December 5, 2017

How to Contact Companies for Clarifications, Why Promoters' Hold Shares via Companies, Why Trade Payables are Interest Free Funds (Q&A)

www.drvijaymalik.com has a section dedicated to answering queries from readers: “Ask Your Queries”. Over time, many readers have asked their queries related to many aspects of stock analysis and sought clarifications about investing. I have responded to these queries as replies to their comments.

“Q&A” series is an attempt to share the queries & their responses, which have featured on “Ask Your Queries” section, with all the readers. The primary aim of this new feature is to share the knowledge with other readers of the website, who might have similar queries.

The current article in this series provides responses related to:
  • How to contact companies to get more information/clarification about their business?
  • Why do promoters hold shares in their companies through different companies and not in their individual names?
  • How are trade payables a source of interest-free funding for a company?
  • Why would a company with positive free cash flow have high debt?


How to contact companies to get more information/clarification, Why do promoters hold shares through different companies, trade payables interest-free funding, free cash flow with high debt?


How to contact companies to get more information/clarification about their business?


Hi Sir,

As you have mentioned in the analysis article on Indo Count:

"While analyzing the related party transactions section of the FY2016 annual report (pg. 106), the investor would notice that Indo Count Industries Limited has outstanding receivables of about ₹122 cr from its subsidiaries. The key subsidiary among these is Indo Count Global Inc. (USA). It might indicate that the company is receiving money from its customers in the USA, however, the wholly owned subsidiary in the USA is not remitting the funds to India.
How to contact companies to get more information/clarification, Why do promoters hold shares through different companies, trade payables interest-free funding, free cash flow with high debt?

An investor should monitor the comparative receivables position closely and understand whether the company has any Capex plans for the USA, which might be leading it to hold funds overseas. Otherwise, keeping cash overseas, which would be earning very low returns on deposits when compared to India, might not be a very good decision.
The sustained holding of cash overseas without utilization can also be a sign of caution, which might require the investor to do an in-depth assessment by the investor."
My question is
  1. How to figure out which subsidiary (or) associate owes how much money when the company has more than one subsidiary and more than one associates.
  2. How to draw conclusions like money is with USA subsidiary and it is not remitting funds to INDIA?
  3. I see that even UK subsidiary is holding 100%. So how to know which subsidiary is not remitting funds?

Thanks,

Author’s Response:

Hi,

Thanks for writing to us!

The information sought by you in your queries is usually present in the annual report of the company.


However, in case, an investor finds that the information is not in the annual report, then she should write to the company about it (investor's relations department).

Usually, for most of the companies, the company secretary is the person in-charge of the investors’ relations. However, the website of the company will have the email and phone number details of the concerned person-in-charge.

An investor might face a situation where their first email is not responded to by the company. However, our experience has been that most of the companies provide the response after one follow-up (email or phone call). Therefore, if the investor does not get a prompt response from the company, then she should not lose heart and instead follow it up with the company.


All the best for your investing journey!

Regards

Dr. Vijay Malik

Why do promoters hold shares in their companies through different companies and not in their individual names?


Hi Sir,

Why is the shareholding of promoters in any company usually in the names of different companies and not in their individual names?

Is this a common practice to have promoters’ shareholding in different companies’ names?

Can this lead to chances of manipulation and fraud in any way?

Author’s Response:

Hi,

Thanks for writing to us!

Many times, promoters hold shares via companies and therefore, the name of the companies in whose name shares are held is shown in the list of shareholders.

It allows promoters to create multiple layers in the shareholding structure and this, in turn, helps them create holding companies, create cross holding structures, raise equity at different levels in the shareholding structure and also in succession planning of family assets among different stakeholders/family members.

However, it also makes it difficult to find the true identity of the person who might be the real economic beneficiary of the shares.

Therefore, multilayered shareholding has its benefits as well as pitfalls. It differs from person to person, what they choose to use it for.


Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

How are trade payables a source of interest-free funding for a company?


"At March 31, 2017, Caplin Point Laboratories Limited had an inventory of ₹22 cr. and trade receivables of ₹33 cr. This working capital requirement of ₹55 cr. (22+33) has been sufficiently funded by the outstanding trade payables of ₹78 cr. on March 31, 2017. Effectively, the suppliers are funding a lot of business operations of Caplin Point Laboratories Limited."
How can trade payables be the cash/money should be getting from a supplier? I think you are telling the opposite. Instead, trade payables should be the cash owed by Caplin to the suppliers. Correct?

Could you clarify, please?

Author’s Response:

Hi,

Thanks for writing to us!

We look at it from the following perspective:

In scenario A, when suppliers demand upfront payment (e.g. Rs. 100 cr.) for sending goods to any company, then the company has to arrange Rs. 100 cr. and pay it upfront to suppliers, which means cash outflow of Rs. 100 cr. from the company, on the day it received goods from the supplier or even before receiving goods.

Whereas in scenario B, if the company is able to get a credit period from suppliers for e.g. 1 month, then the company needs to pay Rs. 100 cr. after 1 month from the date it received the goods from the supplier.

The scenario B is like a situation where the supplier has given an interest-free loan of Rs. 100 cr to the company for 1 month where it has agreed to get it payment after 1 month and the company is free to use the Rs. 100 cr. in any manner, it wants, which otherwise it would have had to pay to the supplier on day 1 (like in scenario A).

That's why trade payables are effectively interest-free funding from suppliers to the company. The reverse is true for the trade receivables, which is similar to the company giving interest-free funds to its customer.


Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Why would a company with positive free cash flow have high debt?


Hi Dr. Vijay,

I have recently discovered your website and cannot put into words how much I am learning every day by simply reading your various blogs/articles.

Recently I started reading about the Margin of Safety/FCF/SSGR concepts you have written about which make so much sense.


I have a couple of doubts after reading these articles that I have not been able to fully figure out on my own. Hence requesting if you could kindly help throw some more light on it.
  1. Self-sustainable growth rate (SSGR) looks at obviously the ability of the company to grow its business in terms of topline and hence probably differs from other profitability metrics like RoE which focus almost always on bottom line. Why do you focus on the top line? Esp. when topline can be influenced by many exogenous factors, like say, in the case of companies which use crude derivatives (e.g. Aarti Industries). In such cases looking at top line growth may not give the correct picture I think. Can you please comment on this?
  2. Does looking at free cash flow (FCF) alone give you the full picture of whether the company will need to resort to debt in order to grow? For example, I have found a number of cases, where despite FCF being +ve over 10 yrs, the debt has grown significantly. What are the reasons this can actually happen?

I found that one reason could be that the company is borrowing money to pay interest and dividends etc. and it gets into a loop: take new debt to pay off old debt. One example again I can quote is of Aarti industries. Can you please comment on this as well?

Thank you so much in advance.

Warm regards,

Author’s Response:

Hi,

Thanks for your feedback! We are happy that you found the articles useful!

SSGR provides an output as the top line growth but it has NPM has a constituent parameter (referring to the formula):

SSGR = NFAT*NPM*(1-DPR) - Dep

SSGR effectively tells an investor the sustainable growth rate assuming constant NPM i.e. PAT is also expected to improve in line with sales growth. If the NPM improves/declines for the company, the SSGR will improve/decline as well.

FCF positive companies having high debt is something, which should always be explored further. It might be that money is being diverted from the company as loans & advances to other companies, unaffordable dividends etc.

Hope it answers your queries.

All the best for your investing journey!

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 August 1, 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
  • To register for our Hyderabad “Peaceful Investing” workshop on December 10, 2017: Click here


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 any of the companies discussed above