Thursday, May 10, 2012

Jubilant Industries Ltd

1st day, 1st Show and intention is out and clear.

Today, Jubilant Ind Ltd has reported its 1st post merger result for FY12 and the stock is locked in 20% down circuit. Probably we may see few more.

While assessing the impact of merger of unlisted retail business of promoters in the listed Jubilant Industries Ltd, I had all my doubts about the rational and real intention of the management behind the merger.

A company which had an EPS of Rs 35.70 in FY11 has reported a loss of Rs 47.85 per share in FY12. The reason for this upside down is only one. Merger of hugely loss making privately owned retail business with the company.

Retail business continued to bleed and has reported an even larger loss of Rs 98.59 cr this year on a sale of only Rs 359 cr. This loss is more than 8.3 times of equity capital of Jubilant Ind Ltd. I see no hope and possibility of this retail business coming to even break even level at any point soon. Profit from this business should be a distant dream.

Till such time management finds some magic of turning this huge loss making business  into even no loss situation, shareholder will continue to suffer and see their wealth being eroded.

We, shareholders are very accommodating and seldom question the management and pay the price.

Friday, February 24, 2012

Camson Biotechnologies revisited

I last wrote on Camson Biotechnologies Annual Report of FY 09-10.

Taking clue, the company tried to make amends in their annual accounts for FY 10-11. But these did not change investor heart and share price continued to slide. During the present bull run also, when most of the small cap stocks recovered, Camson stock continue to languish at around Rs 60 (though recovered  a bit from its low)

Having gone through recent 3 qtr’s results published by the company, some of my observations are:

  1. Manufacturing activities are dwindling as can been seen from raw material consumption. During Q3FY12 while sales have been maintained at around Rs 33 cr as against Rs 32 cr in Q3FY11, raw material consumption is down from Rs 6.12 cr to Rs 1.29 cr. Most of the sales may have been accounted from selling out of stocks.
  2. Similar trend was also seen during Q2FY12 as well, in which raw material consumption was only Rs 1.85 cr vs Rs 3.00 cr in Q2FY11 while sales were at the same level of Rs 23 cr. Here again there was significant decrease in stocks which signifies sales made out of stocks only.
  3. Thus last 2 qtr’s raw material expenses clearly show that there have been considerable slow down in manufacturing activities by the company which does not indicate bright future. One can argue that there has been conscious effort by the company to liquidate the inventories but fall in raw material consumption has been rather steep.
  4. What is also surprising is that research expenses keep fluctuating in line with the sales. Last 3 qtr’s research expenses are Rs 5.69 cr, Rs 3.46 cr and Rs 6.73 cr. These expenses keep on increasing and decreasing in line with increase and decrease in sales. This clearly indicates that these are more like a sale expenses but disguised as research expenses.

Friday, December 16, 2011

Why small cap stocks valuations are rotting?

Erstwhile promoters of some of the companies which have changed management tell us - why.
MUDRA LIFE STYLE LTD was sold by the Indian Promoters to a Korean Company earlier this year. The company has now reported a loss of Rs 199.29 cr in Q2FY12 on a sale of Rs 44.90 Cr. The loss looks extraordinary by any standard. In fact they are. But if you read the notes below the tabulated result, the reason for the loss is write off/ down the values of inventories taken over by the new promoters at the time of acquisition. And one of the reasons for write off is NON EXISTING INVENTORY found during the course of stock audit conducted by the independent auditors. This not only a poor corporate governance but it is a FRAUD. This is similar to Satyam where the promoters had inflated cash and here Mudra Lifestyle inflated stocks. Erstwhile promoters have been inflating inventory and showing stocks which were not there to show not only higher profit but also to take loan from banks as well.
Somewhat similar issue is also there in case of ISPAT INDUATRIES LTD as well. Subsequent to the takeover by JSW, the company made a provision of over Rs 1180 Cr within 6 months of taking over the company by the new promoters under various heads. The point is, how come these amounts which were good till 6 months back, can become bad immediately on change of management. Simply, these were bad earlier also but shown to be good to keep balance sheet healthy. Else, how would someone explain for these provisions just because promoter shareholders have changed?
More recently, the new promoters of THE ANDHRA PAPER MILLS LTD also had to make provision of Rs 26.50 cr subsequent to taking over charge.
However, all small cap stocks cannot be bad. One is required to make proper research before making investment decision but sometime it is really difficult and for common investors, it is just impossible.

Saturday, December 10, 2011

Jubilant Industries Ltd

Jubilant Industries Ltd (JIL) – Scheme of Arrangement a wealth creator or destroyer?

JIL has come out with a scheme of arrangement wherein its Agri & Consumer Division will be transferred to its wholly owned subsidiary company Jubilant Agri & Consumer Products Ltd (JACPL). There is nothing wrong with this as long as, aim is to give undivided management attention to this business. But what is really disturbing is merger of hugely loss making  Mall & Hypermarket business (Retail Business) of promoters closely held company Enpro Oil Pvt Ltd with JACPL.

Retail Business which is getting merged with JACPL has been making huge losses since inception, having made loss of over 300 cr since inception. During FY11 alone loss was in excess of 71 cr on a turnover of Rs 300 Cr. against JIL Profit before Tax of only Rs 40 cr during FY11. Thus loss of retail business exceeds the profit of JIL.

With the merger of Retail Business with JAPCL, profit of Agri & Consumer division which is getting transferred to JAPCL will be used to finance the losses of Retail Business.

Besides this loss making retail division, JAPCL is also taking over loan and net current liabilities of over Rs 238 cr from the promoters.

Now the question is what is the rationale of this merger? Is it that the management wants to share the so called bright prospect of retail business in India with the public shareholders, or it wants to fund the loss of a privately held company with the profit of a listed company at the cost of minority shareholders.

Given the finance of the retail business, certainly management is not sharing goodies with the minority shareholders, so ultimately, it is the loss which is getting transferred from closely held company to the listed entity. As usual, minority shareholders are taken for a ride.

Above all, this is coming to the shareholders of JIL at a cost of Rs 200 cr. (Present market value of 38.35 lac shares of JIL to be issued to the promoters in consideration of retail business and excess of liability over assets of Rs 123 cr to be taken over by JAPCL).

Saturday, October 1, 2011

DFM Foods Ltd

Got a Brand or Product that sells ? – Your Balance Sheet will speak.

One does not often get the opportunity to come across Balance Sheet like DFM Foods Ltd, that too from a small cap sector. It is truly amazing for this Rs 120 crores company selling CRAX and NATHKATH brands packaged snack foods.

Consider some of these truly admirable figures in the Balance Sheet:

  1. FY11 sales at 120 Cr but debtors just Rs 29000. Not even one day sale. That means products are in great demand or DFM knows how to sell. Customers and dealers are not required to be given any credit. If DFM can sell its entire products on cash basis, there is no denying that they have got a product or a brand or both.
  2. Not only this, DFM inventory of Finished Stocks is just Rs 81 lacs. It is just 3 days sales. DFM dispatches every thing the moment it is produced. No need to stock. Meaning customers have lined up with cash to take the material  
  3. So, no debtors, no finished stock then what next. What is even greater indicator? It is advances from customers. Yes sir, that is also there. DFM has advances from customers to the tune of Rs 5.20 crores. That is around your 15 days sales.
  4. If you have these three extra ordinary indicators of your Brand, Products and sales ability, why sales during last 3 quarters are stagnating. Sir, plant running at 100% capacity.
  5. Then what do you do? Expand. Doing Sir. New Plant is under construction at a cost of Rs 70 crores and will be ready by 3rd Qtr of this year.
  6.  How DFM using cash flow. Already bought land for new plant for Rs 9 crores. Given advance for capital goods of more than 4 crores. No additional loan till date. But will take when construction picks up.
  7. Some concerns as well. Dispute is there with excise department regarding classification of the products.

Market is also quick to recognize these facts. Stock is quoting near to its all time high even during this uncertain time. Market cap is just at 1.5 times its sales.

Saturday, September 24, 2011

Opto Circuits (India) Ltd

Value addition (manufacturing expenses) is a surprise.

For the first time, I went through the Annual Report of Opto Circuits (India) Ltd.

What looks great about the company is the margin in its medical devices business and also surprising is the value additions it does in its Indian operation.

  1. Opto manufacture/assemble medical devices for 100% export.
  2. It imports almost every thing (99%) what is required for manufacturing/ assembling
  3. To manufacture medical devices whose sale value was 603 cr, labour charges was just over 1 crore, (thus operation is not a labour intensive), power & fuel was less than 1 crore (neither the operation is power intensive), other expenses including repairs and insurance etc do not add to even one crore (so other cost is also negligible).
  4. One is made to think, what one can add value to imported raw material by spending not even one percentage of sales value and then sell it at a margin of over 35%. The products are sold in USA and Europe markets.
  5. What Opto possesses which the manufacturers of these raw material do not have ? They loose huge margin if they sell final products instead of selling raw material to OPTO.
  6. I thought, might be company may be making these raw materials in one of its overseas subsidiaries and final assembling is done in India. But these are not the products of any of its overseas subsidiaries as there is hardly transaction with them.
  7. I thought India is a big medical market, but none of these equipments are sold in the country.
  8. Company does not pay any taxes as its profit being profit from export.  but huge dividend payment is one thing which compel you to think.

Friday, September 16, 2011

What will Coal India do with its huge cash ?

Coal India Holds Cash of over 45000 cr as on 31st March 2011. During last ten year, since 2001 when cash balance was around 1000 cr, every year cash balance has gone up to reach this level, even after spending for capex.

I can imagine if this trend continues, Coal India will be having more than 1 lac cr in cash in next 5 years. Even if we take into account all the expansions that Coal India proposes to undertake in next 5 years, it will not be able to use this mammoth cash and future its cash flows.

Co or the Govt. must find better use of this money rather than keeping the same in the bank. It is pity that when entire power and other  sectors in the country is starved of coal, Coal India  keeps on adding cash balance year after year. Can’t the company become more aggressive in opening more mines and help the country in developing infrastructure.

We blame shortage of funds for our poor infrastructure but when it is available there is no taker.