October 14, 2017

Garware-Wall Ropes Research Report

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, “Analysis” covers Garware-Wall Ropes Limited, an Indian manufacturer technical textiles specializing in ropes & nets focusing on fisheries, aquaculture, shipping, sports, agriculture, coated fabrics and geo-synthetics.
Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

Reader’s Query

Dear Sir,

I have been investing now for almost 5-6 years and find your blogs and articles/ e-books compilation very informational and useful.

I have a specific query about Garware-Wall Ropes Limited on which I wanted your expert thoughts.

I evaluated the same and it fulfills all the criteria except being a bit high on the valuations side which is not that steep too.

It has a good margin of safety (MoS) in terms of FCF/CFO ~ 67%, SSGR > Sales Growth, DE ratio < 0.5, Promoters check is satisfactory and healthy and consistent NPM.

While browsing through its FY17 annual report I found one strange observation. Garware-Wall Ropes Limited has increased its short term borrowings by 45 Cr. At the same time it increases its bank balance by 32 Cr. Now they invest around 105 Cr around 120% of their FY 17 PAT in NCDs and Mutual funds, which if fine for a long term investment but why do it at the cost of Debt?

Does it means that Garware-Wall Ropes Limited is believing it is better to invest in MF and NCDs rather than in itself?

Also, it has deposited money in banks worth 30 Cr. as increase in its bank balance. Why has Garware-Wall Ropes Limited not utilized the same for borrowings and borrowed at additional costs?

I am attaching my analysis for reference and would be thankful if you can please advise.

Regards,

Sunny Bhardwaj

Garware-Wall Ropes Limited


About the Company (Source: Credit Rating Rationale by ICRA, August 2017):

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics


Products and Solutions:

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics


Analysis of checklist of parameters


Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics


Analysis of FY2017 annual report


Dependence on Crude:

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics


Forex Conservative hedging:
  • 25~30% of earning hedged as raw material imports
Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics


Subsidiaries:

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

Business environment:

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics


Company Performance:

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

Fund Flow Analysis:

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics


Investments:
  • The company has bought worth more than 100 Cr. of NCD’s and mutual funds with their Cash.
Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

At the same time the company is increasing its short term loans from domestic and international banks to a tune of 45 Cr. It means the company is believing it is better to invest in MF and NCDS rather than in itself. Also it has deposited money in banks worth 30 Cr. as increase in its bank balance. Why has the company not utilized the same for borrowings and borrowed at additional costs. Why have they not gone for a share buyback which could benefit the minority shareholders more?

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics


Finance Costs:
  • Finance Cost has though came down in 2017.
Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics


Related party transactions:
  • Management and relatives companies. Most of them trading or investment companies

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

Basically if you have a look and try to understand in simple financial terms, the company takes a loan of 19.32 Cr and pays back 17.91 Cr. and pays an interest of 3.15 Cr. for FY17. If we calculate the rate of interest here it is 3.15/17.91 ~ 17.6% which means that company has 112 Cr. Cash in Bank still they avail loans form their own/relatives investment companies @ 18% and funnel out shareholders money out of the company to their own/relatives companies.

This is not in interest of the minority shareholders. The company in fact should have used its cash or reserves from 105 Cr. invested in NCD and equities to fund the necessary requirements instead taking of a loan @ 18% from their own companies.

The intention of management is GREEDY and NOT IN INTEREST OF MINORITY SHAREHOLDERS.

Thus we need to avoid this company.



Credit Ratings Review

(Source: ICRA Credit Rating Rationale, August 2017)


Challenges

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics


Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

Strengths

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics


Author’s Response


Hi Sunny,

Thanks for sharing the analysis of Garware-Wall Ropes 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 Garware-Wall Ropes Limited over last 10 years.

An investor would note that currently Garware-Wall Ropes Limited has one wholly owned subsidiary and one associate company. However, both the entities are yet to start their operations (FY2017 annual report: page 22). Therefore, the standalone financials present the entire current operations of Garware-Wall Ropes Limited.

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics


However, we believe that while analysing any company, the investor should always look at the company as a whole and focus on financials which represent the business picture of the entire group including operations and assets. Garware-Wall Ropes Limited has been publishing only standalone financials until FY2011. However, from FY2012 onwards, it has been publishing consolidated financials as well. Therefore, while analysing Garware-Wall Ropes Limited, we have analysed standalone financials until FY2011 and the consolidated financials of the company thereafter.

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

Garware-Wall Ropes Limited has been growing its sales since last 10 years (FY2008-17) at a rate of about 8-10% year on year from ₹399 cr. in FY2008 to ₹865 cr. in FY2017.

An investor would notice that the sales growth achieved by Garware-Wall Ropes Limited until FY2014 was associated with fluctuating profitability margins. The operating profit margin (OPM) was fluctuating between 8-12% during this period. The key reason was the inability of the company to pass on the raw material changes to its end consumers.

A reading of the credit rating report prepared by ICRA in November 2013, also highlights the challenges faced by Garware-Wall Ropes Limited to maintain its profitability especially the competition from unorganized sector:

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics


However, it seems that since FY2014 onwards, the efforts of the company to establish a brand in the consumer market have paid fruit and the company is able to exercise some pricing power and hold on to the retail consumer prices despite reduction in the inputs costs, which are dependent on crude oil prices. As a result, the OPM of the company has witnessed improvement from 8.9% in FY2014 to 15.3% in FY2017.

An excerpt from the July 2016 credit rating report of ICRA affirms the same:

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

Moreover, apart from focusing on creating a brand, Garware-Wall Ropes Limited has been working on adding and increasing the share of value added products in the sales portfolio like aquaculture cages, predator nets, sports nets, agri-tech and coated fabrics. (ICRA, December 2015 credit rating report):

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics


And as a result, currently, the increased focus on these value added products seems to have yielding results as the increasing share of value added products in the sales portfolio has been leading to sales growth and improved profitability. (ICRA credit rating report, July 2016):

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

It seems that the company is consistently trying to bring in new products, which might add higher value to customers. Recently, Garware-Wall Ropes Limited has tied up with an Israel entity, Aero-T to produce aerostats, which are balloons used for surveillance and it plans to supply these to Indian defense forces. The company has entered into the MoU with Aero-T in July 2017 and has done a press release to announce it and submitted it to stock exchanges as well:

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

Until now, the company has been able to hold on to the retail consumer prices in the times of declining raw material costs (crude oil prices), however, it remains to be seen whether the company would be able to increase prices in future when the commodity cycle turns and the crude oil prices increase again. This is essential because otherwise, the company will witness decline in profitability margins and it will again find itself entangled in the the cyclicty of operating margins.

Moreover, it also remains to be seen whether the company is able to successfully execute the new initiative with Aero-T, absorb the technology and produce quality aerostats acceptable to defense forces.

The net profit margin (NPM) has been following the trend of the operating profit margin (OPM). NPM was initially fluctuating between 4-6% during FY2008-14 and it has been improving in recent years from 3.9% in FY2014 to 9.6% in FY2017.


The tax payout ratio of Garware-Wall Ropes Limited had been below the standard corporate tax rate prevalent in India until FY2014. However, since then, the company has been accounting for taxes at a rate nearly equal to the standard corporate tax rate.

It seems that in the past, Garware-Wall Ropes Limited used to enjoy tax exemptions on some of its units, which were classified as export oriented units (EOUs). However, now the tax exemptions are no longer available to the company. (ICRA credit rating report, November 2013):

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

While assessing the net fixed asset turnover (NFAT) for Garware-Wall Ropes Limited, an investor would notice that the NFAT of the company has been consistently at a healthy level of more than 3.5 throughout last 10 years. The NFAT has declined during FY2015-17 from 4.91 to 4.30. However, this reduction coincides with the capacity expenditure being done by the company during this period. An investor should keep a watch whether the NFAT of the company improves as it operates its capacity on optimal levels going ahead.

An investor would notice that Garware-Wall Ropes Limited has a NFAT exceeding 4, which is a very good asset turnover for most of the businesses.

Such 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.

It does not come as a surprise to an investor that initially Garware-Wall Ropes Limited faced a lot of pricing pressure on its products from the unorganized sector, as discussed above. However, now the company seems to have realized that the competition from unorganized sector will always be there in this industry due to low capital intensiveness. Therefore, the company has started to focus more on creation of brand in the consumer market and on production of more value adding products, which seems to have resulted in the improving profit margins for the company in recent years.

As discussed earlier, the current improvement in the margins is on account of Garware-Wall Ropes Limited not reducing the prices in line with reduction in the raw material prices (linked to crude oil prices). It remains to be seen whether it would be able to increase prices further, which are already at a premium to other competitors, when crude prices increase in future to protect its margins. (ICRA credit rating rationale, November 2013):

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics


Looking at the inventory turnover ratio (ITR) of Garware-Wall Ropes Limited, an investor would notice that Garware-Wall Ropes Limited has been able to improve its inventory turnover ratio consistently since FY2011. The ITR has increased from 4.3 in FY2011 to 6.5 in FY2017. This reflects improvements in the inventory management by the company over these years.

When an investor analyses the receivables days of Garware-Wall Ropes Limited, then the investor would notice that the receivables days of the company have been improving in the initial period of last 10 years, i.e. from 99 days in FY2010 to 75 days in FY2014. However, since FY2014, the receivables days have been increasing consistently and have reached 89 days in FY2017.

One possible explanation for the increase in receivables days in the recent years might be that Garware-Wall Ropes Limited has to give higher credit period to distributors in light of ongoing stagnation in the domestic market for companies products (as highlighted by ICRA in August 2017 rating rationale):

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

Other reasons might be that Garware-Wall Ropes Limited might need to give higher credit period to add new customers as well as push premium priced value added products in the markets.
It is advised that the investor may seek clarification from the company about increasing receivables days in recent years and also keep a close watch on the trend of receivables days going ahead.


However, the delay in collection of receivables as reflected by increase in receivables does not seem to be large enough to create troubles on the cash flow/liquidity front for Garware-Wall Ropes Limited. The company has been able to report a cumulative cash flow from operations (cCFO) of ₹616 cr over last 10 years (FY2008-17) against cumulative net profit after tax (cPAT) of ₹348 cr.

An investor would notice that the cCFO is remarkably higher than cPAT for Garware-Wall Ropes Limited due to depreciation and interest expenses, which are significant for last 10 years (FY2008-17). Garware-Wall Ropes Limited has had cumulative depreciation of ₹137 cr and interest expense of ₹116 cr. over FY2008-17, which is added back to cPAT to arrive at cCFO over these years.


Moreover, as discussed in the section on net fixed asset turnover (NFAT) above, Garware-Wall Ropes Limited operates a business, which has low capital intensiveness and therefore, does not has a lot of cash requirements to sustain its growth.

Self-Sustainable Growth Rate (SSGR):

The investor would notice that Garware-Wall Ropes Limited has witnessed an SSGR ranging from 1% in FY2011 to 24% in FY2017. The key reasons for such improvement in the SSGR for the company are improvements in the NFAT and the NPM for the company over the years (the SSGR formula used by us takes 3 years rolling average of the input parameters).


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.

As of FY2017, the SSGR of Garware-Wall Ropes Limited is 24%, which is higher than the achieved sales growth of 8-10% achieved by the company over the years. As a result, it can be observed that Garware-Wall Ropes Limited has been able to reduce its debt over the years. Moreover, the investor would also notice that the company has investments of worth ₹228 cr. in FY2017 against a debt of ₹85 cr. and therefore the company has a net debt of zero at FY2017.

The asset light nature of the business of Garware-Wall Ropes Limited, which is reflected in the net fixed asset turnover ratio of more than 4 over the years and thereby comparatively low requirement of cash to fund its growth is also visible when we analyse the free cash flow position of the company over last 10 years.

The relative asset light business model of Garware-Wall Ropes Limited has ensured that the company needed to do a total capital expenditure of ₹202 cr. over last 10 years (FY2008-17) to increase its sales from ₹399 cr. in FY2008 to ₹865 cr. in FY2017.

If an investor analyses the total cumulative financial performance of Garware-Wall Ropes Limited over last 10 years (FY2008-17), then she would notice that the company had met the entire capex of ₹202 cr. from its cumulative CFO of ₹616 cr. during the same period. As a result, after meeting entire capex, Garware-Wall Ropes Limited had a free cash flow (FCF) of ₹414 cr.

Free cash flow (FCF) analysis is one of the main pillars of assessing the margin of safety in the business model of any company.


Garware-Wall Ropes Limited seems to have used the FCF of ₹414 cr. to pay the interest costs (about ₹116 cr.) and reduce debt during last 10 years (about 27 cr), pay dividends to shareholders (about ₹55 cr) and increase the cash & investments balance (about ₹228 cr.) on its books.

An investor would also appreciate that in addition, Garware-Wall Ropes Limited came out with a buy back offer in 2013, where it bought back 4% shares of the company using about ₹10-11 cr. of funds.

It seems that the markets have appreciated that Garware-Wall Ropes Limited has been able to demonstrate strong cash flow position along the growth path and as a result, its market capitalization has increased by about ₹1,700 cr. over last 10 years against the retained earnings of about ₹300 cr. over last 10 years. It amounts to creation of a wealth of about ₹5.8 for each ₹1 of earnings retained by the company.

Also, the strong cash flow position of Garware-Wall Ropes Limited has been recognized by credit rating agency, ICRA as well and as a result, ICRA upgraded the credit rating of the company from A+ to AA- in July 2016.

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

Let us now address the specific queries:

Simultaneous presence of high cash and debt on the books of the company:

Presence of high cash and high debt on the books of any company is a sign of caution and demands further analysis before any final opinion is made about the company.

The concern being highlighted in case of Garware-Wall Ropes Limited is the presence of debt of ₹85 cr. along with cash & investments of about ₹228 cr at March 31, 2017

Upon analysis of debt of Garware-Wall Ropes Limited, an investor would notice that the entire debt of ₹85 cr. is short term debt, which is primarily working capital debt. Moreover, out of the increase in debt of ₹45 cr. in FY2017, almost all of the increase (₹42 cr.) is in packing credit in foreign currency loan.

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

We believe that there can be two aspects, which might explain this scenario:

a) The packing credit in foreign currency (PCFC) is a facility available solely to exporters for funding the purchase of raw material to produce the product to be exported. It is available at very cheap terms. As per SBI website, on Oct. 14, 2017, the PCFC is available at LIBOR + 2%. The current LIBOR for 1 to 3 months as per bankrate.com as of Oct. 14, 2017 ranges from  1.25% to 1.50%, which makes the estimated cost of PCFC for Garware-Wall Ropes Limited equal to 3.25% to 3.50%.

As Garware-Wall Ropes Limited, has significant amount of export receivables, therefore, it enjoys a natural hedge in its cash flow and it does not need to incur additional hedging costs on PCFC.
Therefore, this scenario of increase in debt along with increase in cash investments might be construed as a case where Garware-Wall Ropes Limited is funding its export products at 3.25% and investing the CFO proceeds into NCDs etc, which might give it a return of 8-10%.

b) The second situation, which we believe deserves attention is that in some of the communications in the media (we are not able to locate the exact interview), the management has guided about growth via inorganic route (i.e. acquisitions). Carrying on cash on the books might be to create a war-chest for any impending acquisition transaction, if the management has identified any target company.

However, both the above situations are our assumptions without contacting management. Therefore, we believe that the investors should contact the company directly before making any final opinion about the presence of high cash on the books of the company along with carrying debt of ₹85 cr.

Getting clarification from the company management in this regard would become further pertinent if this situation of high cash with debt persists going forward without any disclosure by management regarding its plans for the cash accumulated.

Therefore, it is recommended that investors should monitor the cash and debt levels of the company going ahead.


While studying about Garware-Wall Ropes Limited, an investor comes across certain other aspects, which are important for analysis and subsequent final investment decision by investors:

1) Management succession planning:

An investor would notice that the founder promoter Mr. B. D. Garware, brought in his son Mr. R. B. Garware in the company, who took forward the company after the demise of the founder chairman.

Mr. R. B. Garware brought in his son Mr. V. R. Garware and made him the CMD of the company and himself stayed as director of the company. As a result, after the demise of Mr. R. B. Garware in February 2014, the company could keep on functioning smoothly.

It seems that until now, Garware-Wall Ropes Limited has witnessed good succession planning. However, it remains to be seen how the succession planning goes on in future. It should be one of the key parameters, which should be assessed by the investor, while making investment decision in the company.


2) Promoters not participating in the buyback of the shares in 2013:

Garware-Wall Ropes Limited conducted a buyback of shares in 2013. It is pertinent to note that promoters did not participate in the buyback of shares by the company and it led to the increase in shareholding of promoters in the company. (Buyback notification of 2013)

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

The increase in shareholding of promoters by not tendering their shares in the buyback reflects confidence of the promoters in the company’s business on the similar lines like that of market purchase of shares of the company by promoters.

To clarify, this is not to state that when promoters who submit/tender their shares in the buybacks, it is a bad sign. The recent changes in the taxation on dividends, where entities/persons receiving large amount of dividends (>₹10 lac), have to pay additional tax, has made dividends as a non-preferred way of distribution of cash by companies to shareholders. As a result, more and more companies now prefer buybacks over dividends to distribute cash to shareholders. In buybacks, the receipt of money by shareholders from the company is taxed as capital gains, which has now become more tax efficient than dividends.

Therefore, we believe that when promoters submit proportionate number of shares like everyone else, then the buyback transaction effectively becomes equal to dividend distribution.

However, when promoters do not tender/submit their shares in buybacks, then post-buyback, their shareholding in the company increases and we interpret it in the same manner like market purchase of shares by promoters, which shows confidence in the company and its business.

3) High remuneration of promoters:

An analysis of FY2017 annual report brings to fore multiple aspects regarding promoter’s remuneration and its expected future trend:

a) The promoter/CMD Mr. V. R. Garware drew a remuneration of ₹6.23 cr. in FY2017, which is almost equal to the maximum possible remuneration allowed by companies act, 2013 (₹6.40 cr. for Gareware-Wall Ropes Limited). (Annual report FY2017, page: 36).

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

b) The investor would also notice that the commission taken by the promoter (₹4.15 cr.) is almost 5% of the PAT (₹85 cr.). A commission of about 5% of PAT is high when we compare it with the commissions taken by many other promoters of different companies. We find that many other promoters normally take a commission equal to 2% of PAT.

c) Another aspect to note in FY2017 annual report is that in the AGM, the company proposed to increase the remuneration of the promoter to 10% of the net profits as per Companies Act 2013, which, going ahead, would allow the company to effectively pay the promoter double the level of remuneration, which was paid to him in FY2017 because in FY2017, the applicable cap/limit on the promoters’ remuneration was 5% of net profits as per Companies Act 2013. (Annual report FY2017, page: 1):

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

d) An investor would also note that the proposed remuneration clause does not has any fixed percentage of commission to be paid to the promoter. Therefore, effectively, if the board wants, then it can decide to give as much commission to the promoter as it wants until the total remuneration is within the new proposed higher limit of 10% of net profits as per Companies Act 2013. Such liberty to pay any level of commission to promoter would not have been there, if the commission percentage to be paid to promoter is fixed in the clause to be approved by shareholders.

Therefore, an investor would appreciate that quite a few of the shareholders who voted at the AGM, opposed the increase in the remuneration. (BSE submission of AGM proceedings, page 5):

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics


4) Company venturing into projects dependent upon govt. subsidies:

Garware-Wall Ropes Limited has been taking initiatives to create a market in the protective farming space where the govt. provides 50% capital subsidy. (ICRA credit rating report December 2015, page: 3):

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

However, there have been many cases where the release of subsidy from Govt departments have witnessed delays and which has led to delay in realization of cash flows and resultant pressure on the working capital of the companies.

Even in the case of Garware-Wall Ropes Limited, the company has accepted in the FY2017 annual report that despite increase in agricultural growth rate due to relatively good monsoon, it did not benefit the company due to delay in subsidies. (Annual report FY2017, director’s report section, page: 18):

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics


Going ahead, it is advised that an investor keep a track of the contribution of the protective farming segment in the overall revenue profile of the company and the level of receivables days.

5) Sudden increase in trade payables:

In FY2017, the trade payables of Garware-Wall Ropes Limited have witnessed a sudden increase from ₹160 cr. at March 31, 2016 to ₹191 cr. at March 31, 2017.

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

We believe that this increase in payables should be seen in the same light as the discussion of high cash with debt on the books of Garware-Wall Ropes Limited. This is because increase in trade payable is effectively the suppliers/vendors funding the cash position of the company.

Therefore, an investor should keep a close watch on the cash, debt and trade payables position of the company going ahead to monitor the utilization of the cash accumulated by the company.


6) Significant amount of unexplained short term provisions:

In FY2017, the company has made provisions of about ₹50 cr. under “Other Provisions” in the short term provisions. (Annual report FY2017, page: 99):

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

The annual report does not provide any details about the exact nature of these provisions. We suggest that investors may contact the company to understand more about these provisions.

7) Significant level of processing and testing charges:

In FY2017, Garware-Wall Ropes Limited has reported processing and testing charges of about ₹76 cr.

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

Though the processing and testing charges are about the same level as previous year (₹70 cr.), still as it is a very significant part of overall expenses (about 9% of sales), therefore, we believe that an investor should understand further about these charges either from the company directly or from any industry contacts, if she is able to find one.


8) Related party transactions:

Garware-Wall Ropes Limited has been entering into many transactions with the promoters and related entities. Out of these transactions, a lot of transactions pertain to continuous raising of small sized deposits of a few lac rupees from 11 related parties and refunding these deposits during the year and paying interest cost of insignificant amounts of a few thousands to a few lacs. (FY2017 annual report, page 111):

Analysis of Garware-Wall Ropes Limited, technical textiles, ropes & nets, fisheries, aquaculture, shipping, sports, agriculture, coated fabrics, geo-synthetics

Even though, the amount of deposits and the interest thereon seem insignificant when compared to the overall net worth of Garware-Wall Ropes Limited of about ₹450 cr., however, the nature of these transactions raise a curiosity. It is advised that an investor may seek clarifications from the company about the reasons for entering such small sized transactions with so many related entities, which have the impact of increasing the compliance and reporting burden on the company.


Currently (Oct. 14, 2017), Garware-Wall Ropes Limited is available at a price to earnings (P/E) ratio of about 22 based on trailing 12 months earnings, which does not offer any margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.




Overall, Garware-Wall Ropes Limited seems to be a company, which has been facing tough competition from unorganized sector until a few years back, which has kept it under a lot of pricing pressure. However, since last few years, its efforts for creating a brand in consumer market has borne fruits and it is able to command a premium pricing over competitors as well as is able to hold retail prices despite reduction in the raw material prices. This along with the continued focus of the company on the newer value added product segments has led to the increasing sales growth of the company, which is associated with improving profitability. It remains to be seen whether Garware-Wall Ropes Limited would be increase its retail prices to maintain profitability when commodity cycle turns and raw material prices increase in future.

Garware-Wall Ropes Limited has a comparatively asset light business characterized by relatively high asset turnover. It has led the company to report healthy free cash flows despite increasing receivables days in recent years.

The company has utilized the free cash flow to fund capex, reduce debt, pay dividends, conduct buybacks etc. and it is carrying the balance funds as cash & investments. This strong cash position seems to be recognized as credit strength by the rating agency, which has led to credit rating upgrade from A+ to AA- in 2016.

There are certain queries related to debt of ₹85 cr. on the books of the company despite presence of significant cash & investments of ₹228 cr. An investor should closely monitor the cash and debt position of the company going ahead to track the utilization of the cash.

Until now, Garware-Wall Ropes Limited has demonstrated good management succession planning and the confidence by the promoters in the company’s business, which was reflected by the promoters not participating in the buyback offered by the company in the past. However, the current high remuneration of the promoter along with the enabling clauses approved by recent AGM, where the proposal of even higher remuneration was approved by shareholders deserves attention of investors.

There are certain other aspects, which might require investors to take further clarifications from the company like increase in trade payables, related party transactions etc.


These are our views about Garware-Wall Ropes Limited. However, investors should do their own analysis before taking any investment related decision about Garware-Wall Ropes 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:
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  • 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.