Analysis: Mirza International Limited

Modified: 04-Jul-20

This article provides in-depth fundamental analysis of Mirza International Ltd, an Indian manufacturer of leather footwear and finished leather having brands like RedTape, Yezdi and OakTrak.

 

Mirza International Ltd Research Report by Reader

Q: Hello Sir, I came across your blog when Prof. Sanjay Bakshi tweeted about you. Your blog is a brilliant idea and a much-needed access that most new investors will benefit from. I would like to pick your brain on Mirza International Ltd: makers of Red Tape and Oaktrak shoes.

Here are my top lines for the Mirza International Ltd:

  • 10 yr CAGR of 15% for sales turnover & net profit after tax (PAT).
  • Profit Margin has not increased but is at average of 6% for last five years.
  • The Return on Net Operating assets is (operating profits – depreciation)/Net Operating assets is 28%. Its financial obligations have steadily increased but the solvency and debt coverage ratios look comfortable.
  • The company is undergoing a merger with a private company called Genesisfootwear Enterprises Private Ltd. I am not sure if this will be a good move for Mirza International Ltd.

Look forward to hearing from you on Mirza International Ltd.

 

Dr Vijay Malik’s Response

Thanks for your feedback & appreciation! I am happy that you found the articles useful!

 

Financial Analysis of Mirza International Ltd:

Mirza International Ltd Financials

Mirza International Ltd has been growing its sales at a moderate pace of 12-15% year on year since last 10 years (FY2005-14). Mirza International Ltd has been able to achieve this sales growth while maintaining its profitability margins. Operating profit margins (OPM) have been stable in the range of 16-18% and net profit margins (NPM) are in the range of 6-8%. Sustained or improving margins are good signs for any business being considered for investment.

For last 4-5 years, the company has been paying tax at the standard corporate tax rate, which is a good feature.

 

Operating Efficiency Analysis of Mirza International Ltd:

However, when an investor observes operating efficiency parameters of Mirza International Ltd, she notices that it has not been able to maintain its efficiency levels over the years. Net fixed assets turnover though mixed but seems to be on declining trend recently. Inventory turnover ratio of Mirza International Ltd has been deteriorating since last 4 years (FY2011-14). An investor needs to keep a close watch on the operating efficiency parameters of the company so that she can identify any further signs of deterioration and update her views about the company accordingly.

Mirza International Ltd has been able to convert its profits in to cash flow from operations. PAT for last 10 years (FY2005-14) is INR 246 cr. whereas the CFO over the similar period is INR 290 cr. This is corroborated by declining receivables days over the years. Mirza International Ltd has been able to collect money from its buyers in time, which is a positive for any company being considered for investment.

Debt levels of Mirza International Ltd have been increasing year on year. Total debt of the company has increased from INR 104 cr. in FY2010 to INR 189 cr. in FY2014. Increasing debt levels along with business growth are features of companies operating in capital-intensive businesses. Such businesses are characterized by low fixed asset turnover ratios, as is noticed in case of Mirza International Ltd.

Any company showing continuously increasing debt levels should make the investor cautious, as it has the potential of increasing the risk of reducing profitability and bankruptcy under tough business environments. You should read the analysis of two other companies: Ahmednagar Forgings Ltd and Amtek India Ltd, to understand the impact low fixed asset turnover can have on the debt levels of companies. You may read their analysis here:

As pointed out by you, Mirza International Ltd has been in the process of merger of Genesisfootwear Enterprises Private Ltd with itself. Last month the board of the company has approved the merger. It seems to be an all-stock merger with no cash payout. An investor needs to analyse Genesisfootwear Enterprises Private Ltd, when its financial and other details are disclosed by the company in the scheme of amalgamation, to access whether this merger is positive for shareholders of the company.

 

Margin of Safety in the market price of Mirza International Ltd:

Mirza International Ltd is currently available at a P/E ratio of about 19, which does not offers 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.

 

Analysis Summary

Overall, Mirza International Ltd appears to be a company growing at a moderate pace while maintaining its profitability margins. However, the business growth of the company has come with deteriorating operating efficiency. Declining operating efficiency along with low fixed asset turnover has led to increasing debt levels for Mirza International Ltd. An investor needs to watch the merger related developments, operating efficiency parameters and debt levels of the company to identify any further deterioration.

These are my views about Mirza International Ltd. However, you should do your own analysis before taking any investment related decision about the company.

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

Hope it helps!

Regards,

 

Answers to Investors’ Queries

Interpretations for increase in debt of the company

“The total P&L interest expense of Mirza International for 2007-16 is Rs. 237cr. which leaves little money for debt reduction. Instead, the FCF being Rs. 212 cr. is not sufficient to meet the interest expense and the company has to take additional debt (Rs. 93 cr.) in last 10 years to service the interest and pay dividends. “

In 2006, Interest Coverage was around 3.6 has gradually improved to 5.6 in 2017. Debt/PBIT have decreased drastically from around 5 to 1.5 recently. Hence, though debts have increased but when u consider the OPMs and improved profit levels, isn’t it at much more comfortable levels? So the company has to take additional debt not to service the interest and pay dividends but to increase its earning significantly. It can pay its debt in less than 2 years now!! Even the promoters have been raising stakes in the company.

Read: How to do Financial Analysis of Companies

From the time of analysis, P/E has decreased from 19 to 13.33 making its relatively attractive when compared to peers.

Author’s Response:

Hi,

Thanks for writing to us and sharing your valuable inputs!

We appreciate your assessment about the reasons for the increase in debt being the shortfall of FCF in meeting the requirements of interest outgo and dividend payments. It is a good analysis of the cash flow position of the company.

Regarding other parameters: Improvement in the interest coverage, reduction in the Debt/PBIT levels etc., if these parameters are seen on an exclusive basis, then the direction of change of these parameters is a positive sign for the company.

Similarly, reduction in P/E ratio also indicates that the margin of safety built in the purchase price is increasing with increasing earnings yield, which is the result of declining P/E ratio.

However, the above parameters only cover 2 of the important aspects of stock assessment namely, financial position and valuation levels. We believe that the investment decision should be based on the comprehensive assessment of the company after Financial, Valuation, Business, Management and Operating Efficiency analysis.

If after conducting the comprehensive analysis, the investor believes that the company fits her preferred criteria, then she may take the final investment decision.

The investor may use the following steps as guidelines to conduct her stock analysis:

Read: Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

All the best for your investing journey!

Regards

Dr. Vijay Malik

P.S.

 

DISCLAIMER

  • 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.

Related Posts:

Get free e-book with 20 Companies Analysis

Free Investing Ebook Case Studies Peaceful Investing
  • Get the e-book: “Case Studies: Applying Peaceful Investing Approach”
  • Learn fundamental analysis by reading 20 case studies in this e-book​
  • Get email updates of our articles

Get email updates of our articles

  • Portfolio returns of 16% against Sensex returns of 8.4%.
  • We identified companies, which were later invested by Sanjay Bakshi, Mohnish Pabrai, PE funds, Mutual Funds
  • See details of stocks in our portfolio
  • Get updates of buy/sell transactions in our portfolio by email

“Peaceful Investing” approach is the result of my more than a decade of experience in equity markets. This approach helped me invest even when I had a full-time corporate job and therefore, could not spare a lot of time for stock analysis.

During my investing journey, I have faced almost all the common challenges of the investors; the biggest one being “scarcity of time”. “Peaceful Investing” approach keeps in mind that an investor will have only limited time for stock analysis. 

The objective of “Peaceful Investing” approach is the selection of such stocks, where once an investor has put in her money, then she may sleep peacefully. Therefore, if later on, the stock prices increase, then the investor is happy as she is now wealthier. On the contrary, if the stock prices decline, even then the investor is happy as she can now buy more quantity of the selected fundamentally good stocks.

Watch Balance Sheet Analysis through a Free Sample Video:

Peaceful Investing Video Series Image
Play Video

Please share your comments here:

1. IMPORTANT: You MUST do a search on Google and on our website to find answer to your query before writing it here. It will save your time as well as our time.

2. All comments are moderated. Your comment will be visible after we approve/reply to it.

Get free e-book with 20 Companies Analysis

Free Investing Ebook Case Studies Peaceful Investing
  • Get the e-book: “Case Studies: Applying Peaceful Investing Approach”
  • Learn fundamental analysis by reading 20 case studies in this e-book​
  • Get email updates of our articles

Get email updates of our articles