Analysis: Neo Corp International Limited

Modified on July 1, 2018

This article provides in-depth fundamental analysis of Neo Corp International Ltd, one of the largest manufacturers of technical textiles.

 

Neo Corp International Ltd

Q: Hello Vijay ji! Thanks a lot for replying and the advice to go through the articles first. I have gone through them and found them extremely well written and explained clearly with good example of real companies. Thanks a lot. I appreciate all the effort you have put in to write all these good information.

Regarding Neo Corp International Ltd, though it fails at the condition you have mentioned that promoter holding should be minimum 51% (Neo Corp International Ltd promoters’ holding is only 24.07%) but then also I am interested in it as:

  • Promoters have bought the shares from open market and increased their stake from 19 to 24% in last few quarters and pledged shares % came down in last few quarters.
  • Company has shown tremendous revenue growth (5year CAGR 43%), net profit growth (5year 32%) and with newly acquired IPC Ltd, the revenue and net profit is all set increase further. This is the main reason why I am interested in this.
  • Consolidated P/E is only 2.5, which is very much cheaper.
  • I have gone through the annual report as well and found their business prospect brighter with the area of Technical Textiles is going the grow globally and Neo Corp International Ltd is having good share in this area with good exports.

However, the OPM, NPM and ROE of Neo Corp International Ltd are decreasing in recent times. Debt is also going up as last 5 years. Cumulative CFO is only INR 66 cr., whereas the net profit is INR 75 cr. However, last 3 years CFO is very good with INR 65 cr. whereas net profit is INR 52cr.

Moreover, with the shareholders approved preferential convertible warrants with floor price 65 it gives a lot of confidence, as big organization organizations are ready to buy the convertible warrants in much higher price than CMP of 26.

Therefore, to me Neo Corp International Ltd looks like a good bet with good future with respect to sales and net profit.

Could you please analyze Neo Corp International Ltd in ‘Q&A Analysis’ so that I can get confirmed on some analysis, which I have done? I am sure i will get a different perspective and will get to know info/analysis, which i am missing now.

Thanks a lot in advance! God Bless You!

 

Author’s Response

Thanks for your feedback & appreciation! I am happy that you found the articles useful! I appreciate the time & effort put by you in going through the company’s financials & annual report and sharing your analysis.

 

Financial Analysis of Neo Corp International Ltd:

Neo Corp International Ltd equity analysis research report

Neo Corp International Ltd has been growing its sales at a fast pace of 40-50% year on year since last 6 years (FY2009-14). However, Neo Corp International Ltd has not been able to maintain its profitability during this growth. Operating profit margins (OPM) have been come down from 13% in FY2010 to 10% in FY2014. Net profit margins (NPM) have been come down from 5.3% in FY2011 to 3.1% in FY2014.

Declining profitability margins indicate that Neo Corp International Ltd has low bargaining power with their customers and suppliers. Neo Corp International Ltd finds it difficult to pass on the increase in raw material costs to their customers quickly whereas the suppliers increase their raw material costs immediately.

Credit rating agency CARE Ltd also highlights in its 2014 rating rationale of Neo Corp International Ltd that it is impacted by volatility in raw material prices and strong bargaining power of its suppliers due to oligopolistic nature of the raw material supply market.

Over the years, the tax payout ratio of Neo Corp International Ltd has been fluctuating from 14% to 40%. An investor should study it in detail to understand whether Neo Corp International Ltd has received any tax concessions etc. from govt. If not, then the reasons of varying tax payments should be properly understood before taking any investment decision about Neo Corp International Ltd.

 

Operating Efficiency Analysis of Neo Corp International Ltd:

Operating efficiency parameters of Neo Corp International Ltd though highly fluctuating year on year, reflect that it has not been able to maintain its efficiency levels over the years. Net fixed assets turnover has decreased from 5.8 in FY2010 to 5.1 over the years. It dipped to 3.8 in FY2012. Similarly, inventory turnover ratio of Neo Corp International Ltd has also decreased from 20 in FY2011 to 11 in FY2014 after declining to 4 in FY2013. These are not good signs.

Data of Neo Corp International Ltd available at screener, does not contain complete details of cash flow statements, therefore, I would not be able to give any independent opinion based on cash flows. However, as per the cash flow data provided by you, Neo Corp International Ltd has not been able to convert its profits in to cash flow from operations except for recent 3 years. In such a scenario, an investor should keep a close watch on the conversion of profits into free cash by Neo Corp International Ltd in future so that any further deterioration/tying of funds in working capital can be identified at the earliest and the investor can decide accordingly.

As rightly pointed out by you, debt levels of Neo Corp International Ltd have been increasing year on year. Total debt of Neo Corp International Ltd has increased from INR 54 cr. in FY2009 to INR 368 cr. in FY2014. Increasing debt levels have led to interest cost rising from INR 3 cr. in FY2009 to INR 54 in last 4 quarters. Such rapid increase in interest costs reduces profitability margin and increases the risk of failure to meet debt obligations in case of tough business situations.

You have mentioned that promoters of Neo Corp International Ltd have stake of only 24.07% in the company. This is worrisome as low shareholding of promoter’s might lead to hostile takeover attempts, which more often than not hurts businesses. Vested interest of other prominent shareholders might also expose the minority shareholders to undue disadvantages.

New acquisitions might not always be fruitful for companies. Tata-Corus is an example in front of all of us. Therefore, I would prefer to wait and see whether the acquisition is successful and have started yielding results, before taking any investment decision. Otherwise, the decision might become speculation. Similarly, expectation of big organizations buying convertible warrants at a premium might turn out to be optimistic.

 

Margin of Safety in the market price of Neo Corp International Ltd:

Neo Corp International Ltd is currently available at a P/E ratio of about 2.86, which looks quite low. However, apart from fast pace of sales growth, there are not many other factors which support higher valuations. Neo Corp International Ltd has been losing out profitability. Operating efficiency is declining. Debt is increasing very fast. In such a situation, the company might face very difficult times to service interest and principal payment in challenging times.

Read: 3 Simple Ways to assess the Margin of Safety in a Stock

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

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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