Q&A: Asahi Songwon Colors Ltd

Modified on July 2, 2018

I used to own shares of Asahi Songwon Colors Ltd in my portfolio. I first bought the stock in February 2012 and sold my position finally in August 2015.

Many readers have asked me multiple queries on Asahi Songwon Colors Ltd at different points of time, as comments on the “My Portfolio” and “Ask Your Queries” pages. Responses to these queries were provided as replies to reader comments.

The current article is an attempt to put the queries asked about Asahi Songwon Colors Ltd and my responses to these queries, so that it can be beneficial to other readers as well, who might be analyzing Asahi Songwon Colors Ltd.

These queries cover different aspects of Asahi Songwon Colors Ltd like:

  • business analysis of Asahi Songwon Colors Ltd including competitive advantages,
  • financial performance and valuation levels of the stock
  • my reasons for buying and then finally selling the stock.

Asahi Songwon Colors Ltd

Query:

Hello Vijay sir,

I went through the framework provided by you and checked couple of stocks from your portfolio. I would like to know your perspective for holding Asahi Songwon Colors Ltd. It actually fails on Company Analysis Framework parameters, which you recently commented in reply to few questions asked.

I checked one of the stock, Dhanuka Agritech Ltd that am holding, which passes the analysis framework except that the ratio of cumulative CFO with cumulative Net Profit is less than 1, which is not good sign.

Request you to elaborate more on this.

Author’s Response: 

Thanks for writing to me!

Asahi Songwon has been enjoying good growth & healthy profit margins till FY2012. In FY2013 they shut one of units for debottlenecking for about 2 months, in FY2014 it raised debt and did capex on water treatment plant and oil prices also kept on increasing during these periods. Combined impact of these had weighed on its profit margins. Now the company has undergone demerger as well.

I expect the net profit margins to improve. However, if at all it might happen, then when it would happen is anybody’s guess. Management is good and I believe, they would also be having the concerns you have shared in their mind. Let’s see what they do and how they perform.

Regarding a company not able to collect its profits in cash, multiple companies discussed in this website have faced this issue. I would suggest you to go through the other companies discussed on in the Research & Analysis section. The most common result of such issue is that companies rely more on debt to run their operations and their debt keeps on increasing year on year.

Also Read: How to do Financial Analysis of a Company

Hope it clarifies your queries.

Regards,

Query

I have read your articles and found them highly insightful and simple to understand with great clarity. Accept my heartfelt gratitude for sharing your knowledge with public.

I am a value investor and thought process for selecting companies and analyzing them is very similar to yours.

I have read the annual report of Asahi Songwon Colors Ltd (FY 2013-14) and analyzed their financials for last 8 years. Management seems to be impressive, transparent and has clarity of thoughts for business future.

However, I am concerned on few areas as mentioned below:

  1. They are dependent on single product (blue and green color). No plans to add other products for reducing business risk.
  2. Dependence of business on 4 clients, hence high risk if even one of the clients stops doing business with the company. Although probability of that happening is less since they are focusing on quality and have ISO and other certifications in place.
  3. Past performance and margins have been inconsistent (may be due to crude oil dependence).
  4. Their long term vision and growth plan is lacking in Annual report.
  5. Moat or competitive advantage is weak. Quality and customer relationship are the ones I can think of. No sharing of plans on how to increase competitive advantage.

These are my view points on this company and I might be completely wrong in interpreting financials and business.

Also I believe company is trading at low valuations (7 times earnings) due to these issues only, otherwise it would be available at 20~25 times earnings.

I request you to share your views and thought process on this company and your insights for investing in it.

It will help me surely to learn from your viewpoints and see same things from a different view point.

Once again thanks for your guidance.

Regards,

PS: It would be great if you can provide views on control print. A company that manufactures printers for industrial use. It has good track record of growth, ROE and cash flows.

Author’s Response: 

Thanks for your feedback and appreciation! I am happy that you liked the articles and found them to be useful.

I appreciate that fact that you do your own stock analysis. Your queries reflect the hard work you have put in studying the company and making the observations.

1. Single product: It’s definitely a risk which an investor is taking while investing in Asahi. It is to be noted that with the demerger of green pigment to Aksharchem India Ltd, the risk is even more concentrated. An investor needs to take her own call.

2. Customer concentration: again the same logic as above. It can be an advantage or disadvantage. Investor needs to take informed call.

3. Profitability:

“Asahi Songwon has been enjoying good growth & healthy profit margins till FY2012. In FY2013 they shut one of units for debottlenecking for about 2 months, in FY14 it raised debt and did capex on water treatment plant and oil prices also kept on increasing during these periods. Combined impact of these had weighed on its profit margins. Now the company has undergone demerger as well.

I expect the net profit margins to improve. However, if at all it might happen, then when it would happen is anybody’s guess. Management is good and I believe, they would also be having the concerns you have shared in their mind. Let’s see what they do and how they perform.”

4 & 5: Amount of disclosures expected is subjective interpretation. One may feel something is lacking and declare it poor. Other may like certain things compare it with other companies’ disclosures and have different view. However, SME companies are always on learning path and disclosures improve as they grow. Whether the same would happen in this case, only time will tell.

Also Read: Understanding Annual Report of a Company

You may read my views about Control Print Ltd in the following article:

Analysis: Control Print Ltd

Regards,

Query

Hi Vijay, Thank you for all your wonderful posts. I came across them while going through investment made by Prof. Sanjay Bakshi in Ambika Cotton Mills Ltd. I want to understand the reason behind your buying Asahi Songwon Colors Ltd in spite of poor Return on Capital Employed over the years. Please refer to attachment.

Keen to understand your perspective

Author’s Response: 

Thanks for writing to me!

I have responded about Asahi Songwon Colors Ltd in other posts as well. You may find my views about its profitability of Asahi Songwon Colors Ltd in the above queries.

ROCE:

Falling profitability of last few years is a reason for decline in ROCE. However, Sourabh I am not a huge proponent of ROE and ROCE. I had written a post on my views about ROE a few months back. You may read that here:

Why Return on Equity (ROE) is not meaningful for Stock Market Investors!

ROE and ROCE are different yet in some ways similar parameters. I do not give huge weightage to both.

Hope it clarifies!

Regards,

Query

Hi Vijay,

I am a regular visitor to your blog and you are doing a wonderful work here.

I wonder why you have sold Asahi Songwon Colors Ltd scrip. It would be good if you can say the reason for the sell as well. I am just curious on this.

Thanks

Author’s Response: 

Thanks for your feedback & appreciation! I am happy that you found the articles useful!

As I continuously keep researching/analyzing companies, I keep coming across new factors which differentiate rewarding businesses from average businesses. Asahi Songwon met all the criteria of my earlier checklist, therefore, it was purchased in the portfolio. However, recently while reading book “Financial Shenanigans” I learned about another factor, Free Cash Flow, which is CFO-Capex, where Asahi is not doing good.

Also Read: 7 Signs to tell whether a Company is cooking its Books: “Financial Shenanigans”

Pigment business Asahi requires continuous heavy capex to continue growth. Over last 10 years, it has generated CFO of about ₹90 cr. whereas its capex is about ₹140 cr. Therefore, it is a cash guzzling business. I now realize that an investor should invest in businesses which are free cash generating (post capex).

One of the readers, Jigar (you may find his inputs in the comments below “My Portfolio” page) has highlighted this issue to me about 3 months earlier, however, I chose to stick with the company as there was no issue otherwise with the company. Good growth, good management, good pricing etc. everything was fine.

However, when I analyzed many companies on the FCF parameter, I found that invariably the companies with high FCF post meeting their capex requirements, have rewarded shareholders well.

That is the primary reason for selling Asahi Songwon Colors Ltd, despite it meeting all my checklist criteria.

All the best for your investing journey!

Regards,

Query

Hello Vijay Sir,

With regards to Asahi Songwon Colors Limtied, I observed that over years amount it has invested is 1.5 times higher than amount it has generated from operations. This being one of your prime criteria, how do you see it for the said company?

That the company is not able to generate more cash from operations when compared to funds it has been utilizing to generate cash from operations.

I may be wrong. So asked you.

Regards

Author’s Response: 

Thanks for providing this crucial input. I agree that pigment business Asahi requires continuous heavy capex to continue growth. Over last 10 years, it has generated CFO of about INR 90 cr. whereas its capex is about INR 140 cr. Therefore, it is a cash guzzling business. I now realize that an investor should invest in businesses which are free cash generating (post capex).

Keep providing your valuable inputs! All the best for your investing journey!

Regards,

Query

Dear Dr. Vijay, If I understand correctly, they have had to invest a good amount to meet environmental standards, which are becoming stricter by the day. Obviously it has absorbed money without adding to productivity or increased capacity. And this is expected in these kinds of manufacturing units. The points I wanted to make are:

  • Is it not possible to look at it in a different way? This capex acts as an increased entry barrier for new competition. Thereby actually improving the long term story?
  • Here I am assuming that
    • All the excess fund requirement was for environmental systems
    • The management didn’t foresee this situation and will take corrective actions in future (either proactively planning advanced systems for environment management meeting future requirements or pricing)

Regards, Praveen

Author’s Response:

Thanks for your inputs!

1) Capex might act as a barrier to entry. However, the capex/barrier to entry is not benefiting shareholders. The company is raising debt to fund extra fund requirements which is having impact on the balance sheet. Company is paying dividends effectively by borrowing from lenders.

2) (a) you would get to know the exact amount of capex done on the environment related expenses by going through their past annual reports.

2(b): I doubt that management did not foresee this situation. They are running this business since many decades and if not the state govt., their overseas clients have been asking for high environment standards. Any way, if the situation/operating efficiency improves in future, an investor can always change her views and check back into the company.

Hope it clarifies.

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.

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