 years. Sales declined only in FY2021 due to Covid-related
restrictions. Over the last 10 years, profit margins have also seen significant improvements; however, the
profit margins have seen fluctuations as well.
The business of the company started growing fast, in both sales and profits, after 2012 when Mr Sudhir
Jatia, an industry veteran and ex-MD of the industry leader, VIP Industries Ltd, took over Safari Industries
from the Mehta family. Sales of the company that were growing at a slow rate of about 5% year on year in
the last 20 years (FY1993-FY2012) started growing at 25% year on year after Mr Jatia took over.
Using his experience, Mr Jatia expanded the sales channel of the company from primarily CSD to exclusive
showrooms, hypermarkets, eCommerce sites etc. He added many other brands as well as new products like
backpacks, laptop bags, and polycarbonate zippered hard luggage to meet changing customer preferences.
As a result, Safari Industries increased its market share in the intensely competitive luggage bags industry.
However, despite significant sales growth, the company has low pricing power over its customers, as there
is intense competition from the unorganized sector as well as an oligopolistic organized sector dominated
by VIP, Samsonite and Safari. As a result, whenever the inputs costs increase whether due to commodity
price increase or due to Rupee depreciation, then the company has to take a partial hit on its profit margins.
Nevertheless, recently when the company was hit due to problems of Rupee depreciation as well as supply
chain problems from China, then it diversified its sourcing of soft luggage from China to India and
Bangladesh. This resulted in cost savings as well as lower inventory requirements.
All these strategies have helped the company grow its business at a brisk pace; however, still, its business
is highly dependent on the spending on travel by corporates and individuals as well as wedding season. In
FY2021, the Covid restriction led to a decline in spending on all these aspects leading to a sharp decline in
sales for the company and it reported losses.
Safari Industries’ business is highly capital intensive as it needs a large amount of inventory to make its
product available to the customer across different sales outlets like exclusive showrooms, hypermarkets
and CSD etc. In addition, as its business has grown, more and more money is stuck in receivables. In fact,
the working capital of Safari Industries has consumed cash much more than what it generated by its
operations in the last 10 years. This is even though its operations are not fixed-capital intensive as it
completely outsources the production of soft luggage, which is more than half of its sales.
The company has faced significant negative free cash flow and has to raise additional money by equity
dilution and debt to meet its funds’ shortfall. Equity dilution is a regular affair for the company and after
every 2-3 years, it comes up with a preferential issue of shares, which dilutes the holding of existing
shareholders. In FY2015, when the shareholding of its key promoter fell below the majority mark after
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issuing shares to the private equity investor, then the company issued warrants to the promoter to bring his
shareholding above the majority mark.
However, despite the situation of a continuous cash shortfall, Safari Industries has declared dividends for
many years, which seem to be funded by debt or the proceeds from equity dilution.
The current promoter of the company, Mr Sudhir Jatia is young at 52 years of age and has also introduced
his two daughters as employees in the company. It seems a step toward management succession planning.
There have been many instances, which indicate scope for improvement in the internal controls and
processes of Safari Industries.
Going ahead, an investor should keep a close watch on its profit margins, product mix, forex losses,
sourcing for soft luggage, and utilization levels of the newly completed hard luggage-manufacturing unit
as well as its inventory levels. The investor should also keep a check on the receivables level of the company
and monitor any write-offs of receivables as well as any provisions towards bad/doubtful debt. The investor
should monitor whether the company starts generating free cash flow or it goes for further equity dilution
to fund its growth in the future and whether it goes for any further rounds of warrants issuance to promoters.
All these aspects should be monitored by an investor to keep a continuous check on the financial
performance of Safari Industries.
These are our views on Safari Industries (India) Ltd. However, investors should do their own analysis before
P.S.

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10) Accelya Solutions India Ltd

Accelya Solutions India Ltd is a leading software and outsourcing solutions provider for the airline and
travel industry. The company is owned by a private equity firm, Vista Equity Partners.
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On different occasions in the past, Accelya Solutions India Ltd has created child entities (subsidiaries, joint
ventures etc.). As a result, since FY2002, it has published standalone as well as consolidated financials.
On Dec 31, 2022, the company had two subsidiary companies; Accelya Solutions UK Limited and Accelya
Solutions Americas Inc. (Dec. 2022 quarter results, page 11).
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 the consolidated financials of the company, whenever they are
present.
Therefore, while analysing the past financial performance of Accelya Solutions India Ltd, we have analysed
the consolidated financials of the company.
An investor should also note that over the years, the company has witnessed multiple changes in names as
well as promoters.
 In 1986, the company was promoted by Mr Narendra Kale and Mr Vipul Jain as Kale Consultants
Ltd.
 In FY2011, Chequers Capital bought the company from Mr Kale and Mr Jain using Accelya group
and renamed it Accelya Kale Solutions Limited.
 In FY2017, Warburg Pincus bought the company from Chequers Capital and the company was
renamed Accelya Solutions India Limited.
 In FY2020, Vista Equity Partners bought the company from Warburg Pincus.
With this background, let us analyse the financial performance of Accelya Solutions India Ltd.
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Financial and Business Analysis of Accelya Solutions India Ltd:

In the last 10 years (FY2013-FY2022), the sales of Accelya Solutions India Ltd have increased at 2% year
on year, from ₹304 cr in FY2013 to ₹368 cr in FY2022. In the last 12 months ending Dec. 2022 (i.e. Jan.
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2022 to Dec. 2022), the company reported sales of ₹423 cr. At times, the company saw its sales decline like
in FY2015, FY2020 and FY2021.
Over the years, the operating profit margin (OPM) of Accelya Solutions India Ltd has been around 38%-
40%, which declined during FY2020 and FY2021 to 29%. However, the OPM has again recovered to 40%
in the last 12 months ending Dec. 2022 (i.e. Jan. 2022 to Dec. 2022).
On an overall basis, during FY2013-FY2022, the profit after tax (PAT) of the company declined from ₹84
cr in FY2013 to ₹76 cr in FY2022.
To understand the reasons for such a financial performance of Accelya Solutions India Ltd, an investor
needs to read the publicly available documents of the company like its annual reports from FY1999
onwards, credit rating reports by ICRA, corporate announcements as well as other public documents.
In addition, an investor should also read the following article explaining the key factors affecting the
business of information technology companies: How to do Business Analysis of IT
Services Companies
The above-mentioned documents indicate that the following key factors influence the business of Accelya
Solutions India Ltd, which are critical to understand for any investor analysing the company.
1) Low growth prospects of the business:

While analysing the financial performance of Accelya Solutions India Ltd, one thing that stands out is its
low business growth rate over the last 10 years (FY2013-FY2022). There are multiple reasons for the low
growth prospects of the company’s business.
First and foremost, the market that Accelya Solutions India Ltd can cater to, is small. Therefore, even after
the best of its efforts, the company cannot grow a lot.
Credit rating report by ICRA, May 2018, page 3:
The company’s scale of operations remains modest owing to limited market for outsourcing in the
airlines services space, thereby limiting its growth prospects.
1.1) Intense competition for airline services business:
Even within this small market opportunity, Accelya Solutions India Ltd faces intense competition from
other information technology services as well as from in-house technical teams of airlines.
Airline business is very complex and competition from other service providers is intense.
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Kale also faces stiff competition from other third-party outsourcing companies and also from
the in-house departments of airlines.
The role of in-house technical teams of airlines in the industry is significant because as per the company,
they form the second largest player in the market after it. Accelya Solutions India Ltd own 20% of the
market. (Source: Accelya leads with 20% NDC market share, who is number two?)
Technical divisions of airlines own 12% of the market and provide tough competition to the players like
Accelya Solutions India Ltd. For example, the technical division of Lufthansa airlines, Lufthansa Systems
Airline Consulting is offering its solutions for new distribution capabilities (NDC) and ONE Order standard
to other airlines.
Trapped in the NDC-jungle? Stay calm and relax. Our retailing experts can
tame any wild challenge! – Lufthansa Systems
Airlines have been active players in the market of airline services for a long period. For example, in the
past, British Airways had a significant presence in the market via its technical division, Speedwing. It
developed many products that it offered to other airlines. However, in the dot-com bubble, British Airways
sold off many products of Speedwing, which were bought by Accelya Solutions India Ltd in FY2001.
Your Company acquired four software products from Speedwing, a division of British Airways Pic.
UK, in July, 2000.
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Due to a small market and intense competition, Accelya Solutions India Ltd has a limited ability to grow
its business.
The limited opportunity for growth seems to be the primary reason that so many different promoters have
sold off the company in quick succession in the last decade.
In FY2011, the founder-promoters, Mr Kale and Mr Jain sold off their entire shareholding to Chequers
Capital (Accelya) when the company had achieved a revenue of ₹226 cr. From FY2011, until FY2022, the
company has grown its sales at a rate of 5%.
In FY2011 when the promoters sold their entire stake and the promoter Mr Vipul Jain became an employee-
managing director of the company, it seemed similar to Kokuyo Camlin Ltd where the promoters of Indian
company sold a majority stake to Kokuyo, Japan and became employees of the company i.e. the promoters
preferred paycheque to the dividends.
An investor may read our analysis of Kokuyo Camlin Ltd in the following article: Analysis: Kokuyo
Camlin Ltd
In fact, in FY2011 when Chequers Capital took over the company, the remuneration of Mr Vipul Jain
increased sharply by more than 80% from about ₹1.5 cr in FY2010 to ₹2.7 cr in FY2011. This sharp increase
in remuneration of Mr Vipul Jain was despite a decline of more than 20% in the net profit of the company
in FY2011 to about ₹20 cr from ₹26 cr in FY2010.
Due to the lack of growth opportunities, Accelya Solutions India Ltd has been paying out large dividend
payouts to its investors because it is not finding opportunities to gainfully deploy its capital. At times, the
dividend payout of the company has exceeded 100% of its net profits indicating that the company has paid
out the entire profits of the year and in addition, has used the existing cash balance to pay dividends to its
shareholders.
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The company also acknowledged it when it declared dividends more than its profits in FY2013. The
company stated that the high dividend reflected its current year’s performance as well as its past
performance.
A dividend payout of Rs. 70 per share (which includes Rs. 40 per share proposed) reflects not only
current year’s performance, but past performance as well as our ability to generate free cash on
an on-going basis.
The manner in which, the company has changed hands among private equity players; from Chequers Capital
to Warburg Pincus and then to Vista Equity Partners, it seems that every time a new buyer came with hopes
of generating high growth. However, soon, it realized that in this business swift growth is not possible.
Therefore, every time, soon after purchase, the buyer of the company became a seller.
2) Per-transaction billing model:

Originally, Accelya Solutions India Ltd primarily focused on creating software products serving airlines
and then selling their licenses to airlines based on a one-time license fee. The products of the company were
good and they found well-known customers. However, a one-time sale model did not generate any recurrent
income. It led to a continuous search for new customers, year-on-year, for growing its revenue.
the classical Initial Licensing Fee (ILF) model, where an upfront license fee was collected from a
customer and subsequent years would see relatively small AMC incomes from the same customer.
It meant that one looked for new sales every year just to replace revenues. The challenges in doing
this whilst selling large enterprise-wide applications to an industry with a very finite customer
set can well be imagined.
Nevertheless, when Accelya Solutions India Ltd started its outsourcing business (Managed Process
Solutions, MPS), then it focused on per-transaction billing instead of per-seat (number of people employed)
billing. As a result, when its customer airlines flew more passengers (i.e. higher number of transactions),
then Accelya Solutions India Ltd made more money.
While the MPS business has grown significantly on a YOY basis, the headcount has increased only
by 58% from 92 to 145, which has led to improved margins. Kale’s business model is not based
on a per seat pricing, but on a per-transaction cost and thus the productivity benefits are to Kale’s
benefit.
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Accelya Solutions India Ltd liked the per-transaction business arrangement so much that for its software
sales business as well, it focused on turning it into a per-transaction-based, multi-year contracted business
instead of a one-time license sale business.
Here Kale provides the application and infrastructure and customer uses the system. Charges are
per transaction for product, hardware, system software and system management services. Typical
contracts would be for 4-5 years in duration….These revenue models lead to long term,
periodic, annuity type revenue.
By FY2006, the company earned almost 70% of its revenue from sustainable annuity-type contracts.
During the year ended 31st March, 2006 over 70% of the revenues of the company are such annuity
type predictable revenue
Due to per-transaction billing, the business of Accelya Solutions India Ltd became highly dependent on the
air-traffic growth i.e. the number of passengers flown by airlines.
Airlines business is very sensitive to any economic or political turmoil. This is because in political or
security-related issues people do not feel very safe travelling by air whereas during economic downturns,
both companies as well as individuals cut down on air travel to save on expenses.
As a result, whenever there is a downturn, the airline industry is impacted, which in turn affects Accelya
Solutions India Ltd due to a lesser number of transactions.
The airline industry is amongst the first to be impacted by any major economic or political
situations.
After switching its business model to a per-transaction basis, Accelya Solutions India Ltd faced the first
such situation in FY2009 when due to a financial meltdown, people and companies reduced spending on
air travel. Because of the reduction in the number of passenger transactions, the business of Accelya
Solutions India Ltd was affected.
The immediate impact is lower revenues from our existing customers because many of our
contracts have a transaction (E.g. per passenger or per air waybill model) based pricing. Thus if
there are fewer passengers flying compared to a year ago or less cargo being carried, we earn
less on the same contracts.
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In recent times, the business of Accelya Solutions India Ltd was severely impacted in FY2020 and FY2021
when due to coronavirus pandemic-related lockdowns, air travel reduced significantly. As lesser passengers
flew in aircraft, the business of Accelya Solutions India Ltd, which earns on a per-transaction basis, was
affected significantly.
Over two years of FY2019-FY2021, the revenues of the company declined by about 33% and its operating
profit margin declined from 39% in FY2019 to 29% in FY2021.
Company’s business model is principally based on per transaction pricing, the Company’s revenue
which is linked to airline passenger transactions suffered from larger impact due to minimum
billing agreements with customers.
Credit rating report by ICRA, July 2021, page 1:
revenue in 9M FY2021 recording degrowth of 41.4% YoY. The revenue was impacted because
of significant decline in airline passenger traffic amid the pandemic.
Therefore, even though it may seem that due to per-transaction billing, Accelya Solutions India Ltd has
created a significant operating leverage in its business i.e. as airlines carry a higher number of passengers,
the company makes more money without a significant additional investment.
However, an investor should also note that the business of Accelya Solutions India Ltd is very vulnerable
to any economic and political situation because air travel is one of the first sectors to feel the impact of such
circumstances.
3) Declining focus of Accelya Solutions India Ltd on research & development:

Over the years, the focus of the company on research and development (R&D) has gone down. It is clearly
visible from the money spent by the company on R&D as a percentage of sales.
The following table shows the R&D expenditure done by Accelya Solutions India Ltd as a percentage of
its sales over the last 20 years (FY2003-FY2022).
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When the founder promoters (Mr Kale and Mr Jain) were running the company, then they had a high focus
on R&D as they were spending almost 7%-10% of revenue on R&D. However, ever since the private equity
players (Chequers Capital, Warburg Pincus and Vista Equity Partners) took over the company, the R&D
expenditure has declined significantly to less than 1% of sales.
Accelya Solutions India Ltd, in FY2003, when it was under its founder-promoters and had only ₹55 cr of
revenue spent ₹5.6 cr (10% of sales) on R&D. Whereas, in FY2022, when the company is under private
equity players and has sales of ₹368 cr, then it has spent only ₹3.8 cr (1% of sales) on R&D.
It looks like the private equity players have focused more on taking out high dividend payouts to give cash
payments to their investors (limited partners) instead of spending it on R&D to develop new products,
which can take the company to the next level.
Even the credit rating agencies have highlighted the focus of private-equity promoters on large dividend
payments as a constraint on the business strength of the company.
The company has maintained a liberal dividend policy since it was taken over by Accelya in
FY2012, which has constrained the accretions to net worth and accumulation of liquid reserves
Focus on removing the money from the company limits its ability to expand its business, develop new
products, and enter new industries for growth. Instead, now, the company has to restrict its business to the
modest growth opportunities provided by the airline industry only.
4) Declining number of employees of Accelya Solutions India Ltd:

When an investor looks at the number of people employed by the company over the last 20 years (FY2003-
FY2022), then she makes some key findings.
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The number of employees of Accelya Solutions India Ltd was growing at a sharp pace until the company
was managed by founder promoters (Mr Kale and Mr Jain). Under their control, the number of employees
increased from 563 in FY2003 to 1,591 at the end of FY2010.
In FY2011, Chequers Capital took control of the company and soon thereafter, the growth in the number
of employees stagnated. In FY2022, Accelya Solutions India Ltd had 1,248 employees, which is less than
the number of employees it had in FY2008, about 15 years back.
5) A sharp contrast in the business strategy of founder-promoters and private

equity owners:
It looks as if the private equity (PE) owners are not willing to invest in the business of the company by way
of R&D or increasing the workforce. Instead, the PE players are more interested in taking out the annual
cash generated by the company by way of high dividend payouts.
This is in sharp contrast to the business strategy of expansion followed by the founder-promoters (Mr Kale
and Mr Jain) who focused on expanding to newer markets and business opportunities by investing a large
proportion of its sales in R&D and increasing the employee count at a fast pace.
The founder-promoters worked hard to expand the business into newer geographies, which consumed a lot
of cash. As a result, the promoters felt that the business is not able to generate sufficient cash.
While Kale grew and earned a great reputation, we did not generate adequate funds to sustain the
heavy investments required to break into the global market.
As a result, time and again, the company had to rely on raising funds through debt, equity dilution and
selling assets to capitalize on growth opportunities.
 In FY2000, the company raised ₹38.25 cr via an initial public offer (IPO) to meet its funds’
requirements. (FY2000 annual report, page 10).
 In FY2004, the company raised ₹3.1 cr from promoters by issuing shares and warrants to promoters
on a preferential basis (FY2004 annual report, page 10).
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 In FY2010, the company raised ₹4.8 cr from the promoters by issuing warrants.
The company also resorted to raising debt to fund its acquisitions.
Interest and Finance Charges increased from Rs. 4.29 million in 2003-04 to Rs. 8.67 million,
primarily due to loans taken to fund the acquisition of Cognosys
In FY2008, the company sold one of its properties to fund its acquisition of a company in the UK (Zero
Octa).
Profit After Tax includes an exceptional item of Rs.101.16 million which is primarily a net of profit
on sale of property of Rs.127.51 million
During the year Kale made an investment in a wholly owned subsidiary viz. Kale Revenue
Assurance Services Limited, UK of Rs.123.41 million for the purpose of acquisition of Zero Octa
UK Limited.
The promoters found all the avenues to generate cash like giving out spare space in the office building on
rent to generate additional cash. In FY2006, the company earned a rent of ₹3.36 million (FY2006 annual
report, page 26) and in FY2007, it earned a rent of ₹5.13 million (FY2007 annual report, page 29).
The founder-promoters expanded to newer geographies and formed subsidiaries and joint ventures.
Sometimes, they succeeded and sometimes, they failed.
The company ventured into New Zealand; but had to shut down the subsidiary when the business did not
make any sense.
Your Company also closed down its wholly owned subsidiary in New Zealand viz. Kale
Consultants NZ Limited. In the changed market scenario, the market was not attractive enough for
the subsidiary to continue its presence in the region
Founders established entities in Australia and Malaysia. However, they had to take a loss when the
businesses did not work out as expected.
your Company has assessed a decline, other than temporary…in a subsidiary viz. Kale Consultants
Australia Pty. Limited and a joint venture viz. Antah Kale Sdn. Bhd. As a result of this assessment,
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a provision has been made for diminution in the value of investments of Rs. 25.19 million and Rs.
4 million respectively
Therefore, the desire to take risks as well as the business growth strategy of the company has undergone a
big change since the private equity players have taken over the company.
6) Narrowing down business focus to only airlines & travel industry:

Originally, apart from airlines, Accelya Solutions India Ltd served multiple other industries like hospitals,
banking etc. and it was a prominent player serving those industries.
For example, in the late 1990s, it was India’s largest provider of hospital-management software solutions.
It had about 70% market share and had many renowned Indian as well as international hospitals as
customers.
the company is India’s largest hospital management solution provider with over 70% market
share.
KCL’s clients in this segment include prestigious hospitals like Breach Candy Hospital and
Research Centre, Bombay Hospital, Tata Main Hospital, Jehangir Nursing Home, The Aga Khan
Hospital (Tanzania), City Medical Centre (Malaysia), etc.
Similarly, it catered to the banking industry and had almost 35 banks as its customers including leading
public sector, private as well as international banks.
KCL has bagged several clients in this sector, including Citibank, Punjab National Bank, Central
Bank of India, Bank of Maharashtra, Bank of Baroda, The United Western Bank Ltd, etc.
However, later on, to focus solely on the airline industry, it sold off all these businesses.
In FY2004, Accelya Solutions India Ltd sold its banking business to Onward Technology Ltd and its
Citibank business to Polaris Software. It sold off its healthcare business to Sobha Renaissance Information
Technology Pvt. Ltd.
This involved transfer of the software services business with Citibank / Orbitech to
Polaris Software Labs Limited, sale of the Banking Products division to Onward
Technologies Limited
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your Company has transferred its Healthcare business under the brand name WINCARE™ to
Sobha Renaissance Information Technology Private Limited.
As a result, it became very narrowly focused on airlines and the travel industry.
With this restructuring, your Company has become a pure play in the Airlines and Travel industry.
Because of a very narrowed-down focus on an industry with limited players where existing airlines also
focus on developing technological solutions in-house and selling them to other airlines, Accelya Solutions
India Ltd has limited its growth prospects.
As a result, it seems that the founder-promoters sold it and moved on and whenever anyone else buys it,
very soon, it starts looking to sell it off.
7) Customer concentration risk of Accelya Solutions India Ltd:

The airline industry is highly vulnerable to events and downturns and has very few customers running their
operations profitably. Moreover, year-on-year, the profit margins of airline companies are deteriorating.
The airline industry will see lower margins owing to factors such as labor, fuel and infrastructure.
Deteriorating business environment with trade wars will add more pressure on the margins
As per the company, in 2016, airlines were expected to make a profit of $10.4 per passenger (FY2016
annual report, page 35) whereas the same had declined to $6.12 in FY2019 (FY2019 annual report, page
42).
Therefore, Accelya Solutions India Ltd, which focuses sharply on the airline industry faces customer
concentration risk as well as weak negotiating power against its large customers.
One of the customers accounted for more than 10% of the revenue for the year ended 30 June
2021.
The loss of any such large customers affects its business growth.
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Dependence upon a few customers has impacted the company’s growth trajectory when it
witnessed a few customer exits in the past. In the last fiscal too, the loss of a key customer in Q2
FY2018, as it filed for bankruptcy, impacted its growth in Q3 FY2018.
As discussed earlier, there are only limited outsourcing opportunities in the airline industry. Therefore, a
change in the business strategy of even one customer has affected the business of Accelya Solutions India
Ltd.
Accelya Kale had a challenging year because the year started with the loss of a significant sized
contract with one of its key customers. This was largely due to change in the customer’s IT and
outsourcing strategy
At times, large customers have forced tough terms on the company like longer credit periods than the
industry norms.
The strengths are partially offset by the concentration of revenues on a few customers and in a
single vertical (airlines), modest scale of operations, its liberal dividend policy and a slightly
elongated payment cycle for one of its customers.
Therefore, while projecting the performance of Accelya Solutions India Ltd in the future, an investor should
keep in her mind the limited growth opportunities provided by the airline industry and the high negotiating
power of a few large profitable airline players. She should also note the preference of its promoters (PE
players) to take large dividends from the company instead of investing the money to venture into newer
products and industries for growth.
Over the last 10 years (FY2013-FY2022), the tax payout ratio of Accelya Solutions India Ltd is in line with
the corporate tax rate prevalent in India. The decline in the tax payout ratio in the recent year is due to a
reduction in the corporate tax rate announced by India in FY2020.
Operating Efficiency Analysis of Accelya Solutions India Ltd:
a) Net fixed asset turnover (NFAT) of Accelya Solutions India Ltd:

Over the years, the NFAT of the company had increased from 3.9 in FY2015 to 6.2 in FY2019. The main
reason for this improvement in the NFAT seems to be the hesitation by the company to invest more in the
physical infrastructure as it restricted its employee count growth. As there was no new large investment in
the physical infrastructure, the NFAT of the company kept on increasing due to the declining denominator
due to depreciation.
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In FY2020, the company invested in new office premises in Mumbai, which led to a decline in the NFAT.
Thereafter, the decline in the business performance of the company due to the coronavirus pandemic has
led to a decline in the NFAT. As a result, from FY2019 to FY2022, the NFAT of the company declined
from 6.2 to 3.3.
Nevertheless, unlike manufacturing companies, the business of information technology (IT) companies is
not highly dependent on investment in physical infrastructure. Therefore, NFAT as a parameter may not
provide very useful insights into the operating efficiency of IT companies.
b) Inventory turnover ratio (ITR) of Accelya Solutions India Ltd:

The company operates in the information technology/software segment and does not require any physical
inventory for running its business.
company is a service company, primarily rendering IT and IT enabled services. Accordingly,

it does not hold any physical inventories.
Therefore, the inventory turnover ratio is not a very useful parameter for assessing the company.
c) Analysis of receivables days of Accelya Solutions India Ltd:

Over the years, the receivables days of Accelya Solutions India Ltd have deteriorated from 41 days in
FY2014 to 93 days in FY2021. Even though the receivables days of the company have improved to 63 days
in FY2022; however, still, the overall trend of declining receivables days indicates that the company is
losing its negotiating power over its customers to collect its dues on time.
One of the reasons is the large-sized customers of the company in a highly volatile and vulnerable industry
who hold a high negotiating power over Accelya Solutions India Ltd. As mentioned earlier, the company
faces customer concentration risk where the largest customer of the company has negotiated for a longer
credit period.
In addition, during the coronavirus pandemic, the troubles faced by the airline industry deteriorated the
financial health of all the airlines, which delayed payments to their suppliers like Accelya Solutions India
Ltd.
Credit rating report by ICRA, July 2020, page 2:
In the current environment, the company’s receivables are expected to remain stretched, given
the stress on its clients.
As a result, during FY2020-FY2021, the receivables days of Accelya Solutions India Ltd increased sharply
from 52 days in FY2019 to 93 days in FY2020.
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This period resulted in large receivables write-offs by the company.
 In FY2022, the company wrote off ₹4 cr of receivables (FY2022 annual report, page 176).
 In FY2020, it wrote off ₹3 cr of receivables (FY2020 annual report, page 176).
These write-offs were especially large when compared to regular receivables write-offs of about ₹1 cr every
year by the company in previous years.
At any point in time, the company used to have about ₹10 cr – ₹20 cr of unbilled receivables, which used
to stay unbilled for about 30-90 days. Unbilled receivables represent money for that work, which the
company has done for the customer but not billed for it i.e. not yet asked the customer to pay for it.
Unbilled receivables is ₹ 119,056,651 and ₹ 96,705,245 as at 30 June 2020 and 30 June 2019
respectively. The Company’s unbilled receivables generally ranges from 30 – 90 days.
In FY2020, the company had to write off about ₹4.5 cr of unbilled receivables (FY2020 annual report, page
148).
In addition, in FY2022, the company wrote off the accrued income of about ₹2 cr, which it had already
worked for but had not received from the customers (FY2022 annual report, page 176).
The stress in the airline industry was so much that Accelya Solutions India Ltd had to write off even the
withholding tax deducted by its counterparties because it seems that the counterparties were no longer in a
position to deposit these taxes.
In FY2021, the company wrote off a withholding tax of ₹4.8 cr and in FY2022, it wrote off the withholding
tax of ₹2.9 cr (FY2022 annual report, page 176).
The period of the coronavirus pandemic (FY2020-FY2022) is not the only period when Accelya Solutions
India Ltd faced delays in the collection of its receivables and subsequent write-offs.
Previously, in FY2012 also the company faced similar circumstances when almost 17 cr out of total
receivables of ₹40 cr were overdue for more than 6 months. Out of these, the company had provided for
about ₹8.5 cr of receivables as doubtful for collection.
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Going ahead, an investor should monitor the trend of receivables days as well as unbilled receivables of
Accelya Solutions India Ltd to assess whether it is able to collect its receivables on time.
Further advised reading: Receivable Days: A Complete Guide
operations (cCFO) of Accelya Solutions India Ltd for FY2013-2022, then she notices that over the years
Over FY2013-22, Accelya Solutions India Ltd reported a total net profit after tax (cPAT) of ₹817 cr. During
Learning from the article on CFO will indicate to an investor that the cCFO of Accelya Solutions India Ltd
is higher than the cPAT due to the following reasons:
 Depreciation expense of ₹198 cr (a non-cash expense) over FY2013-FY2022, which is deducted

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Going ahead, an investor should keep a close watch on the working capital position of Accelya Solutions
India Ltd.
The Margin of Safety in the Business of Accelya Solutions India Ltd:

target growth.
Where,

An investor would notice that SSGR is dependent on net fixed asset turnover for assessing the sustainable
growth rate for the company. However, in the case of IT services companies, fixed assets are not the primary
determinant of revenue. Therefore, SSGR may not give the best conclusions for Accelya Solutions India
Ltd.
As a result, we need to rely on the free cash flow generation ability of the company to assess the margin of
safety in its business model.
b) Free Cash Flow (FCF) Analysis of Accelya Solutions India Ltd:

While looking at the cash flow performance of Accelya Solutions India Ltd, an investor notices that during
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Therefore, during this period (FY2013-FY2022), Accelya Solutions India Ltd had a free cash flow (FCF)
of ₹778 cr (=991 – 213).
of ₹16 cr. As a result, the company had a free cash flow of ₹842 cr (= 778 + 80 – 16). 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 Accelya Solutions India Ltd over the last 10 years
(FY2013-2022), an investor notices that the company has used its free cash flow primarily in the following
avenues:
 ₹676 cr as dividends excluding dividend distribution tax (DDT) to its shareholders. When DDT
was applicable, then the company would have paid an additional 20% of the dividend amount as
DDT.
 ₹45 as an increase in the cash & equivalents from ₹72 cr in FY2013 to ₹117 cr in FY2022.
Please note that the debt seen on the books of the company in FY2020, FY2021 and FY2022 is not a debt
from lenders; however, it is the future lease liabilities recognized as debt by the company as per the latest
accounting standards.
Going ahead, an investor should keep a close watch on the free cash flow generation by Accelya Solutions
India Ltd to understand whether the company continues to generate surplus cash from its business and
whether it continues to use it largely to pay dividends to the shareholders.
Additional aspects of Accelya Solutions India Ltd:

On analysing Accelya Solutions India Ltd and after reading annual reports, credit rating reports and other
1) Management Succession of Accelya Solutions India Ltd:

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Accelya Solutions India Ltd is currently owned by a private equity (PE) firm, Vista Equity Partners. As
discussed earlier, once the founder-promoters (Mr Kale and Mr Jain) sold the company to Chequers Capital,
it changed hands multiple times to various PE players.
The owners of the company no longer seem to focus on the long-term for business growth. They are
prioritizing large cash payouts in the form of dividends instead of investing in R&D and employee strength.
The lack of a longer-term vision of the new owners seems to have percolated the senior management as
well.
As a result, once the founder promoter (Mr Jain) left the leadership of the company, the senior management
of the company has seen a lot of churns.
The founder promoter, Mr Vipul Jain ran the company for almost 30 years from 1986 to FY2015. However,
after he stepped down, the next managing director (MD), Ms Neela Bhattacherjee resigned in FY2021.
The next MD, Mr Shrimanikandan Ananthavaidhyanathan stayed in the job only for one year and resigned
in FY2022.
Thereafter, the company had to find another MD, Mr Gurudas Shenoy. However, his appointment is yet
not confirmed because he does not fulfil the precondition of staying in India for 12 months before he was
appointed an MD.
Since Mr. Gurudas Shenoy was based in the US…he could not meet the
requirement of…having stayed in India for a continuous period of twelve months preceding the
date of his appointment as Managing Director.
Central govt. is yet to approve his appointment as the MD of Accelya Solutions India Ltd.
December 2022 quarter result, page 5:
Mr Gurudas Shenoy was appointed as managing director w.e.f. 01 July, 2022. The Company has
filed application to the Central Government seeking as approval for his appointment as Managing
director, which is still awaited.
Going ahead, an investor should keep a close watch on the changes in the senior management of the
company to see whether any person is willing to continue to lead the company for a long time to generate
good business growth in the long term. Or he/she also leaves the company after realizing the lack of growth
opportunities due to a lack of desire of the owners to invest money back in the business for generating
avenues for growth.
2) High remuneration to senior management by Accelya Solutions India Ltd:
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As discussed previously, when Chequers Capital took over the company, the remuneration of Mr Vipul Jain
increased sharply by more than 80% from about ₹1.5 cr in FY2010 to ₹2.7 cr in FY2011. This increase in
remuneration was despite a decline of more than 20% in the net profit of the company in FY2011 over
FY2010.
In FY2015, when Ms Neela Bhattacherjee became the MD of the company, then over and above his salary,
the company paid a special bonus of ₹1 cr to Mr Jain when he became a non-executive director of the
company.
The consent of the Company, be and it is hereby accorded to the payment of one-time special bonus
of Rs. 10,000,000 (Rupees Ten Million only) to Mr. Vipul Jain as a gesture
Thereafter, Ms Neela Bhattacherjee became the MD and received a remuneration of ₹1 cr in the first year
of her tenure (FY2016 annual report, page 24). When she left Accelya Solutions India Ltd in FY2021, she
took home a remuneration of about ₹4 cr (FY2021 annual report, page 31). This is an increase of 4 times
(an annualized increase of about 32%) whereas during this period the net profit of Accelya Solutions India
Ltd declined about 50% from ₹83 cr in FY2016 to ₹42 cr in FY2021.
3) Foreign exchange and derivative losses:

Over the years, Accelya Solutions India Ltd suffered significant losses due to foreign exchange (forex)
fluctuations and on the derivative contracts that it entered for hedging them, which indicates that the
hedging policy of the company has room for improvement. For example:
 In FY2013, the company had a forex loss of ₹4 cr (FY2013 annual report, page 71).
 In FY2018, the company reported a forex loss of ₹2.3 cr (FY2018 annual report, page 149).
 In FY2019, the company faced a forex loss of ₹2.5 cr (FY2019 annual report, page 128).
 In FY2020, the company had a forex loss of ₹4.3 cr (FY2020 annual report, page 148).
 In December 2022 quarter, the company reported a forex loss of ₹2 cr (Dec. 2022 quarter results,
page 9).
Other than these forex losses, the company had reported large mark-to-market (MTM) losses on the
derivatives/forward contracts entered by the company.
 In FY2018, the company reported an MTM loss of ₹16 cr on a forward contract (FY2018 annual
report, page 124).
 In FY2015 and FY2014, the company had MTM losses on forward contracts of ₹4 cr and ₹5.5 cr
respectively (FY2015 annual report, page 82).
 In FY2013 and FY2012, the company had MTM losses on derivative contracts of ₹6.8 cr and ₹3
cr respectively (FY2013 annual report, page 54).
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Going ahead, an investor should closely track the losses suffered by the company on its forex and
derivatives transactions to understand whether it has improved its hedging strategies.
4) Tax demands from govt. authorities:

Over the years, the company had received significant tax demands from govt. authorities, which are shown
under contingent liabilities.
For example, in FY2017, Accelya Solutions India Ltd received a demand notice for unpaid service tax of
about ₹5 cr. As per the govt. authorities, the company should have deposited service tax under the reverse
charge mechanism (RCM) for certain transactions, which it had not done. In addition, the company took
Cenvat tax credit for some transactions for which it should not have taken the credit.
As a result, the govt. authorities demanded a sum of about ₹5 cr from the company.
Company has received Show Cause cum Demand notices on account of service tax
demand amounting to ₹ 48,581,562 (excluding interest and penalty) by Service Tax authorities
(Certain transactions were chargeable to tax under Reverse Charge Mechanism and Cenvat credit
was not eligible for certain transactions
In the next year, the tax dept. heard the company’s case and ordered that the company should have paid the
taxes. As a result, for the RCM section, it confirmed a tax demand and penalty of about ₹6 cr. The company
has appealed against the order.
During the year, with respect to RCM, the Company has received an order from Central Tax &
GST authorities where the commissioner has confirmed the demand of ₹29,560,902 and
imposed penalty of ₹29,560,902 on the Company. The Company has filed an appeal
For the balance portion of the alleged wrong Cenvat credit, in FY2020, the department put a demand and
penalty of ₹4.16 cr on the company. The company filed an appeal against the same.
Contingent liability on account of service tax demand and penalty by Service Tax authorities
towards reversal of CENVAT credit on Mutual Fund transactions…The Company has filed an
appeal against the same with Commissioner (Appeals). ₹41,620,997
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On June 30, 2022, the company has disclosed contingent liabilities of about ₹8.38 cr on account of tax
demands where at the initial level the orders have come against the company. However, the company has
filed appeals against them (FY2022 annual report, page 129).
An investor should track developments related to these tax demands as well as check whether the company
receives more such tax demand notices in the future.
In FY2022, the company disclosed that its Goods and Services Tax (GST) refund receivables of about ₹1.4
cr are now doubtful (FY2022 annual report, page 167). The GST department might be planning to adjust
these refunds against the outstanding tax demands. An investor may contact the company directly for
reasons for declaring GST refunds as doubtful.
The Margin of Safety in the market price of Accelya Solutions India Ltd:
Currently (January 31, 2023), Accelya Solutions India Ltd is available at a price-to-earnings (PE) ratio of
about 20 based on consolidated earnings of the last 12 months ending December 2022 (Jan. 2022 – Dec.
2022). An investor would appreciate that a PE ratio of 20 does not offer any margin of safety in the purchase
price as described by Benjamin Graham in his book The Intelligent Investor.
Analysis Summary
Accelya Solutions India Ltd has seen its business growth slow down considerably in the last 10 years
(FY2013-FY2022) as it could achieve sales growth of only 2% year on year. During this period, the net
profits of the company declined.
The reasons for such a stagnating business performance are primarily two. First, the limited scope of growth
in the outsourced airline services business where many airlines have in-house technology teams developing
software as well as intense competition from other IT firms. The volatile nature of the airline industry,
which is susceptible to economic and political turmoil, accentuates the growth issues.
Second, the new owners (private equity players) have focused on taking out money via high dividends from
the company to return to their investors instead of letting the company invest that money for business
growth by developing new products and hiring more employees.
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As a result, the company is limited to the venerable airline industry without attempting to develop new
products to diversify into other industries.
The subdued growth potential seems to be the reason why the founder-promoters sold their stake in the
company and Mr Jain preferred to become an employee for the company instead of its owner. Apparently,
the lack of growth potential led each successive private equity owner to sell off the company shortly after
they acquired it.
The high churn among the promoters also seems to have percolated senior management because recently,
the company has seen frequent exits at the managing director level.
Even though the company had tried to make its revenues more sustainable by going for a per-transaction
billing. However, the high susceptibility of air travel to various events and the high negotiating powers of
its large airline customers have brought volatility in its business performance over the years.
The company had to witness significant write-offs of its trade receivables, unbilled receivables, withholding
tax etc. as during tough times, the financial health of its customers declined and it could not recover money
from them.
In recent times, the company has paid out large dividends to its shareholders because the successive private
equity owners seem to have prioritized dividends payouts over investments in the business of the company.
In the past, when the founder-promoters were investing for growth, the company’s cash generation ability
fell short of its funds’ requirements and the promoters had to infuse money via share and warrant
subscription multiple times. In addition, the company had to raise money via debt as well as by selling its
properties to fund its acquisitions.
Along similar lines, in case, the company decides to grow its business aggressively, then the dividends may
see a decline and the company might have to go for equity dilution in the future.
Going ahead, an investor needs closely monitor the cash flows of the company to note if it still deprioritizes
its business growth over high dividend payouts. She also needs to check whether the company is able to
collect its receivables in time without having to write them off.
The investor also needs to monitor whether the salary of senior management of the company increases at a
higher pace than the business and profits of the company. She also needs to check its tax liabilities and if it
continues to have large forex and derivative losses.
These are our views on Accelya Solutions India Ltd. However, investors should do their own analysis
before making any investment-related decisions about the company.
P.S.
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Videos
Analysis Excel
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How to Use Screener.in "Export to Excel" Tool

Screener.in is one of the best resources available to equity investors in Indian markets. It is a website, which
provides investors with key information about companies listed on Indian stock exchanges (BSE and NSE).
We have been using screener.in as an integral part of our stock analysis and investments for the last many
years and have been continuously impressed by the tools offered by it that cut down the hard work of an
investor. Some of these features, which are very useful for equity investors are:
 Filtering of stocks based on multiple objective financial parameters. Investors can share these
parameters in the form of “Saved Screens”.
 Company information page, which collates the critical information about a company on one single
page including balance sheet, profit & loss, cash flow, quarterly results, corporate announcements,
links to annual reports, credit rating reports, past stock price movement etc. A scroll down on the
company page provides an investor with most of the critical information, which is needed to make
a provisional opinion about any company.
 Email alerts to investors for new stocks meeting their “Saved Screens”
 Email alerts to investors on updates about companies in their watchlist.
All these features are good and have proved very beneficial to investors. However, there is one additional
feature of screener.in, which we have found unique to screener.in. This feature is “Export to Excel”.
“Export to Excel” feature of screener.in lets an investor download an Excel file containing the financial
data of a company on the investor’s computer. The investor can use this excel file with the data to do a
further in-depth analysis of the company.
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The most important part of the “Export to Excel” feature is that it allows the investor to customize the Excel
file as per her preferences. The investor can create her own ratios in the excel file. She can arrange the data
as per her preferred layout in the excel file and when she uploads her customized excel file in her account
at screener.in, then whenever she downloads the “Export to Excel” sheet for any company, she gets the data
of the company in her customized format with all her own ratios auto-calculated and presented to her in her
preferred layout.
The ability to get the financial data of any company in our customized format with our key ratios and
parameters auto-calculated has proved very useful to us in our stock analysis. “Export to Excel” feature of
screener.in allows us to analyse our preferred financial ratios of any company at the click of a mouse, which
makes it very easy for us to make a preliminary view about any company within a short amount of time.
Sometimes within a few minutes.
We have been using the “Export to Excel” feature for the last many years and it has become an essential
part of our stock analysis. It has helped us immensely while doing an analysis of different stocks and while
providing our inputs to the stock analysis shared by the readers of our website. Investors may read the
“Analysis” articles at our website on the following link: Stocks’ Analysis articles
Over time, more and more investors have started using the “Export to Excel” feature of screener.in and as
a result, we have been getting a lot of queries about it at the “Ask Your Queries” section of our website.
These queries have been ranging from:
 Why is there a difference between the data provided by the screener and the company’s annual
report?
 How does screener calculate/group the annual report data in the “Export to Excel” tool?
 What is the source of the data that screener.in provides to its users?
 How to customize the “Export to Excel” file?
 How to upload the customized file in one’s account at screener.in
We have been replying to such queries based on our understanding of screener.in, which we have gained
by using the website for multiple years and based on our learning by listening to the founders of screener.in
(Ayush Mittal and Pratyush Mittal) in June 2016 at the Moneylife event in Mumbai.
In June 2016, Moneylife arranged a session, “How to Effectively Use screener.in” by Ayush and Pratyush
at BSE, Mumbai in which Ayush and Pratyush explained the features of screener.in in great detail. This
session was recorded by Moneylife and has been made available as a premium feature on their private
YouTube channel.
The recorded session can be accessed at the following link, which would require the viewers to pay to view
it:
https://advisor.moneylife.in/icvideos/
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(Disclaimer: we do not receive any referral fee from Moneylife or Screener.in to recommend the above
video link to the session by Ayush and Pratyush. For any further information about the video, investors
may contact Moneylife directly)
As mentioned earlier that we have been replying to investors’ queries related to the “Export to Excel”
feature on the “Ask Your Queries” section of our website. However, in light of repeated queries from
different investors, we have decided to write this article, which addresses key aspects of “Export to Excel”
feature of screener.in.
The current article contains explanations about:
 The financial data provided by screener.in in its “Export to Excel” file and its reconciliation with
the annual report of companies
 Steps to customize the “Export to Excel” template by investors
 Steps to upload the customized Excel file on screener.in so that in future whenever any investor
downloads the “Export to Excel” file of any company, then it would have the data in the customized
preferred format of the investor.
Financial Data
The “Export to Excel” file of screener.in contains a “Data Sheet”, which contains the financial data of the
company, which in turn is used to calculate all the ratios and do in-depth analysis. As informed by Ayush
and Pratyush in the Moneylife session, screener.in sources its data from capitaline.com, which is a
renowned source of financial data in India.
The data sheet contains the data of the balance sheet, profit & loss, quarterly results, cash flow statement
etc. about the company.
We have taken the example of a company Omkar Speciality Chemicals Limited (FY2016: standalone
financials) to illustrate the reconciliation of the data provided by screener.in in its “Export to Excel” file
and data presented in the annual report.
Read: Analysis: Omkar Speciality Chemicals Limited
Let’s now understand the data about any company, which is provided by screener.in.
Balance Sheet:
This is the section, where investors get most of the queries as screener.in groups the annual report items
differently while presenting the data to investors. Let’s understand the data in the balance sheet section of
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the “Data Sheet” of the “Export to Excel” file taking the example of FY2016 data of Omkar Speciality
Chemicals Limited:
Balance Sheet Screener.in "Data Sheet"
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Balance Sheet (Annual Report FY2016)
 Equity Share Capital: It represents the paid-up share capital taken directly from the balance sheet
(₹20.58 cr.).
 Reserves: It represents the Reserves & Surplus taken directly from the balance sheet (₹160.87 cr.).
 Borrowings: It represents the entire debt outstanding for the company on March 31, 2016 (₹185.76
cr.). It comprises the following components:
o Long-Term Borrowings: ₹79.23 cr taken directly from the balance sheet.
o Short-Term Borrowings: ₹95.49 cr. taken directly from the balance sheet.
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o Current Liabilities of long-term borrowings: ₹11.04 cr. taken from the notes to the
financial statements. This data is included as part of “Other Current Liabilities” of ₹15.89
cr. under “Current Liabilities” in the summary balance sheet. In the annual report of Omkar
Speciality Chemicals Limited, “Current Liabilities of long-term borrowings” can be found
in Note No. 7 on page 89 of the FY2016 annual report.
o Sum of these three items: 79.23 + 95.49 + 11.04 = ₹185.76 cr. Investors might find a small
difference for various companies, which might be due to rounding off.
 Other Liabilities: It represents the sum of the rest of the liabilities (₹79.52 cr.) like:
o Deferred Tax Liabilities: ₹8.04 cr. taken directly from the balance sheet
o Long-Term provisions: ₹2.42 cr. taken directly from the balance sheet
o Trade Payables: ₹50.52 cr. taken directly from the balance sheet
o Other Current Liabilities net of “Current Maturity of Long-Term Debt”: ₹15.89 - ₹11.04
= ₹4.85 cr. is considered in this section.
o Short-Term Provisions: ₹13.69 cr. taken directly from the balance sheet
o Sum of these items: 8.04 + 2.42 + 50.52 + 4.85 + 13.69 = ₹79.52 cr. Investors might find
a small difference for various companies, which might be due to rounding off.
 Net Block: It represents the sum of Tangible Assets (₹ 77.75 cr) and Intangible Assets (0.15 cr.)
taken directly from the balance sheet. The total netblock in the “Data Sheet” is ₹77.90 cr, which is
the sum of the tangible and intangible assets.
 Capital Work in Progress: It represents the paid-up Capital Work in Progress taken directly from
the balance sheet (₹112.67 cr.).
 Investments: It is the sum of both the Current Investments and the Non-Current Investments
presented on the balance sheet. The Current Investments are shown under “Current Assets” in the
balance sheet whereas the Non-Current Investments are shown under “Non-Current Assets” on the
balance sheet.
o In the case of Omkar Speciality Chemicals Limited, there are no current investments,
therefore, the “Investments” (₹13.91 cr.) in the “Data Sheet” of “Export to Excel” file is
equal to the Non-Current Investments in the balance sheet (₹13.91 cr.)
 Other Assets: It represents (₹242.25 cr.) the sum of rest of the assets:
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o Long-term Loans and Advances: ₹26.53 cr. taken directly from the balance sheet
o Inventories: ₹61.78 cr. taken directly from the balance sheet
o Trade Receivables: ₹102.26 cr. taken directly from the balance sheet
o Cash and Cash Equivalents: ₹6.63 cr. taken directly from the balance sheet
o Short-term Loans and Advances: ₹44.14 cr. taken directly from the balance sheet
o Other Current Assets: ₹0.89 cr. taken directly from the balance sheet
o Sum of these items: 26.53 + 61.78 + 102.26 + 6.63 + 44.14 + 0.89 = ₹242.23 cr. The
difference of ₹0.02 cr. in this sum and the figure in the “Data Sheet” of ₹242.25 cr. is due
rounding off.
It is important to note that certain additional items, if present in the balance sheet, are usually shown by
screener.in as part of “Other Liabilities” or “Other Assets” depending upon their nature (Liability/Assets).
E.g. “Money Received Against Share Warrants” is shown as a part of “Other Liabilities” in the “Data Sheet”
in the “Export to Excel” file.
Profit and Loss:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Registration Status with SEBI:
I am registered with SEBI as a Research Analyst.
Details of Financial Interest in the Subject Company:
Currently, on the date of publishing of this book, February 02, 2023, 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 10

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Copyright © Dr Vijay Malik. All Rights Reserved.

Company Analyses (Vol. 10)

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) Polycab India Ltd

Company website: Click Here

Financial data on Screener: Click Here

Copyright © Dr Vijay Malik. All Rights Reserved.

Copyright © Dr Vijay Malik. All Rights Reserved.

Financial and Business Analysis of Polycab India Ltd:

Copyright © Dr Vijay Malik. All Rights Reserved.

1) Intense competition with a continuous pricing pressure:

FY2020 annual report, page 41:

In segments like wires, where unorganised make nearly half of market.

Copyright © Dr Vijay Malik. All Rights Reserved.

RHP, April 2019, page 519:

FY2020 annual report, page 42:

2) Very high dependence of Polycab India Ltd on basic commodities:

Copyright © Dr Vijay Malik. All Rights Reserved.

Copyright © Dr Vijay Malik. All Rights Reserved.

Copyright © Dr Vijay Malik. All Rights Reserved.

3) Flexibility to fix prices of inventory up to 90-days after purchase:

Copyright © Dr Vijay Malik. All Rights Reserved.

Copyright © Dr Vijay Malik. All Rights Reserved.

Conference call, October 2020, page 21:

Conference call, May 2019, page 14:

Copyright © Dr Vijay Malik. All Rights Reserved.

Conference call, October 2020, page 4:

Conference call, October 2020, page 4:

Conference call, June 2021, page 19:

Conference call, October 2020, page 7:

Credit rating report by India Ratings, September 2019:

Copyright © Dr Vijay Malik. All Rights Reserved.

Conference call, January 2021, pages 6 and 10:

Conference call, January 2021, pages 6 and 10:

Gandharv Tongia: Yes, I think we can attribute a part of it to that.

Conference call, July 2021, page 6:

Copyright © Dr Vijay Malik. All Rights Reserved.

Conference call, October 2021, page 4:

Conference call, January 2020, page 3:

5) Shifting of business from the unorganized sector to the organized sector:

Conference call, January 2020, page 7:

FY2020 annual report, page 42:

Copyright © Dr Vijay Malik. All Rights Reserved.

Conference call, January 2021, page 9:

FY2021 annual report, page 178:

Operating Efficiency Analysis of Polycab India Ltd:

a) Net fixed asset turnover (NFAT) of Polycab India Ltd:

Copyright © Dr Vijay Malik. All Rights Reserved.

Conference call, January 2020, page 7:

Conference call, July 2021, page 18:

Gandharv Tongia:..third is in-house production which gives us confidence on the quality as