Koutons Retails India Ltd - may post significant losses going ahead - time to sell ?

Koutons Retails India Ltd

Quick analysis on company’s fundamentals

Report Dated : 05^th December 2010.

The company has performed disappointingly F1-FY11 where sales are down more than 50% as compared to F1-FY10. The company has managed PAT of around 7 cr as against 35 Cr.

We believe, with scale of business down to this level and with no corresponding reduction in the loan liabilities and current assets (inventory level and sundry debtors), the company will be hard pressed to meet its obligations towards lenders going ahead. Default is very much possible.

The balance sheet looks to be very stretched in terms of loan and working capital as compared to its operation. In the absence of liquidity available in the balance sheet, we feel that even current scaled down operation will be difficult to sustain.

Further, since company is carrying significant inventory for some time and not matched by sales. The company had over Rs 600 cr of Finished/Semi goods (at cost)  as on 31^st March 2010 whereas sales in F1Fy11 has been only around 325 cr, we firmly believe that there may be significant write down in the value of the inventory in next few quarters resulting in company going deep in to the red.

There seems to be no case of remaining invested in the company and barring some short term recovery based on market conditions, immediate term fundamentals looks to be very weak and any recovery in the price can be used as an opportunity to exit. Even booking losses at this level can be thought.

Camson Bio Technologies Ltd - Very interesting Annual Report

The Company has come out of its Annual Report for 2009-10.

The Co has posted sales of Rs 80.33 Cr and PAT of Rs 13.56 Cr and declared a dividend of 10%.

The company is basically in Seeds and biocides products which are tax free under sec  10(1) of IT Act. The tax liability of the co for the year is less than 4%.

There are some very interesting points in the Annual Report, raising several points on its corporate governance issue and also its business.

Auditor’s has qualified its accounts on several counts raising some very serious issues as under. Incidentally, the present auditors was appointed in the last AGM only and this is theirs first year of audit.

1. Out of total expenditure of Rs 62.46 cr, supporting vouchers for Rs 25.06 cr. (40.12% of expenses) not available.
2. Sales of Rs 79.98 Cr as reported in the accounts are not tallying with the sales tax return filed with Sales tax authorities. The company is reconciling the same and there may be additional liabilities on account of its towards VAT.
3. Inventory records are not maintained. (Giving serious doubt about the production reported by the Company.)
4. Internal Control as regards purchase of fixed assets, purchase of inventory and sales of goods and services is very week and is not commensurate with the size of the Company.
5.  Internal audit system is not commensurate with the size of the Company.

These points clearly points to two things :

1. Since supporting documents for over 40% expenses, they could be bogus. Bogus expenditure does not necessary means otherwise higher profit. I feel, sales have also been inflated.
2. Sales being inflated can also be established by the fact that sales as reported in the annual report does not tally with sales tax return filed with the company.

Now, look at some of my other observations :

1. The company has sold Seeds for Rs 59.68 Cr and Biocides for Rs 20.29 Cr and others for Rs 27201 totaling to Rs 79.98 Cr.

2. Some of very unnatural and abnormal  expenditure booked by the Co are as under :
1. Rebate and Discount                          :               Rs 14.81 Cr
2. Business Promotions                           :               Rs 11.26 Cr
3. Demonstration Trials                          :               Rs 14.55 Cr

Business Promotion Expenses of Rs 11.26 cr is incurred as against last years expenses of Rs 3.73 lacs only. One can hardly believe such abnormal expenses on account of business promotions. The business promotion expense is over and above advertisement and publicity expenses for which co maintains separate head of account. One has to see this expense along with demonstration trial expenses.

Demonstration Trials expenses is for Rs 14.55 cr as against Rs 9.40 cr. No where company explains what is the nature of this expenses. In previous years these expenses were booked under Research & Development to show the company is spending very high amount on research. A research report of reputed broking house mentions that company give demonstration trial to the farmers AT DIFFERENT LOCATIONS. Such proportionate of the expenses as compared to sales seems very very unnatural. Even for the sake of arguments, even if we believe such expenses, but there has been no production of either seed or biocides for such demonstration. Whatever the company has produced has either been sold or carried as finished stock.

Rebate and Discount of Rs 14.81 Cr amounting to over 18% is only to inflate the sales figure.

3. Now look at some of the expenditure booked by the company to make a sales of Rs 79.98 cr.
1. Factory expenses of Rs 55,199 only.
2. Consumable stores of Rs 1,22,338 only.

Mind you, the co also gets its seeds through contract manufacturing as well. In case of Monsanto which is also in seed business, cost of production of seed on account of payment to seed growers and production cost is approx 40% of sales besides cost of consumables. This clearly shows, production of seeds is highly inflated.

4. The company has sold 1,39,157 kg of seeds and 11,46,031 ltrs and 11,26,107 kg of  biocides. Against these sales only Rs 61,57,966 was spent for packing. It is important to note that as per annual report photographs, biocides are sold in very small qty packs. Per kg/lt cost of packing of a material costing upto 4290/- per kg comes to less than 3/- kg. Even mineral water packing cost more than Rs 3/- per lt.

5. To produce  11.93 lacs kg & 11.90 Lt of biocides, surprisingly the company has consumed only 60,130 kg of chemicals. There has not been any other consumption of any other material. How can you produce more than 12 lacs kg and 12 lacs ltrs of biocides just by consuming 60,000 kg of chemical.. Here one has to take into account that the company has also produced 1.71 lacs kg of Seeds. Again these productions quantity does not include WIP, which has gone up from Rs 9.38 crores to 14.83 crores. This increase in WIP also involves significant quantity as well.

6. The company consumed 11.51 lacs kgs of chemicals valued at Rs 0.10 cr in the last year to produce 7.21 lacs kg  and 12.51 lacs ltrs of biocides, whereas the company has consumed only 60130 kg valued at Rs 1.24 crores to produce 11.46 lac ltrs and 11.26 kg of biocides.

7. Now look at total direct cost of production:
1. Raw Material Consumed :                                Rs 22.40 Cr
2. Employees Cost                                   Rs   2.12 Cr
3. Factory Expenses                                                Rs   0.01 Cr
4. Labour Charges                                   Rs   0.13 Cr
5.  Power & Fuel & Water                       Rs   0.22 Cr

These expenses not only generated sales of around 80 crores but at the same time, there has been increase in WIP and Closing Stock by Rs 7.34 Crores. That is to say by spending a total of Rs 24.88 crores, the company was able to produce goods worth Rs 87.34 crores. (mind you closing stocks of WIP and Finished Goods have been valued at cost only). This is just flimsy.

8. One would definitely assume that to produce such a huge quantity of seeds in a farm, the company would surely need lot of other farm input as well. Company says that they have around 1000 acres of contract farming for seed production. Where are the expenses involved for contract farming. Surely, the contractors does not produce for free. They are to be paid.

9. Labour cost of only Rs 12.61 lacs to produce such a huge quantity of seeds and biocides on farm is miniscule. I think you cannot even produce wheat of similar quantity at these cost.

10. Now come to capital cost capitalized, the co has capitalized Rs 8.39 crores as foundation seeds. Was it self produced or purchased ? Monsanto or any other seed company do not have these expenses.

11. The company says it is  research driven. Now see the expenses on this account. Total of Rs 57.91 lacs was spent. This is just .71% of sales. This too has come down over last year.

12. Biocides sale has gone up from Rs 17.76 cr in 2007-08 to only Rs 20.29 cr in 2009-10. This is the growth the company has achieved in Biocides for which company claims to be a leader.

13. Previous years account has been significantly recast where almost every expense have been restated giving serious doubt about the company accounting policy and book keeping.

14. This year has been the first audit by the present auditors.

15. There have been significant differences under various head and also PBT and PAT in unaudited result published by the co for this year and audited result.