02 – CURRENT TEMPTATION, FUTURE FRUSTRATION

Posted on September 20, 2020 by Jimit Zaveri under 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

Posted on August 22, 2020 by Jimit Zaveri under 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

Posted on August 2, 2020 by Jimit Zaveri under 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.

Zylog 01

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 ….

Zylog 02

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.

Zylog 03

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.

Zylog 04

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.

Zylog 05

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.

This series contains learning from books –

Financial Shenanigans

Quality of Earnings

The Financial Numbers Game

Creative Cash Flow Reporting

10 – ONCE A DARLING, NOW AN EVIL

Posted on July 19, 2020 by Jimit Zaveri under 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.

GitG01

So, we go deeper ….

GitG02

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

I would like to go further detail of it.

GitG03

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?

GitG04

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.

GitG05