This article provides in-depth fundamental analysis of Stylam Industries Ltd, which manufactures laminated sheets for residential and industrial applications
Stylam Industries Ltd Research Report by Reader
Q: Hi Vijay, First and foremost, my humble thanks for a creating this blog, this is a real treasure trove with all the required knowledge/technique of fundamental Analysis. I have been trading/speculating for more than a year in stocks without any idea. Lost some, gained some, was attracted towards TA. I learnt it for 6 months but could not develop a successful strategy with TA. By God’s grace found your blog some months back. Really interested to use FA to be a successful investor.
I have read most of your blog and now taking baby steps towards FA. I have come up with FA on Stylam Industries Ltd. I request you to validate my analysis and offer suggestions for improvement.
- Stylam Industries Ltd is growing at a good pace of 21%-31% YoY.
- OPM is fluctuating between 5%-10%. NPM is fluctuating between 2%-4%. Please tell if this is in-line with sales growth.
- Tax % is in-line with corporate tax slab of 30% on an average.
- Stylam Industries Ltd is able to convert all its profits into cash total PAT 35.05 Cr and Net CFO is 38.29 Cr.
- Inventory turnover ratio is increasing from 5 to 7 for the period of 2010-2014.
- Receivable days have also increased from 36 – 51 for the same period.
- ROE stands @20% and ROCE stands @19%. I assume that this is good.
- P/E is @8, seems reasonable.
- No FII investment.
- M-Cap increased from 4.9 Cr to 70 Cr (2005-2015)
- MD of Stylam Industries Ltd is offered @36LPA, which seems to be decent remuneration and not extravagant.
- Stylam Industries Ltd’s growth will be strongly inclined towards growth in Infrastructure sector and demand for decorative laminates will boost company’s growth.
- Stylam Industries Ltd has presence in Europe and USA so growth is not tied up with domestic growth to a certain percentage.
- PEG is around 0.09, EY is 12%, P/S ratio of 0.35
- Dividend Yield is 0%. Stylam Industries Ltd is not paying any dividends. Company is investing and expanding constantly.
- Interest coverage has declining from 6%-2%.
- D/E ratio stands @ 2.0 it is a worrying sign.
- Expansion is done funded by debt (capital work in progress and debt is increasing). Stylam Industries Ltd is building a BPO unit in a Tech park in Haryana. Part of it will be used for its own BPO unit to support domestic customers. Rest of the place will be leased for other BPO companies.
- Current ratio is declining from 0.9 -0.5, for the period of 2009-2014.
I also did comparison of Stylam Industries Ltd with its peers for 9 parameters. I found Stylam Industries Ltd a better buy than Greenply & Centuryply due to recent growth observed in Stylam. Please see the below table:
Please answer the below queries, along with your views on Stylam Industries Ltd:
- What is the significance of positive and negative value in CFF & CFI. Please elaborate this ” It’s great if CFO meets the outflow for CFI and CFF”
- I am unable to understand cash flow statements properly; I often find difficulty in understanding CFI & CFF.
- I am unable to find out the fixed asset ratio from stock screener excel, please elaborate how can we calculate that.
Thank you for help.
Dr Vijay Malik’s Response
Thanks for your feedback & appreciation! I am happy that you found the articles useful! I congratulate you on starting your own stocks analysis. It gives me pleasure to see that you have highlighted a lot of important information about Stylam Industries Ltd. I appreciate the time & effort put by you in doing the analysis, including comparison with peers and sharing it with readers and the author.
Financial Analysis of Stylam Industries Ltd:
Stylam Industries Ltd has been growing its sales at a moderate pace until FY2010 when it changed gears and started growing at a good pace of 25%-30% year on year. However, as rightly pointed out by you, its profitability margins (both OPM & NPM) have been fluctuating wildly. Operating profit margins (OPM) have been moving in cycles in the range of 5% to 11% over the years. Similarly, net profit margins (NPM) have been fluctuating from 2%-5% over the years.
Such low fluctuating margins are characteristic of companies, which sell commoditized products and have low bargaining power with their customers. Even though Stylam Industries Ltd seems to sell its products under brand of “Stylam”, still it is not able to enjoy high margins, which are typical of established brands. Financial numbers do not indicate any moat around the brand as Stylam Industries Ltd seems to find it difficult to pass on the increase in raw material costs to the customers quickly and thus takes a hit on the profitability margins.
Over the years, the tax payout ratio of Stylam Industries Ltd has been around the prevalent corporate tax rate, which is a good sign.
Operating Efficiency Analysis of Stylam Industries Ltd:
Operating efficiency parameters of Stylam Industries Ltd reflect that it was using its assets with improving efficiency during FY2005-10, while it was growing at a moderate pace. Fixed assets turnover ratio increased from 2.7 in FY2005 to 5.2 in FY2010 However, since FY2010, as the sales growth of Stylam Industries Ltd picked up, its fixed assets turnover ratio has declined from 5.2 in FY2010 to 3.7 in FY2014. It raises concerns about the quality of capex being done by the company. Financial numbers indicate that fresh capital expenditure has not led to good results in recent years.
Receivables days of Stylam Industries Ltd though seem to be improving marginally over FY2012-14 from 48 days to 46 days, have worsened if compared to FY2011 levels of 40 days. Inventory turnover ratio of Stylam Industries Ltd, which has declined from 5.8 in FY2011 to 5.0 in FY2013, has improved to 6.7 in FY2014. It needs to be seen whether Stylam Industries Ltd is able to maintain the inventory turnover levels going ahead.
Stylam Industries Ltd has been able to convert its profits in to cash flow from operations. PAT for last 10 years (FY2005-14) is INR 26 cr. whereas the CFO over the similar period is INR 38 cr, which is a good sign.
Debt levels of Stylam Industries Ltd have been increasing year on year. Total debt of Stylam Industries Ltd has increased from INR 8 cr. in FY2008 to INR 69 cr. in FY2014. Increasing debt levels with growing business are the features of companies operating in capital-intensive businesses. However, Stylam Industries Ltd is also doing capital expenditure in an unrelated field of business process outsourcing (BPO) in Panchkula. This is a red flag.
Advised reading: Information Technology (IT) Services Companies: Analysis Guide
The unrelated capex for BPO has been going on since 2013, as it finds mention in the rating rationale of Stylam Industries Ltd by credit rating agency, CARE Ltd. In 2013, CARE mentioned:
“The ratings are, however, constrained by working capital intensive nature of operations, fragmented nature of the laminate industry, foreign currency fluctuation risks and risks associated with ongoing debt-funded capital expenditure into unrelated business, viz setting up of the new Business Process Outsourcing (BPO) unit which is expected to adversely impact the capital structure in the near term.”
The BPO unit is a small unit of about 60,000 sqft, which is taking a lot of time to be completed. As per the annual report for FY2014, the BPO unit will be operational in FY2016.
“As a part of support in the existing business setup, the company has planned to setup BPO. The company has already purchase land admeasuring 59964.62 sqft. in Panchkula Technology Park, Haryana. The construction at site is under process. The company has planned to use part of building for its own purpose and the part will be leased out to other IT and BPO players. The company has taken term loan of Rs.2100.00 lacs, as part finance for the project. The project is estimated to be operational in the year 2015-16.”
Until the unit becomes operational, Stylam Industries Ltd would have to bear interest costs. The efficiency of using the BPO units for own operations and finding customers for excess BPO capacity, would remain a key concern to decide whether this debt funded investment is a diversification or diworsification.
You may read a case of repeated diversification attempts ending in “Diworsification” here: Analysis: Bodal Chemicals Ltd
Further advised reading: How to Identify if Management is Misallocating Capital
Investors should always be cautious of investing in companies, which have continuously increasing debt levels, as high debt has the potential of increasing the risk of bankruptcy and reduced profitability under tough business conditions. It has the highest debt leverage among its peers as per your data. Interest cost of Stylam Industries Ltd has increased from INR 1 cr. in FY2011 to INR 9 cr. in FY2014, which should be seen cautiously by investors.
Margin of Safety in the market price of Stylam Industries Ltd:
Stylam Industries Ltd is currently available at a P/E ratio of about 7.9, which offers a theoretical margin of safety as described by Benjamin Graham in his book The Intelligent Investor. However, the stressed operating performance, high debt levels, fluctuating margins, unrelated capex are some of the factors, which indicate that low P/E multiple is not entirely unjustified.
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, Stylam Industries Ltd seems to be a company growing at a fast pace but unable to maintain its profitability margins due to low bargaining power with its customers. Its operating efficiency leaves scope for improvement. It has witnessed increasing debt levels due to its capital-intensive business and unrelated capex. An investor should keep a close watch on its debt levels.
These are my views about Stylam Industries Ltd. However, you should do your own analysis before taking any investment related decision about Stylam Industries Ltd.
You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
Let me address your other general queries:
Additional aspects of Stylam Industries Ltd:
1) What is the significance of positive and negative value in CFF & CFI. Please elaborate this ” It’s great if CFO meets the outflow for CFI and CFF”.
2) I am unable to understand cash flow statements properly; I often find difficulty in understanding CFI & CFF.
Positive values indicate cash inflow and negative values reflect cash outflow. It CFO is sufficient to meet outflow of CFI and CFF, then it indicates that the company is able to fund its expansion plans (CFI), repay debt (part of CFI) and pay dividends (part of CFI) from its profits. This is one of the sign of a very good investment opportunity.
During past 10 years (FY2005-14), Stylam Industries Ltd has CFO of INR +38 cr. whereas its CFI is INR -81 cr. It broadly indicates that the cash generated from operations did not suffice to meet management’s capital expenditure and it has to rely on cash from financing (CFF), which is INR +46 cr. This inflow from financing is visible in increasing debt levels of Stylam Industries Ltd over the years, which has been burdening it with increasing interest expense year on year.
I might write an article detailing cash flow statement and its usage for investors, however, it might take some time.
3) I am unable to find out the fixed asset ratio from stock screener excel, please elaborate how can we calculate that.
I have explained the calculation of net fixed asset turnover ratio in the article: “5 Simple Steps to Analyse Operating Performance of Companies”. All the requisite data is present in the screener excel. You may use the data as per the formula given in the above article.
Hope it helps!
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- 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.
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