Analysis: Mirza International Limited

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

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.

 

Author’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 equity Red Tape Oaktrak shoes analysis research report

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:

Q&A Analysis: Ahmednagar Forgings Ltd

Q&A Analysis: Amtek India Ltd

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.

Read: 3 Simple Ways to assess the Margin of Safety in a StockAlso Read: Hidden Risks of Investing in High P/E Stocks

 

Conclusion:

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,

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.

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