December 1, 2016

Analysis: Emmbi Industries Limited

www.drvijaymalik.com has a dedicated section for investment & stock specific queries of readers: “Ask Your Queries”. Over time, readers have asked queries about multiple stocks in this section. Answers to these queries have been done post preliminary analysis of the stocks under consideration. Such analysis has been found helpful by readers.

Q&A Series is an attempt to summarize & share with all the readers, the key questions and their answers, which have featured on “Ask Your Queries” section. The primary aim of this new feature is to share the knowledge with all the readers of the website.

The current section of this series, “Q&A” covers Emmbi Industries Limited, engaged in the manufacturing of technical textile products: flexible intermediate bulk container (FIBC) / various polymer based packaging products, geotextiles, water conservation products (Aqua Sure) etc.

Analysis of Emmbi Industries Limited, manufacturer of technical textile packaging products, FIBC, geotextiles, water conservation products (Aqua Sure)



Reader’s Query

Dear Sir,

Your efforts are acknowledgeable and very helpful.

I have been a reader of your blog and based on your template I have done an analysis of Emmbi Industries Limited. It would be greatly appreciated if you can provide me further insight in Emmbi Industries Ltd.

Below, I have attached my analysis and summary from annual reports:

In its FY2016 annual report, Emmbi Industries Limited has described its business under following categories:
Emmbi caters to a wide range of customers and industries with our innovative solutions. Our products find applications across a number of industries, and broadly fall into four key groups:
Water Conservation: Emmbi manufactures a range of products that help in the storage, transportation, conservation and harvesting of water, apart from fulfilling the irrigation needs of farmers across the country.
Advanced Composites: This refers to a range of products that are primarily meant to take care of human safety, especially in hazardous environments. Our protective films and fabrics are used for transportation and management of hazardous material.
Specialty Packaging: Emmbi caters to a range of customers globally, serving industries as varied as chemicals, e-commerce, oil and water, through a range of products for transportation and storage.
Agri Products: This refers to a range of products especially made for the farming community. Typical applications include those for yield improvement through crop protection systems, fermentation, storage, radiation- and hailstorm-control and weed management products.

CHECKLIST:


Criteria
Value
              Remarks (Emmbi Industries Ltd.) (Last 10 years)
    FINANCIAL ANALYSIS                                                                 
 
1
Sales growth
CAGR >15% for last 7-10 years
Growth should be a consistent year on year. Ignore companies where a sudden spurt of sales in one year is confounding the 10 years performance.
Sales growth has been
27.77%
Very high growth rates of >50% are unsustainable.
2
Profitability
NPM >8%
Look for companies with sustained operating & net profit margins over the years
NPM has CAGR of 40% over last 10 years, where
Rapid increase in growth is between 2015-16
3
Tax payout
>30%
The tax rate should be near general corporate tax rate unless some specific tax incentives are applicable to the company.
Company has paid its highest tax rate of 41%(2011) since then it has reduced to 26% tax rate
4
Interest coverage
>3
 Interest coverage ratio is 2.81
5
Debt to Equity ratio
< 0.5
Look for companies with D/E ratio of as low as possible. Preferably zero debt
Company’s D/E ratio is 0.85
6
Current ratio
>1.25
Current ratio is  4.25
7
Cash flow
CFO > 0
Positive CFO is necessary.
CFO is Positive (from 2014), totalling to around 21.59cr over 10 years with net cash flow of 0.55cr .in total
It’s great if CFO meets the outflow for CFI and CFF
8
Cumulative PAT vs. CFO
cPAT ~ cCFO
Cumulative PAT and CFO are similar for last 10 years
Cumulative 10 years PAT is 34.3 and cumulative CFO over 10years is 21.59(company isn’t able to convert its accounting profits into cash profits efficiently)
1
P/E ratio
< 10
Such companies provide good margin of safety
17.9
2
P/E to Growth ratio (PEG ratio)
< 1
0.56
3
Earnings Yield (EY)
> 10 year G-Sec yield
EY should be greater than long-term government bond yields or bank fixed deposit interest rates
8.54 which is greater than G-Sec yield
4
P/B ratio
< 1
However, I find P/B ratio irrelevant for sectors other than financial services
2.82
5
Price to Sales ratio (P/S ratio)
< 1.5
James O’Shaughnessy: Buy if P/S ratio is < 1.5 and sell if >3
1.02
6
Dividend Yield (DY)
> 0%
Higher the better.
0.40
DY of >5% is very attractive. However, do not focus a lot on DY for companies in fast growth phase
1
Comparison with industry peers
Sales growth > peers
The Company must show sales growth higher than peers. If its sales growth is similar to peers, then there is no Moat
Yes, its sales growth has been higher than peers over 10 years.
2
Increase in production capacity and sales volume
Production capacity & sales volume CAGR ~ Sales CAGR
Company must have shown increased market penetration by selling higher volumes of its product/service
The company expanded its factory operations, through an additional investment in building and machinery, research and development by Rs. 71 million.

Capacity at 83% registered a growth of 22% over the previous year.
Capacity at 68% has registered a growth of 31% over the past three years,
3
Conversion of sales growth into profits
Profit CAGR ~ Sales CAGR
A Moat would result in increasing profits with increasing sales. Otherwise, sales growth is only a result of unnecessary expansion or aggressive marketing push, which would erode value in long term
10 Year Sales CAGR—27.77%
10year Profit cagr—39.79%
Part of the reason could be their shifting towards high-margin segments.
4
Conversion of profits into cash
cPAT ~ cCFO
If cPAT >> cCFO, then either the profits are fictitious or the company is selling to any John Doe for higher sales without having the ability to collect money from them
Cumulative 10 years PAT is 34.3 and cumulative CFO over 10years is 21.59(company isn’t able to convert its accounting profits into cash profits efficiently)
5
Creation of value for shareholders from the profits retained
The increase in Mcap in last 10 yrs. > Retained profits in last 10 yrs.
Otherwise, company is destroying wealth of shareholders
Not able to calculate
A) Subjective parameters
1
Background check of promoters & directors
Web search
There should not be any information questioning the integrity of promoters & directors
Promoter Executive Directors --Mr. Makrand M. Appalwar, Mrs. Rinku M. Appalwar
Non-Executive & Independent Directors--Mr. Sanjay R. Rathi, Mr. Prashant K. Lohiya, Dr. Venkatesh G. Joshi.

Web search about directors did not reveal any negative information.
2
Management succession plans
Good succession plan should be in place
Salary being paid to potential successors should be in line with their experience
Markand Appalwar--has raised its remuneration under Salaries, Allowances and Perquisites#  from 42lakh pa(2014) to 78.39lak(2016)
Rinku Appalwar--has raised its remuneration under Salaries, Allowances and Perquisites#   from 39lak pa(2014) to 72.39lak(2016)

Sanjay Rathi --Sitting Fees Paid (` )  57500
Prashant lohiya  --Sitting Fees Paid (` )  57500
Venkatesh Joshi --Sitting Fees Paid (` )  57500
B) Objective Parameters
3
Salary of promoters vs. net profits
No salary increase with declining profits/losses
the promoter should not have a history of seeking an increase in remuneration when the profits of the company declined in past
The increase in salary has been due to increase in PAT.

Mr. Markand has remuneration of around 7% of Net Profits.
4
Project execution skills
Green/brownfield project execution
The company should have shown good project execution skills with cost and time overruns.
Not clear.
Exclude capacity increase by mergers & acquisitions.
5
Consistent increase in dividend payments
Dividend CAGR > 0
Dividends should be increasing with increase in profits of the company
Has been reducing its dividend payout ratio from 15%(2012) to 8.4%(2016)
6
Promoter shareholding
> 51%
Higher the better
57.66%
7
Promoter buying the shares
Insider buying ++
If promoter of a company buys its shares, investors should buy too
Promoters has been increasing their stake from around 47% (2010) to 58%(2016)
8
FII shareholding
~ 0%
the lower the better
 0% FIIs holding.
OTHER BUSINESS PARAMETERS
1
Product diversification
Pure play
The company should be either a pure play (only one business segment) or related products. Pure play model ensures that the management is specialized in what they are doing. 
Packaging & Containers( Technical Textiles)
Entirely different unrelated products/services are a strict NO. An investor should rather buy stocks of different companies if she wants such diversification.
2
Govt. influence
No govt. interference in profit making
No cap on profit returns or pricing of the product.
Nothing so far
No compulsion to supply to certain clients.
MoS in Purchase Price
Earnings Yield (EY)
EY > 10 Yr. G-Sec Yield
Higher the EY than 10 Yr. G-Sec Yield, the better
8.54 yes, higher than G-Sec
MoS in Business Model
Self-Sustainable Growth Rate (SSGR)
SSGR > Achieved Sales Growth Rate
Higher the SSGR than achieved Sales Growth, the better
Not able to calculate.
Free Cash Flow (FCF)
FCF/CFO >> 0
Higher the FCF as proportion of CFO, the better
  71% from last year’s 16% (it has come from negative % since 2013)

1
Credit Rating History
BBB- & above
Current credit rating should be minimum BBB-

Credit rating should have been improving over the years
Credit rating agency, CARE has upgraded(on March 30,2016) from ‘CARE BBB’ rating to CARE BBB+  Emmbi Industries’ long-term bank facilities. The rating agency has also upgraded from ‘A3’ rating to CARE A3+  the company’s short-term bank facilities

Some other Points:
  • The promoters have increased their stake by around 10% in 6 years.
  • EIL has 11 Patents i.e. 6 designs and 5 processes.
  • The strength of the company is designing and processing.
  • Design expertise difficult to replicate.
  • Credit rating has gone up.
  • EIL produce enough bags to transport 35000MT of material equivalent to all the pasta consume by USA.
  • Around 1.88% of turnover goes to R&D center. (They have govt. approved R&D which avails them some tax benefits.) 
  • Around 53% revenues from Exports. 
  • Capacity Utilization has been @ 83% from past 68%( which is after 31% growth from its previous year)
  • Right now they are moving away from packaging (which formed around 37%) to advanced composites and water conservation  and Agri-products.(towards High Margin Products)


Regards,
Himanshu Chhajer


Author’s Response


Dear Himanshu,

Many thanks for sharing your analysis of Emmbi Industries Limited with the readers and the author. I appreciate the time & effort put in by you in the analysis.

Let us analyze the financial performance of Emmbi Industries Limited over last 10 years.

Analysis of Emmbi Industries Limited, manufacturer of technical textile packaging products, FIBC, geotextiles, water conservation products (Aqua Sure)

Emmbi Industries Limited had been growing its sales at a good pace of 28% over last 10 years (FY2007-16). However, as the size of the company is increasing the pace of sales is going down year on year. The sales growth has toned down to 27% in last 7 years (FY2009-16) and further down to 22% in last 5 years (FY2011-16) and 14% in last 3 years (FY2013-16).

As per the H1-FY2017 results, Emmbi Industries Limited has reached 83% capacity utilization in its current installed manufacturing capacity. Therefore, it needs to be assessed whether the company has the visibility of future growth in its plans.

Emmbi Industries Limited has disclosed that it is currently undertaking capacity expansion by creating a clean room project for the FIBC manufacturing and a separate facility for the water conservation and agricultural business project. Moreover, the company is also expanding its presence in Indian markets along with a heightened focus on direct retail sales (B2C). However, it remains to be seen to what extent the company would be able to utilize the increased capacity.

A look at the profitability trend of Emmbi Industries Limited would indicate that the operating profitability margin (OPM) has been largely stable over the last 10 years (FY2007-16) within the range of 9% - 11%. In the recent years, the OPM has improved to 13%. Sustained and improving profitability margins are a good sign for any business and it needs assessment to find out what features of the company help it in maintaining its profitability margins.


During last year, in two different shareholder communications, Emmbi Industries Limited has disclosed the reasons for sustained margins:

1) Annual Report for FY2016:

In management discussion & analysis (MDA) section, while discussing inventory management (pg. 37), the management of Emmbi Industries Limited has mentioned that the order booking and procurement of raw material happen simultaneously, therefore the fluctuation of raw material does not impact the profitability. It leads an investor to conclude that the orders are priced to the customers based on ongoing raw material prices by adding a profitability margin, which in turn leads to stable profitability.

Analysis of Emmbi Industries Limited, manufacturer of technical textile packaging products, FIBC, geotextiles, water conservation products (Aqua Sure)


2) Earnings conference call H1-FY2017 results:

On November 17, 2016, while discussing the H1-FY2017 results of Emmbi Industries Limited, the management while responding to a question about Brexit & Pound depreciation, replied that the company does not have long-term contract with customers and enters into monthly contracts with them. The presence of monthly contracts allows the company to renegotiate the prices of its products in light of the ongoing raw material prices.

Analysis of Emmbi Industries Limited, manufacturer of technical textile packaging products, FIBC, geotextiles, water conservation products (Aqua Sure)

Moreover, the presence of monthly contracts with customers and the business practice of booking customer order and the raw material procurement simultaneously, do not take the credit away from Emmbi Industries Limited that the product it manufactures and its customer relationships allow it the buyer’s power to pass on rising costs to customers.

Further, the increasing capacity utilization levels of the manufacturing capacity of Emmbi Industries Limited is leading to the operating leverage coming into play and the company is able to further improve its margins recently. As per the company, its capacity utilization has increased from 83% in H1-FY2016 to 89% in H1-FY2017, which effectively leads to the production of more products with same fixed costs and thereby increasing the profit margin per product unit.

The net profit margin (NPM) of Emmbi Industries Limited has been fluctuating at a very low level of 2%-4% during last 10 years (FY2007-16) and has touched 5% in FY2016. The major reason for the low net profit margin is the capital-intensive nature of the business of the company. High capital intensity leads to higher depreciation as well as high interest cost due to debt funded operations. As a result, major portion of the operating profit of the company is eaten up by interest and depreciation expenses.


To understand the capital-intensive nature of the business of Emmbi Industries Limited, we need to assess the avenues, which are primary capital consumption segments of any business: fixed assets and working capital.

Looking at the net fixed asset turnover (NFAT) of Emmbi Industries Limited over the years, an investor would notice that the company has been able to improve its net fixed assets turnover (NFAT) over the years. NFAT has improved from 2.82 in FY2012 to 3.55 in FY2016. The improving NFAT of the company is in line with the growing capacity utilization of the existing manufacturing capacity of the company, which was installed post the IPO of Emmbi Industries Limited in FY2010 from the IPO proceeds.

NFAT of the company indicates that the company has been doing well on utilization levels of its fixed assets.

However, when we see the working capital position of the Emmbi Industries Limited, then we notice that working capital has been consuming a lot of funds for the company.

Receivables days of Emmbi Industries Limited has been range bound within 60-68 days over last 10 years (FY2007-16). Therefore, more or less about 2 months’ worth of sales proceeds are tied up as receivables with the customers at any point of time.

Emmbi Industries Limited has about 50% of its sales coming from exports. We see that most of the exports are usually backed by a letter of credit, which in turn are discounted by the companies to get immediate access to funds. In such a case, the receivables days of 2 months for a company into exports seems a bit higher.

When an investor assesses the inventory turnover of the company, then the investor notices that the inventory turnover of Emmbi Industries Limited has deteriorated over the years from 5.9 in FY2009 to 3.7 in FY2016. An inventory turnover of 3.7 means that about 3.25 months of sales (12/3.7) are tied up in inventory at any point in time.


The combined impact of receivables days and inventory turnover means that at any point of time about 5.25 months (2+3.25) worth of sales proceeds are tied up in the inventory at any point in time. For a small size corporate, having about 5-6 months’ sales worth of funds (i.e. about ₹80-₹100 cr. for sales of ₹200 cr.) tied up in receivables and inventory is a huge cost and has been one of the major reasons for the financial drag on the company leading to debt overhang.

When we assess the company on the front of payment to its vendors, then we notice that Emmbi Industries Limited buys most of its raw material from Reliance Industries Limited, where it has to pay entire money advance.

Emmbi Industries Limited disclosed its payment terms with the suppliers in its shareholders’ conference call on September 16, 2016 (pg. 9):

Analysis of Emmbi Industries Limited, manufacturer of technical textile packaging products, FIBC, geotextiles, water conservation products (Aqua Sure)


So there seems to be little that Emmbi Industries Limited can do at the suppliers’ end to improve its working capital efficiency.

The management of Emmbi Industries Limited acknowledges its limitations in improving the working capital efficiency situation and has also communicated its situation to the investors in the conference call on November 17, 2016 (pg. 15):

Analysis of Emmbi Industries Limited, manufacturer of technical textile packaging products, FIBC, geotextiles, water conservation products (Aqua Sure)

The continuous consumption of funds in the working capital is evident when an investor analyses the cumulative profits and cash flow data of Emmbi Industries Limited for 10 years (FY2007-16).  The investor would notice that Emmbi Industries Limited has not been able to convert its profits into cash flow from operations. Cumulative PAT during FY2007-16 is ₹34 cr. whereas the cumulative cash flow from operations (CFO) over the similar period has been ₹22 cr.

No wonder that the company has been continuously reeling under debt and high interest payments due to the working capital intensity of its business.

The tight cash flow situation of the company has been highlighted at times by credit rating agencies as well. Below is the excerpt of the April 2015 credit rating report of Emmbi Industries Limited by rating agency CARE Limited, which highlights the insufficiency of operating cash flow along with working capital-intensive nature of the business being funded by debt:

Analysis of Emmbi Industries Limited, manufacturer of technical textile packaging products, FIBC, geotextiles, water conservation products (Aqua Sure)



Over last 10 years (FY2007-16), Emmbi Industries Limited has done a capital expenditure (capex) of ₹67 cr whereas we noticed above that its cash flow from operations for the same period was only ₹22 cr leaving a gap of ₹45 cr [negative free cash flow (FCF)] to be funded from other sources. The company has relied on a mix of debt and equity to meet the fund's shortfall in its business.

The continuous high debt levels have ensured that the company had to pay about ₹45 cr as interest to its lenders, assuming 12% rate of interest, which is reasonable for a BBB (negative/neutral) rated company.

The resultant gap of about ₹90 cr (₹45 cr negative FCF + interest outgo of ₹45 cr), has been funded by raising incremental debt of ₹47 cr (total debt levels of Emmbi Industries Limited increased from ₹15 cr in FY2007 to ₹62 cr in FY2016) and by equity infusion of about ₹ 40 cr, which was primarily by way initial public offer (IPO) proceeds in FY2010 when the company offered its shares to the public at BSE and NSE.

An investor would notice that Emmbi Industries Limited continuously had negative cash flow from operations for the initial part of last 10 years i.e. until FY2013. During this stressful period, it became urgent for Emmbi Industries Limited, that it should infuse additional equity as the lenders would have been finding it difficult to lend incremental funds to a small company, whose operations were continuously guzzling money.

The result was that the company approached equity markets for funding in FY2010. When an investor tries to assess the costs the company paid for raising the funds from IPO, then she finds out that the company paid about 9% of the IPO proceeds as issue expenses.

To assess the exact amount of funds paid by Emmbi Industries Limited for the IPO, the investor needs to analyse the FY2010 annual report (pg. 22):

Analysis of Emmbi Industries Limited, manufacturer of technical textile packaging products, FIBC, geotextiles, water conservation products (Aqua Sure)


Emmbi Industries Limited raised about ₹43.6 cr. (increase in share capital of ₹13.3 cr and increase in share premium of ₹30.3 cr) and paid ₹3.9 cr as issue expenses, which is about 9% (3.9/43.6) of the total IPO proceeds.

Paying 9% as commission to merchant bankers/underwriters for raising funds seems high and might be an indicator of the urgency on part of the company to raise the funds.

As we know that Emmbi Industries Limited had been facing continuous years of negative cash flow from operations over the years and the issue price of ₹45 in February 2010 with FY2009 EPS of 1.62 (FY2010 annual report pg. 21), meant that the issue was priced at a P/E of 27.7 times. Such P/E levels look high for a company which is not making cash profits.


It was not surprising that on the listing day (February 24, 2010), the price crashed heavily and closed at ₹28.65, witnessing a decline of 36%.

Analysis of Emmbi Industries Limited, manufacturer of technical textile packaging products, FIBC, geotextiles, water conservation products (Aqua Sure)


The share price of the company recovered to the issue price of ₹45 only in October 2015, about 5.5 years from the listing.

Analysis of Emmbi Industries Limited, manufacturer of technical textile packaging products, FIBC, geotextiles, water conservation products (Aqua Sure)


The tight liquidity situation of Emmbi Industries Limited under which the IPO was brought and it barely managed to get subscribed to 1.20 times and the high issue expenses paid by the company (9% of total issue proceeds), it seems that the company has to rely on underwriters to get the issue through.

As per a report published by the PwC deals practice group in September 2012, named: “Considering an IPO? The costs of going and being public may surprise you” the underwriting charges of small IPOs with gross proceeds up to $50 million (about ₹335 cr at ₹67/$), can go up to 6.9% (pg. 7 of the report).

Analysis of Emmbi Industries Limited, manufacturer of technical textile packaging products, FIBC, geotextiles, water conservation products (Aqua Sure)

In light of the same, it seems plausible that Emmbi Industries Limited had to pay up to 9% of IPO proceeds as issue expenses for its ₹43.6 cr. IPO to become successful.

Without the backing of fundamentals to support the P/E ratio of 27.7 at the issue price, it was not surprising that the share price could not hold at the issue price levels.

Therefore, we have noticed that Emmbi Industries Limited has been operating in a business, which is capital intensive and eats up a lot of funds as working capital and the company had to rely on equity dilution as well as debt funding to meet its growing fund requirements to sustain its sales growth.

As per the company its current capex plans of ₹22 cr are to be funded by ₹15 cr of debt and ₹10 cr of equity.

Analysis of Emmbi Industries Limited, manufacturer of technical textile packaging products, FIBC, geotextiles, water conservation products (Aqua Sure)

When the said capacity becomes operational, then as per the high working capital needs of the company’s business, it would need more working capital funds. Such pattern indicates that Emmbi Industries Limited would be in continuous need of debt for sustaining its growth.

Investors should be cautious of investing in companies, which have continuously increasing debt levels, as high debt has the potential of increasing the risk of bankruptcy and reduced profitability under tough business conditions.

You should read the analysis of two other companies: Ahmednagar Forgings Limited and Amtek India Limited, to understand the sales growth funded by debt can have on the financial situation of any company. You may read their analysis here:




Moreover, there are certain other aspects as well, which also need an investor's attention before making the final investment decision about Emmbi Industries Limited:

1) Promoter-managers’ remuneration:


Upon further analysis of Emmbi Industries Limited, the investor would notice that the company has paid its promoter-managers a remuneration of ₹1.50 cr in FY2016 (pg. 29 of the FY2016 annual report), which is about 14% of the net profit after tax of FY2016 (₹10.6 cr).

The companies act mandates that the remuneration of all the executive directors/whole time directors including MD should be capped at 10% of the profits of the company as per section 197 of the companies act, 2013. The company needs to take central govt. approval to give remuneration higher than the stipulated cap, to its executive directors.

It seems that the company is paying remuneration higher than the stipulated cap and as per the audit report of the FY2016 annual report (pg. 59), Emmbi Industries Limited has taken approval for it:

Analysis of Emmbi Industries Limited, manufacturer of technical textile packaging products, FIBC, geotextiles, water conservation products (Aqua Sure)


However, promoters’ remuneration of 14% of net profits after tax seems high from conventional standards.


2) Dividends apparently being funded by debt:


Emmbi Industries Limited has been paying dividends to its shareholders since FY2011. However, in the light of the company being free cash flow negative over the years and even since FY2011 (CFO for FY2011-16 is ₹33 cr whereas Capex for FY2011-16 is ₹61 cr. leading to negative FCF of ₹28 cr), the dividends seem to be effectively funded by debt (as the money is fungible).

It is advisable that an investor should not take any comfort of the dividend yield of the companies, which declare dividends to shareholders despite having negative free cash flow situation. Such are paid usually paid out of debt proceeds and when a company decides to pay a dividend out of debt and not from the free cash flows, then there is hardly any limit to which the company can declare dividends to appease shareholders.

Moreover, if the shareholders including promoters of such free cash flow negative companies use these dividends (which are effectively paid out of debt raised by the company), then the situation might tantamount to increasing personal shareholding by leveraging the company balance sheet.

An investor would note that the promoters of Emmbi Industries Limited have increased their shareholding in the company from about 47% to about 57% in last 5 years.

As per the shareholders’ conference call on September 16, 2016, the promoter has clarified that he is putting most of the dividend and other income in buying shares of Emmbi Industries Limited.

Analysis of Emmbi Industries Limited, manufacturer of technical textile packaging products, FIBC, geotextiles, water conservation products (Aqua Sure)


We believe that declaring dividends when the companies are not making free cash flows is not a good practice as the company does not have an inherent surplus to pay to shareholders so in turn the company ends up leveraging its already indebted balance sheet further to pay dividends. And the use of such dividends by shareholders including promoters (which also get a comparative higher salary) to increase stake in the company, as mentioned above, is tantamount to benefiting at the cost of the company.


3) Capitalization of certain expenses:


As per page 72, FY2016 annual report, Emmbi Industries Limited has been capitalizing certain expenses like brand development expenses, foreign trade fair expenses and knowledge development expenses, which on the face of it look like expenses which should be charges to P&L and not capitalized.

Analysis of Emmbi Industries Limited, manufacturer of technical textile packaging products, FIBC, geotextiles, water conservation products (Aqua Sure)


It is advised that an investor should examine these expenses further and may get a clarification from the company about the nature of these expenses, which warrants them to be capitalized.

Emmbi Industries Limited is the first company, which I have analysed until date that holds a shareholders conference call at the AGM. This is a very nice gesture from the promoter management of the company that they are offering an alternative channel to the shareholders to interact with them and virtually attend the AGM despite being based away from the AGM location.

As per the transcript of the shareholders’ conference call held by the company on September 16, 2016, about 10 shareholders attended the AGM in person and about 30 other shareholders were present on the conference call where the management of the company listened to their queries and answered to their questions.

Such conference call seemed a nice gesture in the times, where many companies seemingly deliberately hold their AGMs at far-flung plant locations where it becomes difficult for public shareholders to go and attend the AGMs.

Further, Emmbi Industries Limited is the first company that I have come across, which issued a clarification to stock exchanges (July 13, 2016) when an anonymous person wrote on Moneycontrol message board that one of its directors has been arrested:

Analysis of Emmbi Industries Limited, manufacturer of technical textile packaging products, FIBC, geotextiles, water conservation products (Aqua Sure)


Emmbi Industries Limited is currently available at a P/E ratio of about 17, which does not provide a margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.



Overall, Emmbi Industries Limited seems to be a company, which has been growing its sales at a decent pace with sustained operating margins. However, the profitability margins of the company do not seem sufficient to meet the funds requirements of its highly capital intensive business. In the past, Emmbi Industries Limited has funded its cash shortfall, which was required to sustain its growth, through a mixture of debt and equity

Currently also, Emmbi Industries Limited has been working on capacity addition plans, which are about 70% debt funded and might need further debt to meet increased working capital requirements looking at the nature of its business in the past. Therefore, the primary parameter that an investor should monitor going ahead is the debt level of Emmbi Industries Limited, lest it should fall into a debt trap.

An investor should take note of the high salaries of promoters as compared to the net profit after tax levels. The investor should also focus on the fact that the dividends seem primarily debt funded due to the company being in a free cash flow negative state. Moreover, usage of these debt-funded dividend proceeds by the shareholders, including promoters, to increase their stake in the company might tantamount to benefiting at company’s expense.

These are my views about Emmbi Industries Limited. However, you should do your own analysis before taking any investment related decision about Emmbi Industries Limited.

You may use the following steps to analyze the company: "How to do Detailed Analysis of a Company"

An investor should keep a close watch on the operating efficiency and the debt levels of Emmbi Industries Limited along with its profitability margins in future.


Hope it helps!

Regards,


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DISCLAIMER


Registration Status with SEBI:


I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013

Details of Financial Interest in the Subject Company:


Currently, I do not own stocks of the companies mentioned above in my portfolio.