05 – Current temptation, future frustration

The fifth part of Series “Current temptation, future frustration“. This series is based on the companies which are currently darling of the market and many trying to catch such opportunities but it has a probability to become a reason for future frustration. It can wipe out the majority of gains in wealth. I am trying to put some of the number-crunching facts by which we can identify ongoing issues in the companies and can save our wealth.

I am starting this series with one of the company which is engaged in import and export agent, representative, contractor, selling agent, the broker on wholesale cash and carry basis for metals, minerals, iron and steel products, pipes, household items, general merchandise etc, has a 52 weeks low price of Rs.4.60 and LTP is Rs.31.65. This company has rewarded ~6.88x of return in a year.

Let’s start looking at the numbers.

When we look at the balance sheet then it seems that the company does not have any issue. It has reduced all debt, also it has huge investments.

Wonderful… The company still available below investment value after 6x price raise.

Let’s go further detail.

If we look at the income then the company does not have any income available. Also, the company is traded at ~530x Mcap/sales.

So this company does not have any business. Only investment of the company is good then this situation seems similar to Bluechip stamp investment made by Sage Mr.Buffett.

Let’s check the investment.

The company has ~30% of investment into liquid assets and all others into unquoted & related party investments. 

So the company keeps giving loans to related parties. 

The company does not have enough plan assets to fund gratuity.

This entire series is based on past available data and ignored the future development in companies and the stock market always looks at the future.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

04 – CURRENT TEMPTATION, FUTURE FRUSTRATION

The fourth part of Series “Current temptation, future frustration“. This series is based on the companies which are currently darling of the market and many trying to catch such opportunities but it has a probability to become a reason for future frustration. It can wipe out the majority of gains in wealth. I am trying to put some of the number-crunching facts by which we can identify ongoing issues in the companies and can save our wealth.

I am starting this series with one of the company which is engaged in Entertainment / Electronic Media Software, has a 52 weeks low price of Rs.3.05 and LTP is Rs.9.20. This company has rewarded ~3.02x of return in a year.

Let’s start looking at the numbers.

We can see that the company has operating level profits but a loss at a net level. It can be possible if the business is at the nascent stage. But major expense is depreciation so have to check why huge depreciation charge.

When we look at the balance sheet then it seems that the company does not have any issue except debt. But when we look at the fixed assets then we get shocked. The depreciation rate is ~40% in FY19 and ~72% in FY20. I have not seen such a high-interest rate in other leading IT companies, there is max ~20% of depreciation rate in other IT companies.

When we move to the next, related parties then….

Then 72% of income in FY20 and 78% of income in FY19 comes from related parties. The company has 93% of receivables in FY20 of related parties.

This entire series is based on past available data and ignored the future development in companies and the stock market always looks at the future.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

03 – CURRENT TEMPTATION, FUTURE FRUSTRATION

The third part of Series “Current temptation, future frustration”. This series is based on the companies which are currently darling of the market and many trying to catch such opportunities but it has a probability to become a reason for future frustration. It can wipe out the majority of gains in wealth. I am trying to put some of the number-crunching facts by which we can identify ongoing issues in the companies and can save our wealth.

I am starting this series with one of the company which is engaged in manufactures industrial speciality oil, ink oil, residue oil, Jal pentane mixture and lubricants, has a 52 weeks low price of Rs.48 and LTP is Rs.139. This company has rewarded ~2.90x of return in a year.

Let’s start looking at the numbers.

We can see that the company generating profits. But the company do not have major other expense means the company do not have major fixed assets or borrowings.

When we look at the balance sheet then it seems that the company does not have any issue except debt. But when we look at the receivables then we come to know that the company has 68% of receivable of total sales in FY20 but do not have major inventories. Is this a manufacturing company or an IT company? So that though the company make profits but cannot able to convert it into cash flow.

But there are more cockroaches available.

Journal entry of Deferred expenditures

Deferred expenses Dr

            To Cash  

So that here expenses directly get settled into the balance sheet and do not comes to an income statement. If this charges debited to income statement then the company is into the losses, not in profits.

Journal entry of Deferred Income

Cash Dr

            To Deferred Income

When have to give effect to income statement then

Deferred Income Dr

                To Revenue

Again, a direct balance sheet effect rather passes through the income statement. This income can be used for future drought period.

The company has contingent liabilities ~23% of revenue and ~11.71x of net profit.

This entire series is based on past available data and ignored the future development in companies and the stock market always looks at the future.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

02 – CURRENT TEMPTATION, FUTURE FRUSTRATION

The second part of Series “Current temptation, future frustration“. This series is based on the companies which are currently darling of the market and many trying to catch such opportunities but it has a probability to become a reason for future frustration. It can wipe out the majority of gains in wealth. I am trying to put some of the number-crunching facts by which we can identify ongoing issues in the companies and can save our wealth.

I am starting this series with one of the company which is engaged in manufacturers of Wind Turbine Generators (WTGs) in India, has a 52 weeks low price of Rs.16 and LTP is Rs.48.15. This company has rewarded ~3.01x of return in a year.

Let’s start looking at the numbers.

We can see that the company has a declining trend of revenue, operating & PAT level also incurring losses. But the company has delivered a good return in a year so it might be possible that the company has a strong balance sheet.

When we look at the balance sheet then I got shocked. The company has trade payable, inventories and receivables are higher than sales. Also, the company is getting higher advances from its customer which is again higher than sales so that the company should have a monopoly and everyone wants its products only. But then why revenue keeps on declining?

Cash conversion cycle of the company is of 497 days in FY20 means its take almost 1+ years to convert to cash. Even the company has receivables, inventories and payables as a % of sales are 174%, 131% and 139% respectively.

When I have looked at the related party transaction then Rs.450 cr of sales in FY20 and Rs.648 cr of sales in FY19 done through related parties which are 59% of sales in FY20 and 45% in FY19.

Another part, when we look at the advances from customers then all are from related parties only. This trick is used by the company to show slightly better CFO. Also, receivable from related parties is 20.49% of total receivables in FY20 and 18.40% in FY19. And if we look at the receivable as a % of sales to related parties then it is 60.16% in FY20 and 46.31% in FY19. Now, I am curious that related parties have ~Rs.1100 cr of the fund to give as an advance but do not have Rs.270 cr to pay for receivables.

When we look at the exposure of the company to related parties then it is worth of Rs.865.46 cr in FY20 and Rs.708.10 cr in FY19 which is 16.35% in FY20 and 14.94% in FY19 of total balance sheet size. These related parties are making losses.

The company has Cumulative CFO < Cumulative PAT which shows difficulties to convert PAT into Cash Profit. Also, CFO is artificially boosting through advances from customers which is from the related parties.

This entire series is based on past available data and ignored the future development in companies and the stock market always looks at the future.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

This series contains learning from books –

Financial Shenanigans

Quality of Earnings

The Financial Numbers Game

Creative Cash Flow Reporting

01 – Current temptation, future frustration

I have started with series “Once a darling, now an evil“ is based on the companies which were once upon a time darling of the market and now, it has wiped out the majority of all those gains. This series has received lots of love and recognition. Majority of readers of the series has demanded current darling which can have the potential to become evil. I cannot refuse the request of all loyal readers who keeps on encouraging me.  So, on an auspicious day, I am going to start with this new series with all your love and wishes. I am trying to put some of the number-crunching facts by which we can identify ongoing issues in the companies and can save our wealth. I wish this series “Current temptation, Future frustration” also receive all your love and recognition.

I am starting this series with one of the company which is engaged in the business of high-end speciality chemicals, has a 52 weeks low price of Rs.0.95 and LTP is Rs.9.90. This company has rewarded ~10.42x of return in a year.

This company at least earns revenue. 😉 But revenue not growing and even going down year-on-year. Let’s look further because at the lowest price the company traded at Mcap/sales of ~0.15x.

It’s not time to get happy by just looking at the revenue. When we look at the balance sheet then we noticed that the company has higher receivables and inventories.

Receivable and inventory as a % of sales continuously growing with stable payable which will worsen cash flow from operating activities of the company.

Wow…. Let’s drive Volvo and Jaguar with the money of shareholders (the majority of shareholders are very busy and does not have time to look at this).

Advances to suppliers but still confirmation is pending (who will read it and check it, let’s play the game). 

Similar to the receivable’s products got sold but they are receivable or not they need to confirm. Wow….

There are lots of related party transactions which can create doubt.

Promoters of the company also reducing stake from the company.

This entire series is based on past available data and ignored the future development in companies and the stock market always looks at the future.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

11 – ONCE A DARLING, NOW AN EVIL

The eleventh part of Series “Once a darling, now an evil”. This series is based on the companies which were once upon a time darling of the market and now, it has wiped out the majority of all those gains. I am trying to put some of the number-crunching facts by which we have identified ongoing issues in the companies and have saved our wealth.

I am starting this part with one of the company is in the business of exports of software and IT related services which has an all-time high price of ~Rs.349 in 2012 and now last traded price at Rs.0.35.

In the first instance this company having huge sales and profit growth. This creates a temptation to buy with missing out of the opportunity. But after the series of articles, we know to not get tempted with sales & PAT growth.

So, we go deeper ….

Good return ratio 😊, Huge debtor days with increasing payable days. I also want to meet an IT platform provider who keeps on giving good credit. (Actually, I want to meet and suggest those vendors to Infosys and TCS for taking services from these vendors because Infosys and TCS do not have such good payable days. It might be possible that this management is much better than the management of Indian leading IT companies.)

I would like to go further detail of it.

If we look at the common size balance sheet then the majority part of the assets side was other assets and that is acceptable in IT firms as they do not have a fixed asset a lot. But here have receivables & Cash are most. Also, cash getting reduces and borrowings getting higher. Where is the cash going? The company might be purchasing assets but as an IT firm, they do not require to have a huge asset.

I dive deep to check the strength of cashflow. I found that cumulative CFO of Rs.291 cr vs cumulative PAT of Rs.674 cr. If we check cumulative FCF then it will be -Rs.38 cr.

Now, if we see the cash flow statement in detail then we can come to know that company has capitalized many assets so that profitability of the company gets boosts but when we see adjust to FCF then it will be different than what we have observed earlier.

If we adjust cumulative FCF with capitalized assets then it comes to -Rs.357.33 cr and what we have observed is -Rs.42 cr from FY08-12.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

10 – ONCE A DARLING, NOW AN EVIL

The tenth part of Series “Once a darling, now an evil”. This series is based on the companies which were once upon a time darling of the market and now, it has wiped out the majority of all those gains. I am trying to put some of the number-crunching facts by which we have identified ongoing issues in the companies and have saved our wealth.

I am starting this part with one of a jewelry company that has an all-time high price of ~Rs.649 in 2013 and now last traded price at Rs.1.05.

In the first instance this company having huge sales and profit growth. This creates a temptation to buy with missing out of the opportunity. But after the series of articles, we know to not get tempted with sales & PAT growth.

So, we go deeper ….

Huge debtor days, Debt/equity increasing so RoE% is due to the higher leverage.

I would like to go further detail of it.

If we look at the common size balance sheet then the majority part of the assets side was other assets that have receivables & inventories. Also, cash getting reduces and borrowings getting higher. Also, when a company growing at a higher rate then what is the need for higher borrowings after using good cash balance?

The company got debt at a lower rate. Curious and that is also at the time of higher interest rate. Also, the company has to pay lower taxes. Wow… lower interest rate and lower taxes.

The company has FCCB which is a more dangerous kind of foreign debt.

Negative CFO in two years and also if we compare cumulative CFO with cumulative PAT then CCFO<CPAT.

The company owns ~39 subsidiaries and associates companies which can be suspicious.

Company has given ~Rs.1400+ cr of loan and advances to subsidiaries companies on interest-free basis and repayment is beyond seven years.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

06 – ONCE A DARLING, NOW AN EVIL

The sixth part of Series “Once a darling, now an evil”. This series is based on the companies which were once upon a time darling of the market and now, it has wiped out the majority of all those gains. I am trying to put some of the number-crunching facts by which we have identified ongoing issues in the companies and have saved our wealth.

I am starting this part with one of shipbuilding and ship repair company which has an all-time high price of ~Rs.992 in 2008 and now last traded price at Rs.1.20.

On the first instance this company having huge sales and profit growth. This creates a temptation to buy with missing out of the opportunity.

Also, when we look at the terms of trade (i.e. debtors to creditor ratio)

Wonderful… should buy it immediately….

But when we go for deepen….

Payable is growing rapidly and it was higher than total expenses. This creates a sense of cautions that which vendor allow to keep this long credit? Also, if the company is capable to pay then why the company is not paying dues?

When we look at the Inventories, then inventory as a % of sales is higher than the sales. Means company has a good inventory pile up. Also, inventory days are above a year.

Now, when we look at the common size balance sheet of the company than almost 89% of the balance sheet was in other assets in FY06. It makes me curious that whether it is a manufacturing company or an NBFC. If we go for a breakup of those other assets then the majority of the part was in inventories and remaining? The remaining part was in loans and advances. I don’t have an old annual report but when looking for the FY10 annual report then such things get cleared. That was almost 25% of balance sheet and ~40%+ of other assets in FY10.

The company also has understated its depreciation. If we compare the depreciation rate with the peer companies then peer company has an almost double rate then the company.

If we look at the taxation as per the Cash flow tax rate then it is substantially lower this creates a doubt that why to pay less tax than actual payment. There can be possible to have an artificially boosted profitability in the P&L account.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

05 – ONCE A DARLING, NOW AN EVIL

The fifth part of Series “Once a darling, now an evil”. This series is based on the companies which were once upon a time darling of the market and now, it has wiped out the majority of all those gains. I am trying to put some of the number-crunching facts by which we have identified ongoing issues in the companies and have saved our wealth.

I am starting this part with one of the manufacturing, processing & trading of yarns, fabrics, ready-made garments and towels company which has an all-time high price of ~Rs.582 in 2008 and now last traded price at Rs.0.35.

On the first instance this company having huge sales and profit growth. This creates the temptation to buy with missing out of the opportunity.

But when we go for deepen….

Now, let’s look at the above data then though the company has good growth in sales and profit but not able to generate CFO. This will require to bring external funding in terms of equity and borrowing, and both have increased rapidly. Look at the receivable and inventory as a % of sales than 73%, 69%, 70% in FY08,09,10 respectively. Also, if we look at the debtor days and inventory days both are increasing rapidly.

If we look at the taxation then as per the Cash flow tax rate then it is substantially lower this creates a doubt that why to pay less tax than actual payment.

Also, when we look at the investment than the majority of the investment made in subsidiaries.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

04 – ONCE A DARLING, NOW AN EVIL

The fourth part of Series “Once a darling, now an evil”. This series is based on the companies which were once upon a time darling of the market and now, it has wiped out the majority of all those gains. I am trying to put some of the number-crunching facts by which we have identified ongoing issues in the companies and have saved our wealth.

I am starting this part with one of the network service company which has an all-time high price of ~Rs.3500 and now last traded price at Rs.1.25. and high of Rs.464 in the year 2010.

On the first instance, this company looks having not a huge problem except debt rising but for understanding it in a better way, we need to go deeper.

If we look at the tax paid in cash flow then that tax outflow is higher than what the company has posted in P&L statement. If we look at the actual PAT and reported PAT then both have a good diversion. This shows that the company has boosted PAT by ~40%+ on an average basis.

Now, if we look at the sales to the related party then that was ~44% and 43% in the FY08 & FY09 respectively. In FY09, ~44% payable was from the related party out of total payables. Company has made ~80%+ investment in its subsidiaries out of investment shown on the balance sheet. In addition, the company has 25+ subsidiaries and few were at Mauritius.

Also, during when the price was traded near too high in the year 2010, the promoter has started putting their stake in a pledge.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.