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 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.
- 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, 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!
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.
From the time of analysis, P/E has decreased from 19 to 13.33 making its relatively attractive when compared to peers.
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:
All the best for your investing journey!
Dr. Vijay Malik
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