August 2, 2017

Analysis: Bhageria 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.

“Analysis” 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 covers Bhageria Industries Limited, an Indian player dealing in dyes & intermediaries and solar power projects.

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects


Reader’s Query

Respected Sir,

You are doing a super job to educate and acknowledge investor like me and it shows because of your efforts on drvijaymalik.com

Here I present a report on Bhageria Industries Limited. Please give your valuable inputs.

I express heartfelt thanks for all the work that you are doing.

Thanking you,

Pratik Solanki.

Bhageria Industries Limited


Introduction (Source: company website)

Bhageria Industries Limited, established in 1989 with an objective to serve the dyes & intermediates industry all over the globe. The company commenced its operations by setting up a Vinyl Sulphone Plant at Vapi (Gujarat) with a capacity of 540 T.P.A. which has now expanded to 3600 T.P.A. Subsequently Company has gone for further expansion in other Dyes intermediates & Dyestuffs.

Nearly 70% of its production is being exported worldwide to various clients including multinationals.

The business activities of the group can be classified as follows:
  1. Manufacturing and exporting of Dyes and intermediates.
  2. Sourcing and exporting various pharmaceutical products (APIs and FFs).
  3. Sourcing of various Bulk chemicals.

Bhageria Industries Limited has various products:
  • Pigments
  • Dye Stuffs
  • Agro Chemicals
  • Pharmaceuticals
  • Dyes Intermediates
  • Specialty Products


Valuation Analysis


Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

  • Here PE Ratio is slightly higher than MOS.
  • PEG ratio means growth adjusted earning is less than 1 that suggests the stock is undervalued.
  • EY is greater than govt. interest rate.
  • P/S ratio is well below 1.5.  James O’Shaughnessy: Buy if P/S ratio is < 1.5 and sell if >3 and
  • P/B ratio is worse (As notified by you, P/B ratio irrelevant for sectors other than financial services).


Financial Analysis


Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

  • Bhageria Industries Limited has been growing at an average rate of about 21% per annum for last 10 years, with average 6% NPM from last three years.
  • From the year 2007, Co. is regularly paying out tax with more than 27% that glimpse about management quality.
  • Bhageria Industries Limited has a very good interest coverage 52 times in recent years that also means that Co. has sufficient interest coverage to paying out its interest.
  • Company’s current assets are 60% more to take care of its current liabilities.

Tax Payout:

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

  

Operating Performance Analysis

  • Bhageria industries Limited is growing at decent sales growth of 21.09% in last 10 years with average NPM of 6% since 2014. In current year sales is decreased to 57.77% compared to previous year. Co. stated in the annual report that it is due to prize and realization remained quite lower compared to previous year.
  • Inventory turnover ratio is stable between 10 - 13% till 2013 and after 2014 it is continually declining. Declining of inventory turnover ratio is becoming a major question for a company.
  • Receivable days are declining till 2014 and after it is increasing, which shows that Bhageria Industries Limited is not able to realize its dues from customers in recent time.
  • NFAT Ratio is continually increasing since 2009 and it is decreasing from 2014.                Overall three ratios are fluctuating and decreasing in recent years. I want your view on these ratios.

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects
  • Debt to equity is decreasing since 2015 that means the company is maintaining its debt level.

 Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects
  • After 2014, it is been generating positive cash flow from its operation


Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

  • Bhageria Industries Limited has PAT for last 10 years of ₹44 cr. whereas the CFO over the similar period is ₹73cr. PAT has nearly been converted into CFO. There does not seem to be much concern on this parameter.
  • Bhageria Industries Limited has an SSGR of about 38-177% from the last three years, which is more than the sales growth rate of 21-31% being achieved by the company in the past, which suggests they can keep on growing without raising debt.
  • Bhageria Industries Limited has generated ₹73 cr. from cash flow from operations (CFO) over FY2007-2016 whereas it has spent ₹32 cr as capital expenditure over the same period resulting in a free cash flow (FCF) of ₹41 cr. Moreover, the company has utilized the free cash to pay dividends to shareholders of about ₹14 cr


Management Analysis


Mr. Suresh Bhageria is a chairperson and promoter of Bhageria Industries Limited. with a qualification of B. Com. and more than 25 years of experience.

Salary of Promoter:

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

  • Current year promoter salary is 15.56% compared to net profit and it is decreasing as net profit decrease.
  • Bhageria Industries Limited is regularly providing a dividend. The Current dividend payout ratio is 25.96%. 
  • Promoter holding is 49.90% and general public is 20.01%, which suggests promoters, faith in company 


Peer Comparison

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

  • Bhageria Industries Limited show sales growth higher than peers except for Jindal poly films, which does not indicate Moat of the BIL.


  • Bhageria Industries Limited has setup a Solar Power Plant at Capital Cost of Rs. 19 Cr. to reduce the cost of power.

New solar power project:

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects
  • In the current financial year, Bhageria Industries Limited used Rs. 81.41 Lakhs and 47 Lakhs in the previous year as CSR activity, which suggests company’s socially responsible value.

Author’s Response



Hi Pratik,

Thanks for sharing the analysis of Bhageria Industries Limited with us! We appreciate the hard work put in by you in the analysis.

Let us first try to analyse the financial performance of Bhageria Industries Limited over last 10 years.

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

Bhageria Industries Limited has been growing its sales since last 10 years (FY2007-16) at a rate of 20% year on year from ₹43 cr. in FY2007 to ₹238 cr. in FY2016. The sales have further increased to ₹344 cr. in FY2017. This sales growth journey has been quite turbulent for Bhageria Industries Limited and it has witnessed sales decline in FY2010 and FY2016. The sales revenue reached the highs of ₹412 cr. in FY2015 and the company is yet to achieve those levels.

Just like fluctuations in the sales growth, Bhageria Industries Limited has witnessed the profitability margins vary significantly over the years. The company reported operating losses in FY2008 and FY2009 and had very low amounts of operating profits until FY2013. Thereafter, the operating profit margin (OPM) has improved but still, the OPM has shown very high fluctuations from 6% to 17%.

Such fluctuating pattern of OPM indicates that Bhageria Industries Limited does not have a pricing power over its customers and is not able to timely pass on the raw material price increases to its customers. As a result, when the raw material prices increase, Bhageria Industries Limited has to take a hit on its profitability margins.

Such cyclical pattern of operating profitability margins is predominantly prevalent in companies that deal with products, which are commoditised and the customers have an option of buying the products from a number suppliers.

Bhageria Industries Limited has communicated the same to the shareholders in its FY2012 annual report while discussing the operating performance (pg. 6):

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects


And in the FY2016 annual report, page 4, when the sales and the profitability witnessed steep decline:

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

The same issue has been highlighted by the credit rating agency CARE Limited in its credit report of August 2016 for Bhageria Industries Limited:

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects


The net profit margins (NPM) of the company have been following the trend of operating margins over the years. The company barely had any net profits until FY2013 where it reported net losses in FY2009 and FY2012. Since then the company has been reporting consistent profits, however, the NPM has been fluctuating from 4% to 12%.

The tax payout ratio of Bhageria Industries Limited seems to be in line with the standard corporate tax rate prevalent in India. Over the years, the tax payout is in the range of 28% to 33%.

While assessing the net fixed asset turnover (NFAT) for Bhageria Industries Limited, an investor would notice that the NFAT levels of the company are consistently on very high levels of more than 10 and at one point in time in FY2014, it had reached 62 times.


Such high levels of NFAT are usually seen in companies, which do not need to invest a lot in their plant and machinery or those who rely on outsourcing of the manufacturing process and in turn primarily act as trading companies. The companies, which are not into trading of goods and enjoy such high fixed assets turnover on account of low capital intensiveness of their operations face a lot of competition from unorganized sector unless their market is protected by intangible factors like brands or patents.

In the case of Bhageria Industries Limited, an investor would notice that the company deals in dyes and dye intermediates, which are commodity chemicals. High fixed asset turnover in commodity chemicals space indicates that a lot of competitors can start manufacturing the same product with limited investment and in turn pose a risk to the market of the company in case it tries to increase its product prices. Therefore, it won’t come as a surprise to the investor that Bhageria Industries Limited has witnessed fluctuating profitability margins as it is not able to pass on the increases in the raw material costs to its customers on account of such competition.

Moreover, the company also deals in trading of goods like pharmaceutical products, agrochemicals and pigments etc. The trading component of the business though has very low margins but increases the NFAT to very high levels.

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects


In last a few years, the company has entered into solar power generation, which is a capital intensive business and as a result, the NFAT of the company might reduce further going ahead.

When an investor analyses the receivables days of Bhageria Industries Limited, then the investor would notice that the receivables days of the company used to be very high until FY2012 in the range of about 120 days. However, since then, the company seems to have put in efforts to improve its collection practices and has brought down the receivables days significantly to 38 days in FY2014. An investor would notice that the receivables days have again started to increase and have reached 68 days in FY2016 and about 50 days in FY2017.

It is advised that the investor should keep a close watch on the receivables days of Bhageria Industries Limited going ahead to monitor whether the working capital efficiency of the company is deteriorating in future.


Looking at the inventory turnover ratio (ITR) of Bhageria Industries Limited, an investor would notice that ITR has been fluctuating wildly over the years in the past. The company has had an ITR of as low as 9.8 in FY2012 and as high as 23.9 in FY2014. Such wide variations in the ITR indicate that the company is not able to plan its inventory levels, which further seems to indicate that the company might not be able to reliably gauze the demand of its products in the market.

This is further substantiated by the explanations given by the management for decline in sales in FY2016 (discussed above) that the demand for the company’s products witnessed a slowdown in the year, whereas, at the start of FY2016 (i.e. at the end of FY2015), the company has kept the highest level of inventories.

Self-Sustainable Growth Rate (SSGR):

The investor would notice that Bhageria Industries Limited has witnessed an SSGR ranging from negative rates to 177% in FY2016. The key reasons for such wide fluctuations in the SSGR for the company are significant variations in the NFAT and the NPM for the company during FY2012 to FY2016 (the SSGR formula used by us takes 3 years rolling average of the input parameters).


The fluctuations in the NFAT, as well as NPM, have been discussed above including the impact of trading business segment and the commodity nature of products and the conclusions of both the parameters indicate that it is very difficult to assess the business of Bhageria Industries Limited on a steady state basis. This seems true as even the management has found it difficult to assess the product demand, working capital requirement etc. in the past.

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it is able to convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds. However, the uncertainties in the business like in the case of Bhageria Industries Limited make the interpretation of the SSGR parameters difficult.

However, still, it can be witnessed that currently, the SSGR is higher than the achieved sales growth of the company and it can also be observed that the company has been able to reduce its debt from ₹21 cr. in FY2007 to ₹13 cr. in FY2016. Moreover, the investor would also notice that the company has investments of worth ₹42 cr. in FY2016 and therefore the company has a net debt of zero at FY2016. We will further discuss this aspect of Bhageria Industries Limited later in the article.

(Later on, in FY2017, the company has raised further debt to fund its solar power plant operations. However, the exact debt position of the company at FY2017 will be clear once the annual report of the company for FY2017 is published and available in the public domain. As per the March 2017 results, the company has long term debt of about ₹4.7 cr. and short term debt of about ₹139.5 cr. An investor does not have the information about the extent of current maturity of long term debt in the other current liabilities of ₹44.7 cr. Therefore, one needs to wait until the annual report of FY2017 is available to investors.)

The debt free assessment of Bhageria Industries Limited up to FY2016 gets substantiated when the investor analyses the free cash flow position of Bhageria Industries Limited.

Over FY2007-16, Bhageria Industries Limited has witnessed its sales increase from ₹43 cr. in FY2007 to ₹238 cr. in FY2016. For achieving this sales growth the company has done an additional capital expenditure (capex) of ₹32 cr. However, Bhageria Industries Limited has generated a cash flow from operations (CFO) of ₹73 cr. over FY2007-16 leading to a surplus of ₹41 cr. as free cash flow (FCF) to its shareholders.

SSGR and FCF are two of the main pillars of assessing the margin of safety in the business model of any company.


Bhageria Industries Limited seems to have utilized the resulting free cash flow (FCF) of ₹41 cr. to reduce its debt from ₹21 cr. in FY2007 to ₹13 cr. in FY2016, pay interest expense of ₹15 cr. over FY2007-16 and to pay dividends of about ₹14 cr to equity shareholders.

While studying about Bhageria Industries Limited, an investor notices certain other aspects, which are important for analysis and subsequent final investment decision by investors:

1) Management succession planning:

The key management of Bhageria Industries Limited constitutes of Mr. Suresh Bhageria, Mr. Vinod Bhageria and Mr. Vikas Bhageria. Mr. Vikas Bhageria, currently 37 years of age, is the son of Mr. Suresh Bhageria.

This relationship gets established by studying the section “Annexure to Director’s Report” in the annual report for FY2016, page: 27:

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

The presence of the next generation of promoter’s family in the company management offers a visibility of smooth management succession in the company.


2) Shareholding of promoters:

An investor would notice that the promoters of Bhageria Industries Limited are steadily increasing their shareholding in the company. As per BSE website, the promoters have increased their shareholding in the company by 0.27% over last 2 quarters and now hold more than 50% shares in the company.

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

3) Amalgamation/acquisition of promoter Group Company: Nipur Chemicals Limited:

Bhageria Industries Limited is currently in the process of merging one of the promoter group entity Nipur Chemicals Limited, which is in a similar line of business, into itself in an all share deal. All share deal means that instead of cash, Bhageria Industries Limited will pay to the shareholders of Nipur Chemicals Limited by way of shares of Bhageria Industries Limited.

Nipur Chemicals Limited is a promoter group company of Bhageria Industries Limited. An investor can look at the following multiple information pieces to reach this conclusion:

a) Nipur Chemicals Limited is a shareholder in Bhageria Industries Limited:

At June 30, 2017, Nipur Chemicals Limited holds 0.29% shares in Bhageria Industries Limited:

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

b) Key management people of Nipur Chemicals Limited are classified as promoters in Bhageria Industries Limited:

As per the corporate database website, Zauba Corp, the key management positions of Managing Director and Whole Time Directors are held by Mr. Deepak Bhageria, Mr. Dinesh Bhageria and Mr. Rakesh Bhageria respectively.

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

As per the shareholding pattern of Bhageria Industries Limited shared above and another image below, Mr. Deepak Bhageria, Mr. Dinesh Bhageria and Mr. Rakesh Bhageria hold 5.25%, 1.13% and 5.10% stake in the company respectively and have been classified as promoters of Bhageria Industries Limited. They also hold additional shares in the names of their respective HUFs (Hindu Undivided Family).

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

Moreover, credit rating agency CARE Limited in its report of Nov 2016 has mentioned Nipur Chemicals Limited as a group associate of Bhageria Industries Limited.

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

Therefore, an investor would appreciate that Bhageria Industries Limited is proposing to effectively purchase a promoter group entity by making payment by way of shares of Bhageria Industries Limited.

The effective value of consideration proposed to be paid (i.e. the value of shared of Bhageria Industries Limited proposed to be given to shareholders of Nipur Chemicals Limited comes to be about ₹229.11 cr. based on closing price of Bhageria Industries Limited shares (₹385.55) on BSE on November 11, 2016, which is the available reference price on November 14, 2016, when the board of Bhageria Industries Limited approved the Scheme of Amalgamation. (November 14, 2016, was a trading holiday on account of Gurunanak Jayanti).

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

An investor may arrive at this calculation in the following fashion:

As per page 11 of the Scheme of Amalgamation document available at the website of Bhageria Industries Limited, the consideration to be paid to shareholders of Nipur Chemicals Limited is 11 shares of Bhageria Industries Limited for each 10 shares of Nipur Chemicals Limited held by its shareholders.

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

As per page 3 of the Scheme of Amalgamation document, Nipur Chemicals Limited has 5,402,300 shares.

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

Therefore, the total number of shares of Bhageria Industries Limited to be paid/given to Nipur Chemicals Limited would be 5,942,530 (= 11 * 5,402,300 / 10).

The value of 5,942,530 shares of Bhageria Industries Limited at the closing price of November 11, 2016, at BSE (₹385.55) comes out to be ₹229.11 cr.

An investor may have a look at the business performance of Nipur Chemicals Limited. The financials of Nipur Chemicals Limited are present on page 47 of the Scheme of Amalgamation document:

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

An investor would notice that Nipur Chemicals Limited has:
  • Sales of ₹59.59 cr. in FY2016 and annualized sales of ₹64.54 cr. in FY2017 (i.e. double of H1-FY2017 sales of ₹32.27 cr).
  • Net profit of ₹7.75 cr. in FY2016 and annualized net profit of ₹12.52 cr. in FY2017 (i.e. double of H1-FY2017 profit of ₹6.26 cr).
  • The net worth of ₹44.84 cr. at March 31, 2016, and ₹51.10 cr. at Sept 30, 2016.

An investor may use these parameters and the total consideration to arrive at the valuation levels of Nipur Chemicals Limited:
  • Price to Sales Ratio (P/S ratio) of about 3.85 based on FY2016 sales (229.11 / 59.59) and 3.55 based on annualized sales for FY2017 (229.11 / 64.54)
  • Price to Earnings Ratio (P/E ratio) of about 29.56 based on FY2016 profit (229.11 / 7.75) and 18.30 based on annualized profit for FY2017 (229.11 / 12.52)
  • Price to Book Value Ratio (P/B ratio) of about 5.11 based on March 31, 2016, net worth (229.11 / 44.84) and 4.48 based on net worth at September 30, 2016, FY2017 (229.11 / 51.10)

The above approach will provide an investor with a perspective of the consideration being paid by Bhageria Industries Limited to merge/acquire the business of Nipur Chemicals Limited.

The price of Bhageria Industries Limited has witnessed a decline of about 12% in one day from ₹321.70 at July 28, 2017 (Friday) to ₹283.90 on July 31, 2017 (Monday). We are able to find only one news/corporate announcement at BSE from the company after the market hours of July 28, 2017, which is related to seeking deferment of AGM for 2017 by 3 months due to the impending amalgamation.

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

An investor may wish to search for any other related development that might have led to this significant decline in the share price in one day.


4) Solar power plant operations:

As per the BSE filing done by Bhageria Industries Limited on July 19, 2017, the company has commissioned the 30 MW solar power plant in Ahmednagar district, Maharashtra on June 17, 2017.

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

A few critical details of the contract for the solar power plant like power tariff, contract tenure etc. are available in the credit rating rationale of November 2016 by CARE Limited:

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects


As per the credit rating rationale by CARE, the solar power plant has a power purchase agreement (PPA) for 25 years at ₹4.41 per unit.

There is another critical information available in the rating rationale that the cost of the project has declined from about ₹190 cr. to ₹170 cr.

An investor would appreciate that in recent times, the cost of solar modules has witnessed significant declines. As per the below chart referring the solar modules (photovoltaic cells) prices from pvxchange.com, the module prices have declined across all the markets:

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects

As per the above chart, the solar module prices for South and South East Asia have declined from EUR 0.48 per watt-peak in June 2016 to EUR 0.38 per watt-peak, which is a 20% decline in costs in one year.

As the cost of solar modules is one of the biggest cost in the solar power project, there is no wonder that the cost of the solar power plant for Bhageria Industries Limited also declined from ₹190 cr. to ₹170 cr.

The continuously declining solar module prices have led to the continuous declining trend in the cost of solar power tariff. As per the recent auctions in May 2017, the solar power prices have declined to ₹2.44 per unit. (Source: Economic Times)

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects
(Image source: Economic Times)

There has been a very sharp decline of about 45% in the solar power tariffs (from ₹4.41 per unit to ₹2.44 per unit) after the power purchase agreement (PPA) was signed by Bhageria Industries Limited for its solar power plant with Solar Energy Corporation of India. If an investor takes a common logical approach, then it looks difficult that any purchaser will keep on paying a higher price for power, which in this case is 80% higher than the current market price (4.41 / 2.44), for next 25 years.

We believe that there is very high probability that such power purchase agreements (PPA) which have tariffs higher than market price will be reneged or renegotiated at lower levels.

There is already news in the media that some power utility companies are now hesitating to sign the PPA for projects, which were allotted at higher tariffs. There is also news in the media that some power utility companies are not buying power from such high tariff plants despite PPAs being in place.

A rational buyer will always look for ways to reduce the cost of purchase. It is normal behavior and is present across industries.

An example of the same tendency was recently witnessed when Petronet LNG refused to buy gas from Qatar’s RasGas at previously agreed prices, which were double of the prevalent the market price. As a result, the producer, RasGas had to renegotiate the prices, edit the contract that earlier did not allow the change in price to now include clause of market dynamics based price revision and also waive off the penalty for no/reduced purchase of gas by Petronet LNG. The following excerpt from an article in Business Line covering this news is pertinent:
“NEW DELHI, DEC 31:  Petronet LNG, India’s largest LNG importer, will ring in the new year with good news. The company will get fuel from Qatar’s State-owned gas producer RasGas at nearly half the cost originally agreed upon. It will also not have to pay the ₹12,000-crore penalty for lower off-take in 2015.
On Thursday, RasGas and Petronet signed a revised sale purchase agreement, according to which, Petronet will get LNG at $6-7 per million British thermal unit (mBtu). Under the original contract signed between the two companies in 1999, Petronet would get LNG at $12-13 per mBtu. Supplies began in April 2004. The new contract is effective January 1, 2016, and ends in 2028.
The earlier contract with RasGas did not allow any change in pricing, resulting in the buyers paying higher than the prevailing market price. Under the new contract, the price for the buyer will be governed by market dynamics based on a crude price linked formula.” (Highlights mine)
As a result, an investor would appreciate that if the market price of solar power tariff continues to fall further or even if it stays at current levels of ₹2.44 per unit and does not increase, then there is a probability that Bhageria Industries Limited might have to face similar situation of tariff renegotiation or lower purchase of power by utility companies. This is because hardly any rational buyer will keep on paying an 80% higher price (4.41 / 2.44) for 25 years. As witnessed above, such contracts have been renegotiated in the past and they might also be renegotiated in the future.

Any reduction in the solar power tariff would lead to the reduction in the returns anticipated by Bhageria Industries Limited from the solar power plant.

The investment by Bhageria Industries Limited in the solar power project of ₹170 cr, which is primarily debt funded, is significant when compared to the overall net worth of the company of about ₹110 cr. at March 31, 2017. Therefore, any impact on the potential tariffs/returns would not be good for the company and the shareholders.

It is therefore advised that investors should keep a close watch on the developments related to the power purchase levels from the company’s solar power plant by utility companies and also the indications of renegotiation of power tariffs in future.

5) Taking short term positions in the stock markets:

Bhageria Industries Limited has been deploying cash in the stock markets and seems to be taking short term bets.

While analysing the current investments of about ₹33 cr. at March 31, 2016 (annual report FY2016, page 58), an investor would notice that almost entire ₹33 cr. is invested in equities. ₹30 cr. has been invested directly in shares of about 35 different companies whereas ₹3 cr. is invested in Axis Equity Fund, which is also an equity exposure.

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects


Managing a portfolio of ₹33 cr. and containing 35 stocks is a specialised function and might require dedicated professionals.

The investor would notice that the amount of equity investments exceeds the operating assets (NFA+CWIP) at March 31, 2016, which stand at ₹27 cr. and it looks like the company has diversified from its core business of making dyes and intermediaries into solar power and equity investing.

Moreover, an investor would also notice that Bhageria Industries Limited has been taking short term bets in equity markets. An investor would witness it while analysing the cash flow statement of annual report FY2016, page 49, which contains items of “Short term Capital gain on sales of shares” for both FY2015 and FY2016.

Equity Research report, analysis, Bhageria Industries Limited, an Indian player, dyes & intermediaries, solar power projects


It is advised that an investor should keep a close watch on the current investments portfolio of Bhageria Industries Limited and monitor whether the company continues to deal in short term equity transactions.

It is important because the equity investments may decline 50% in value in any year without any change in underlying fundamentals of the underlying companies. If the person responsible for current investments at Bhageria Industries Limited is not able to manage equity investments properly, then the resulting losses may eat up the earnings of the business of dyes & intermediates.

Currently, Bhageria Industries Limited is available at a price to earnings (P/E) ratio of about 12 (based on FY2017 earnings), which offers some margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.




Overall, Bhageria Industries Limited seems to be a company operating in a very competitive and tough business where it does not have the pricing power in its hand over its customer. The company is not able to pass on the raw material pricing increases to its customers and as a result, has been facing fluctuating profitability margins over the years to the extent of reporting losses as well.

The dyes business of Bhageria Industries Limited has proved to be highly unpredictable and as a result, the company seems to have faced challenges in estimating the demand for its products leading to sharp decline in revenue in a few years along with suboptimal inventory management.

The company has currently entered into solar power production. However, the final returns, which Bhageria Industries Limited will be able to make from solar power business are uncertain due to the fast changing business & pricing dynamics of the solar power industry.

The company is currently undertaking merger of a promoter group entity, which operates in the similar line of business. An investor may need to analyse the merger transaction in depth.

The company has been keeping its funds into equity investments and seems to have been taking short term positions, which is not the core function of a manufacturing company. An investor should keep a close watch on the current investments portfolio of the company.


Company’s promoters have been increasing stake in the company in recent times and have brought in the next generation of the family in the business, which seems like the management succession plan.

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

You may use the following steps to analyse the company: “Selecting Top Stocks to Buy - A Step by Step Process of Finding Multibagger Stocks

Hope it helps!

Regards,

Dr Vijay Malik

P.S:
  • To know about the stocks in my portfolio, their relative composition, cost price, details of all our buy/sell transactions since July 30, 2017 as well as to get updates about any future buy/sell transaction in my portfolio, you may subscribe to the premium service:  Follow My Portfolio with Latest Buy/Sell Transactions Updates (Premium Service)
  • The financial table in the above analysis has been prepared by using my customized stock analysis excel template which is now compatible with screener.in. This customized Excel template is now available for download as a premium feature. For further details and download: Click Here
  • You may learn more about our stock analysis approach in the e-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing”
  • You may read more company analyses based on our stock investing approach in the Company Analysis e-book series, which is spread across multiple volumes: Click Here
  • I have used the financial data provided by screener.in and the annual reports of the companies mentioned above while conducting analysis for this article.



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.