Between The Lines

Jubilant Industries Ltd

2012-05-10T05:20:00.000-07:00

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

Today, Jubilant Ind Ltd has reported its 1^st 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.

Camson Biotechnologies revisited

2012-02-24T04:58:00.000-08:00

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:

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.
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.
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.
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.

Why small cap stocks valuations are rotting?

2011-12-16T23:32:00.000-08:00

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.

Jubilant Industries Ltd

2011-12-10T21:13:00.000-08:00

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).

DFM Foods Ltd

2011-10-01T21:01:00.000-07:00

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:

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.
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
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.
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.
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 3^rd Qtr of this year.
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.
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.

Opto Circuits (India) Ltd

2011-09-24T23:06:00.000-07:00

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.

Opto manufacture/assemble medical devices for 100% export.
It imports almost every thing (99%) what is required for manufacturing/ assembling
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).
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.
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.
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.
I thought India is a big medical market, but none of these equipments are sold in the country.
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.

What will Coal India do with its huge cash ?

2011-09-16T08:28:00.000-07:00

Coal India Holds Cash of over 45000 cr as on 31^st 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.

Compact Disc Ltd - Delisting cannot happen

2011-07-10T08:50:00.000-07:00

Compact Disc Ltd is in the news since January 2011 for delisting. It is now almost over 6 months, but delisting has not happened. My view, it will never happen. Reason, delisting is a ploy of the management to manipulate the share price. There are several arguments in favour of my view.
1. The balance sheet is hugely manipulated. The company has no business and thus cash in the books to support the delisting.
2. Why the management will go for delisting ?. Normally the management of this size of companies, would like to keep shares delisted so that they can raise funds at will in future.
3. If the management feels that the share prices are low, they can make creeping acquision. but the management is not doing. The company can also go for buy back, if they have surplus fund.
4. Management holds around only 25% shares. To delist company would require 65% shares out of 75%. This is simply not possible in a listed company. The management understands this, thus this trick of delisting to raise share price.

Bartronics India Ltd - Another Satyam in making

2011-01-15T16:21:00.000-08:00

Bartronics India Ltd : - Another Satyam in making ?

Company is supposed to be in RFID and Cards Business –

But company’s sales is comprised of :
Sooftware Export – Value Added : Rs 127.87 Cr
Software Export – Self Developed : Rs 174.68 Cr
Manufacturing : Rs 29.11 Cr.
Trading in Software & Hardware : Rs 226.73 Cr

Against Software Export (Value added) of Rs 127.87 cr, company bought imported Software for Rs 112.97 Cr and after accounting for Opening/Closing, net software consumption was Rs 108.45 Cr – Thus Gross Margin earned Rs 19.42. No manufacturing activity has taken place in the company for this item.

Against Software Export – Self Developed of Rs 174.68 Cr – company’s claim is that the same was developed in previous years by the company and no expenditure was done during the year. (During last year also company exported software worth Rs 100.08 Cr.). Thus Gross Margin earned during the year is Rs 174.68 Cr.

Let us consider some of the points in respect of its income :

When the company is capable of developing its own software, why it is importing and what is this import. This could be to inflate the sales and book some Profit (Tax free).

Company claims to have sold software developed by it in the previous years. During last 2 years itself, company has sold software worth Rs 274.76 cr. It is common that to develop software, only raw material is manpower. During last 9 years amount spent by the company on salary & wages is only Rs 19.73 Cr. These salary expenses also includes, salary for other manufacturing activities undertaken by the Company.

Against the trading sales of Rs 226.73 cr, company has purchased (imported) software and hardware for Rs 192.03 Cr. It is difficult to understand the difference between trading sales of software and Software Exports (Value added). Both the sales have been against import only and there has been no value additions by the company.

Apart from above items of sales, company has booked revenue against services for Rs 21.70 Cr. Against this, the company has spent Rs 20.12 cr towards sub – contracting charges so no value added here also.

To highlight, the kind of manufacturing activities or value additions, the company does, let us see some (in fact all) of the expenses it has incurred during the year.

Salary & Wages : Rs 5.67 Cr

Factory Maintenance Rs 0.34 Cr

Power & Fuel Rs 0.46 Cr

Insurance : Rs 0.78 Cr

Printing & Stationary : Rs 0.23 Cr

Communication Expenses : Rs 0.37 Cr

Travelling & Conveyence : Rs 1.41 Cr

Repairs & Maint (others) Rs 0.57 Cr

These expenses has to be seen, considering the fixed assets base of Rs 71.23 cr in Plant & Machineries, Rs 104.65 Cr in Computers besides investment in building, electrical installation, vehicle etc. Thus there are hardly any manufacturing activities in the company.

Now consider Balance Sheet items:

Fixed Assets :
Company has added Rs 62.57 cr towards computers during the year. This is over and above the existing computers of Rs 45.35 cr. Against this Salary & Wages expense of the company for the year is only Rs 5.67 cr that too has come down from Rs 6.39 cr. The activities within the company hardly justify huge additions of computers. Auditors have also qualified its report on fixed assets register.
The Company has made capital advance of Rs 183.22 Cr included in total capital WIP of Rs 206.54 Cr. – This seems to be next to impossible considering financial condition of the company as explained later in this note. The company has outstanding capital commitment of over Rs 267 cr as on 31/3/2010.
Fixed assets also include software for Rs 176 cr capitalised in the past.

Sundry Debtors :

Against total sales of Rs 581.58 cr, outstanding from customers are Rs 568.66 cr, which shows that the products sold by the company has no priority for the customers.

Sundry Debtors includes amount outstanding over 6 months Rs 270 Cr. Against total sales of Rs 587 Cr.

Loans & advances :

Company has given advances to its subsidiaries for Rs 317.61 Cr which is largely due from 2 of its subsidiaries as under :

Bartronics America Inc USD 48,752,556 ( Rs 219.38 Cr. @ 45/$). This amount is bad because this subsidiary does not have any assets – Entire amount has been used in Goodwill Rs 150 Cr (at Rs 45/-$), Intangible assets Rs 77.35 Cr (at Rs 45/-$), and other assets which includes debtors, inter company receivable etc. The subsidiary has liability of Rs 32.26 cr as well.

Bartronics Asia Pte Ltd USD 21,097,042. (Rs 94.94 cr). – The company does not have any assets except Trade receivable running since last year. Probably very doubtful of recovery.

Sundry Creditors :

Against total purchases of Software/Hardware/Raw material of Rs 328 cr, amount due to the creditors is Rs 229 cr showing the truth behind it.

Secured Loans :

During the year the company raised additional loan of Rs 138.53 cr from banks taking its liability to Rs 395.57 cr.

Promoters Contributions :

Promoters raised through preference issue/ warrant Rs 103.68 Cr.

Now, Consider some of the points which shows that the company has no corporate governance, no liquidity (bankrupt) and the promoters are just manipulating the accounts.

The company is wilful defaulters of Income Tax and other taxes having not paid even undisputed income taxes for the years from 2007-08 to 2009-10 amounting to Rs 23.54 crores.

All other taxes like PF, ESI, Professional Taxes, FBT, Services Taxes etc have not been deposited in time.

Loan repayments have been delayed upto 6 months.

How can a company which has raised more than 100 cr from promoters, raised additional loan of Rs 138 cr from banks, and which has made capital advances of Rs 183.22 cr, default on admitted tax liabilities and does not pay its taxes in time. During the year debtors has gone up by Rs 350 cr..

To sum up, The company has no business model. Accounts are unrealistic and in all probability crooked up. Most of the assets it shows are not realisable. It is engaged in bogus software trading. Co is doing very small manufacturing activities of around Rs 20 cr or so. The company activities hardly require any managerial inputs. Quality of fixed assets is highly doubtful, advances for capital assets is uncalled for as these are not supported by any business plan. Some or most of the sundry debtors are never going to be realised if company stops making sales. Advances to subsidiaries are fully bad as subsidiaries have no assets to pay back. Bankers run the risk of loosing their loan money. Company has subsidiaries at USA and Singapore whereas 80% of exports are to Hongkong and UAE. Only 3% export is to USA.

Moreover, Rs 225 cr FCCB is due for conversion/ redemption in 2013 at substantial premium to present market price. If redeemed company has no resources for that.

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

2010-12-16T04:17:00.000-08:00

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

2010-09-25T20:29:00.000-07:00

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.

Out of total expenditure of Rs 62.46 cr, supporting vouchers for Rs 25.06 cr. (40.12% of expenses) not available.
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.
Inventory records are not maintained. (Giving serious doubt about the production reported by the Company.)
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.
Internal audit system is not commensurate with the size of the Company.

These points clearly points to two things :

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.
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 :

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.

Some of very unnatural and abnormal expenditure booked by the Co are as under :

Rebate and Discount : Rs 14.81 Cr
Business Promotions : Rs 11.26 Cr
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.

Now look at some of the expenditure booked by the company to make a sales of Rs 79.98 cr.

Factory expenses of Rs 55,199 only.
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.

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.

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.

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.

Now look at total direct cost of production:

Raw Material Consumed : Rs 22.40 Cr
Employees Cost Rs 2.12 Cr
Factory Expenses Rs 0.01 Cr
Labour Charges Rs 0.13 Cr
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.

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.

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.

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.

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.

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.

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.

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

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.