This article provides in-depth fundamental analysis of Hitech Corporation Ltd, a plastic container manufacturer.
Hitech Corporation Ltd Research Report by Reader
Q: Hi Vijay, Can you suggest if I should hold on or exit Hitech Corporation Ltd?
I saw that CFO was higher than PAT, with increasing sales and have decent management as with Asian Paints family. However, somehow, I feel confused what to do. any suggestion?
What am I missing?
Dr Vijay Malik’s Response
Thanks for writing to me!
Financial Analysis of Hitech Corporation Ltd:
Hitech Corporation Ltd has been growing its sales at a moderate pace of 10-15% year on year since last 8 years (FY2007-14). However, this growth has come at the cost of profitability. Operating profit margins (OPM) have declined from 16% to 11% and net profit margins (NPM) have declined from 6% to 1%. This is not a good sign for any potential investment.
It seems that the company has very low bargaining power with their customers and finds it difficult to pass on the increase in raw material costs to the customers. the company is taking a hit on its profitability margins.
Over the years, the tax payout ratio of the company has been fluctuating from 17% to 40%. An investor should study it in detail to understand whether the company has received any tax concessions etc. from govt.
Operating Efficiency Analysis of Hitech Corporation Ltd:
Operating efficiency parameters of Hitech Corporation Ltd show improvement in efficiency levels over the years. Net fixed assets turnover has improved from 3.0 to 3.4 over recent years. Similarly, inventory turnover ratio of the company has also improved from 10 to 15. These are good signs.
The company has been able to convert its profits in to cash flow from operations. PAT for last 8 years (FY2007-14) is INR 82 cr. whereas the CFO over the similar period is INR 216 cr. Receivables days, though fluctuating, but are in the range of 50-55 days.
The company has utilized the cash generated from operations for reducing its debt levels, capex and paying dividends to shareholders. Debt levels of the company have seen reduction from FY2012 to FY2014.
Margin of Safety in the market price of Hitech Corporation Ltd:
Hitech Corporation Ltd is currently available at a P/E ratio of about 19, which does not offer any margin of safety as described by Benjamin Graham in his book The Intelligent Investor.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
Overall, Hitech Corporation Ltd seems to be a company growing at a moderate pace but sacrificing its profitability in order to chase growth. It seems to have very low bargaining power with its customers. Hitech Corporation Ltd is trying to make for the falling profitability by improving its operating efficiency over the years; however, it is uncertain to what level a company can compensate falling profitability by improving efficiency. At some point of time, the company will have to raise prices. NPM of 1% is very low.
An investor should keep a close watch on the profitability levels of the company. Companies with low profitability run the risk of turning into operating losses at slightest of challenges in the operating environment. Investors should analyse Hitech Corporation Ltd further to understand the reasons for fluctuating tax rates.
Hitech Corporation Ltd also faces customer concentration risk. About 45% of its sales are to one single client, Asian Paints Ltd. A tough business environment to Asian Paints Ltd, might have its impact on Hitech Corporation Ltd as well.
These are my views about Hitech Corporation Ltd. However, you should do your own analysis before taking any investment related decision of holding or exiting the company.
You should do detailed analysis of the company covering financial, business, management and valuation parameters, which you seem to have missed in your appraisal. You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
Hope it helps!
- To know about the stocks in our portfolio, you may subscribe to the premium service: Follow My Portfolio with Latest Buy/Sell Transactions Updates
- To learn our stock investing approach “Peaceful Investing” by videos, you may subscribe to “Peaceful Investing” Workshop-on-Demand
- To download our customized stock analysis excel template: Click Here
- Learn about our stock analysis approach in the e-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing”
- Read more company analysis in the e-book series: Company Analyses
- To register for our upcoming full-day “Peaceful Investing” workshop teaching in-depth fundamental analysis & portfolio management: Click Here
- To pre-register free/express interest for an investing workshop in your city: click here
- The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
- I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
- Currently, I do not own stocks of the companies mentioned above in my portfolio.