This article provides in-depth fundamental analysis of Indiabulls Ventures Ltd, one of India’s leading capital markets companies providing securities broking, advisory services, depository services, equity research services and commodities trading services to its clients.
Indiabulls Ventures Ltd Research Report by Reader
Q: Hello Doctor Sahab! As per your blog and rules, I have started analyzing companies financially earlier it used to be word of mouth 🙂
I have analyzed Indiabulls Ventures Ltd (Formerly Indiabulls Securities Ltd). PFA the analysis:
- Main reason to choose this sector: I expect more retail participation in the coming years in the stock market
- Cons: the margins are decreasing because of competition. But can heavy volumes compensate for the lower margins is the question.
- Financially this company looks good
- Last year even Madhu Kela invested in this stock (Question: Should these kind of news be also considered or should one ignore these things like some ace investor investing in a stock?)
Please let me know your thoughts on the analysis and if I am missing some important point here.
Dr Vijay Malik’s Response
Hi. Thanks for your feedback & appreciation! I am happy that you found the articles useful! Let us analyse the past consolidated financial performance of Indiabulls Ventures Ltd.
Financial Analysis of Indiabulls Ventures Ltd:
Indiabulls Ventures Ltd has seen its sales fluctuate in tandem with the economic sentiment of investors towards equity markets. Its sales peaked in FY2008 at INR 621 cr. and kept on falling until FY2012 in the after math of global economic meltdown. Its sales have picked up since then and have been growing at a rate of about 20% year on year and have reached INR 335 cr. in FY2015. However, current sales still lag the peak sales achieved in FY2008.
Indiabulls Ventures Ltd has witnessed its profitability margins fluctuate wildly over last few year. Operating profitability margin (OPM) has moved from 67% in FY2008 to 9% in FY2012 to 58% in FY2015. Similar fluctuations have been witnessed in its net profitability margins over these years. This trend indicates that the company has high operating leverage where fixed costs form a huge portion of total costs and lead to wide variations in profitability margins with changes in sales.
Looking at the business of Indiabulls Ventures Ltd, which is to cater to capital market participants, it seems that it would be facing similar fluctuations in future as well, which would be linked to sentiment of investors towards equity and other such instruments. However, the company might face a bit stability in its margins if it diversifies its business to other segments which are not linked to capital markets. Nevertheless, it would entail venturing into unrelated areas, which would have its own risks.
The company has purchased a commercial office complex in Chennai in FY2015 for about INR 600cr. which as per media sources is expected to yield revenues of about INR 60cr. per year. If the company decides to keep this newly acquired asset on its books and earn rental income, then it can be expected that this step would lead to partial stability in its operating margins.However, if the company decides to use this asset to launch Real Estate Investment Trusts (REITs), and offer stake to different investors, then the expected margins stabilization might not be up to the extent when it keeps owning the office complex in its name. It is advised that the investor should keep a close watch on the developments related to the company’s plans for its significant investment in commercial office space.
However, as witnessed currently, the business of Indiabulls Ventures Ltd seems very volatile both in terms of sales and profitability. Moreover, it becomes difficult to put any expected number to its future sales and profits as numerous events across the globe can impact investor sentiment and thereby impacting business of capital market intermediaries like Indiabulls Ventures Ltd.
Over the years, the tax payout ratio of Indiabulls Ventures Ltd has been fluctuating from 36% to -48%, which is in line with the fluctuations in its profitability performance.
Operating Efficiency Analysis of Indiabulls Ventures Ltd:
Traditional operating efficiency parameters like net fixed assets turnover, inventory turnover ratio do not have much relevance for a business like Indiabulls Ventures Ltd. However, if an investor observes the movement of its receivables days over the years, then an alarming pattern arises. Receivables days have increased from 41 days in FY2007 to 210 days in FY2015. This is not a good sign.
Below is the screenshot of the section of trade receivables (note 22) from FY2015 annual report of Indiabulls Ventures Ltd:
An investor would notice that there has been significant increase in the money to be received from its customers from INR 138 cr. in FY2014 to INR 248 cr. in FY2015. What is more concerning is that the receivables from customers who have not paid for more than 6 months from demand date by Indiabulls Ventures Ltd have increased by about INR 76cr. from INR 32.6 cr in FY2014 to INR 108.4 cr in FY2015. It indicates that Indiabulls Ventures Ltd is not able to collect money from certain customers in a timely fashion, whereas it has already recognized this amount in its sales over past years.
Another important finding from the above table of trade receivables is the amount of provisions for doubtful debts, which is constant for both FY2014 and FY2015 at INR 4.6 cr. Provisions are usually constant when any company provides for a single large ticket default over multiple periods. It might be the case here that Indiabulls Ventures Ltd would have recognized certain transaction as sales in past, but later on failed to realize the money from its customer and is currently providing for this bad debt over multiple years.
It is advised that an investor should try to analyse the trade receivables further in detail from multiple sources and see if Indiabulls Ventures Ltd, would be able to realize its outstanding trade receivables in future. She should keep a close watch on the receivables movement of Indiabulls Ventures Ltd to see if the situation improves or deteriorates in future.
When we analyse the data of profits versus cash flow from operations for Indiabulls Ventures Ltd over last 8 years (FY2008-15), we notice over this period, Indiabulls Ventures Ltd has not been able to convert its profits in to cash flow from operations. PAT for these 8 years (FY2008-15) is INR 649 cr. whereas the CFO over the similar period has been INR 432 cr.
This observation comes hardly as a surprise in light of the deteriorating receivables position of Indiabulls Ventures Ltd that we notice above.
Inability to convert profits into cash has ensured that Indiabulls Ventures Ltd has to rely on alternate sources of money (like equity and debt) to fund the requirements of growing business including the purchase of commercial office complex in Chennai as well as the dividends which it has been paying to shareholders over past years.
Free Cash Flow Analysis of Indiabulls Ventures Ltd:
An investor would notice that the cash flow from operations of Indiabulls Ventures Ltd for last 8 years (FY2008-15) is INR 432 cr. whereas it has paid dividends (including DDT) of INR 553 cr. Moreover, Indiabulls Ventures Ltd has done capex of about INR 690 cr. over this period, which predominantly includes the purchase of commercial building at Chennai. This total outflow of about INR 1,243 cr (553+690) has been met through CFO of 432 cr. and incremental debt over this period of INR 1,644 cr. Total debt of Indiabulls Ventures Ltd has increased from INR 40 cr at start of FY2008 to INR 1,686 cr. at end of FY2015.
The surplus from the debt raised over this period: 1,644 + 432 – 1243 = 833 cr. which is more or less available as current cash & investments of about INR 759 cr.
Even though an investor would appreciate that the cash from one source is fungible from another, it seems that the dividends of INR 553cr. and the current cash position of INR 759 cr. is primarily debt funded. This seems predominantly a result of the fact that over the years the business of Indiabulls Ventures Ltd, has not performed as expected by management, however, the management did not cut down on the dividends and kept on raising further debt. In the current situation the commercial office building as well as the cash & investments of the company seem primarily debt funded.
Investors should 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.
You should read the analysis of two other companies: Metayst Forgings Ltd (erstwhile Ahmednagar Forgings Ltd) and Castex Technologies Ltd (erstwhile 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:
- Analysis: Metayst Forgings Ltd (erstwhile Ahmednagar Forgings Ltd)
- Analysis: Castex Technologies Ltd (erstwhile Amtek India Ltd)
Market has also realized that the company has not been able to generate free cash from its operations, which it can use to generate wealth for shareholders. The share price of the company has fallen from INR 99.05 at the close of April 02, 2008 when the company’s shares were listed as Indiabulls Securities Ltd, to current market price of INR 27.5 at close of October 30, 2015. It has led to decline in shareholder’s wealth by about INR 2,095 cr over last 8 years against retained earnings of about INR 97 cr. (FY2008-15).
Margin of Safety in the market price of Indiabulls Ventures Ltd:
Indiabulls Ventures Ltd is currently available at a P/E ratio of about 5.5, which offers a margin of safety as described by Benjamin Graham in his book The Intelligent Investor. Factors like volatile business model, increasing debt and problems in receivables collections have been weighing upon the share price. Therefore, the apprehension of the market in assigning a high P/E multiple to Indiabulls Ventures Ltd seem justified.
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, Indiabulls Ventures Ltd seems to be a company whose business is highly volatile and dependent upon investor sentiment towards capital markets and is expected to remain volatile in future in light of numerous factors in the environment, which may have dramatic impacts on investor sentiment at any time. Indiabulls Ventures Ltd seems to be facing challenges related to collection of receivables and has been providing for sales which were recognized in the past but where it has not been able to collect money from its customers. An investor needs to keep a close watch over its receivables position in future to see signs of improvement or deterioration.
Indiabulls Ventures Ltd has not been able to generate sufficient cash from operations to fund its capex and dividend requirements. However, it seems likely that the company has been relying on debt to fund its dividend payouts and has built its cash reserves from debt.
These are my views about Indiabulls Ventures Ltd. However, you should do your own analysis before taking any investment related decision about Indiabulls Ventures Ltd.
You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
You have opined the expected increase in retail participation in stock market as one of the reasons for choosing a capital market intermediary for analysis. As witness above, investor sentiment is an important factor to determine sales of companies in this sector. However, apart from increased investors’ participation, an investor should also look at other company specific factors like receivables position and debt raising patterns as seen in case of Indiabulls Ventures Ltd.
Even though you seem right that the competition would squeeze margins of all capital market intermediaries, however, the amount of high operating leverage seems to ensure that increase in sales is accompanied by higher profitability margins which is result of high fixed costs in this business.
You mentioned that a renowned investor has invested in Indiabulls Ventures Ltd and wanted to know whether an investor should base her investing decision on the actions of other renowned investors. I believe that it would vary in case of each investor who is analyzing these companies. There have been cases where many reputed investors have recommended replicating portfolio of other investors like Warren Buffett.
However, I believe that every investor should do her own research without getting influenced by actions of other investor whether they are renowned or not. I recommend that every investor should chart her own independent path in stock markets.
Hope it clarifies your queries.
All the best for your investing journey!
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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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- Currently, I do not own stocks of the companies mentioned above in my portfolio.