Q&A: Vimta Labs, Shilp Gravures & Others

Modified on July 2, 2018

The current article in this series provides responses related to:

  • Brief analysis of Vimta Labs Limited
  • Explanation of capitalization of interest by a company
  • My reasons for neither tracking IT/ITeS companies nor analysing real estate stocks on the website
  • Buying fundamentally sound stocks, which have run 10-12 times in the recent past
  • Different viewpoint on performance of Shilp Gravures Limited
  • Possibilities of an international company turning around an Indian company, it recently acquired
  • Clarifications about working capital cycle and capacity utilization of a company
  • Clarifications about analysis of operating performance parameters of companies

 

Vimta Labs Limited

Hello sir,

Can you please tell me about Vimta Labs Limited? I have bought the stock a week back as it showed good signs of recovery from its year’s low with good volumes.

My purchase price is ₹88.

Vimta Labs Limited is into clinical research and lab testing operations and has a state of the art facility established in Hyderabad having 130 centralized AC rooms. This is one of its kind clinical research and lab analysis facility in South Asia.

Also, the company has top five customers from Forbes 500 companies.

If I talk about the last couple of quarters, the results haven’t been that encouraging.

  • Sales have been flattish or have reduced.
  • Net profit has shown taken reduction.

I can hold the stock for a year and if its future is promising and continues to show improvement can hold on for a longer time period.

Please let me know your thoughts!

Many thanks.

Author’s Response: 

Thanks for writing to me!

Vimta Labs Limited was performing very badly till FY2012. However, since FY2013, it seems to have come into an entirely different phase of operations. Sales growth has returned and profitability has improved.

All the operating efficiency parameters of Vimta Labs Limited also seem to have been showing positive changes.

Vimta Labs Limited has been showing improved capital structure, as it has been able to reduce its debt in recent years, which is a good sign.

However, an investor needs to understand in depth the reasons for this improved performance since last 2-3 years. Only post that one should take any investment related decision in Vimta Labs Limited.

Only financial analysis would not give insights into these reasons. One should read the annual reports of last 10 years to understand the changes happening at the company and the recent developments.

Read: Understanding the Annual Report of a Company

I suggest you to go through the annual reports of the company and decide whether the factors leading to improved performance can be sustained.

You make take the help of the guidelines explained in the following article to further analyse the performance of Vimta Labs Limited:

Detailed Analysis of a Company: A Framework

Regards,

Query

Gulshan Polyols Limited (Read – Analysis: Gulshan Polyols Limited)

Sir, If Gulshan Polyols Limited is capitalizing the interest amount, wouldn’t it require paying it sometimes in future? How can debt providers allow company escape paying interest? Please explain for my/our knowledge.

Also do you think that Gulshan Polyols Limited is doing interest capitalization just to show-off bigger profits to investors in this Bull Run? Or can there be any other reason?

Author’s Response: 

Gulshan Polyols Limited is capitalizing interest because the accounting rules allow it to. It is paying this interest as you would understand that banks will not allow it to escape interest. However, it is not mentioning the interest on debt taken for any new plant/fixed assets in the P&L.

It is increasing the value of new plant/fixed assets by the amount of interest it pays on its loan for this asset. This is allowed by accounting rules.

However, we must factor this interest as well while calculating the total interest outgo of any company.

An investor can get the amount of total interest paid by any company in the cash flow from financing section of cash flow statement in the annual report.

Hope it helps!

Query

Dear Vijay sir,

Is there any specific reason for not tracking IT companies stocks by you?

Regards

Author’s Response: 

I have not yet spent time on their products, their requirements, competitive advantages and many other such things, which are essential to have any opinion on the industry & its companies.

Regards,

Query

Hi Doctor. Undoubtedly you are one of those gems who are rapidly increasing the respect ladder of investment.

Like you, I am also a big fan of Screener. However, for last one year I have been struggling to identify growth stocks.

I saw your method of stock selection. I can understand all of these parameters apply to growth investing.

Read: Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

Do you have any specific experience, which you would like to share on spotting growth investing stocks?

Author’s Response: 

Thanks for your feedback and appreciation! I am happy that you found the article useful.

You are right that the criteria mentioned by me under my stock selection strategies, are for selecting stocks which are witnessing good growth in their business. However, I do not believe in overpaying for their growth.

In last one year, almost all stocks have run up in their prices, therefore, it has become difficult to find good stocks available at reasonable prices. However, opportunities are still there, only the effort needed to find them has increased.

All the best for your investing and blogging journey!

Query

Hi Sir, the series of your articles has given a great insight for analyzing stocks along with available sources for further reading. Thanks a lot for that.

I would like to have your views on a stock, which fulfills most of the parameters for being a good investment like ROCE/ OPM/NPM/ Sales growth etc. But the stock has appreciated approx. 10-12 times in last one year.

Should the investor consider it for investment, because it seems that 10-12 times appreciation has left little scope for near future (2-3 Years) gains?

Regards

Author’s Response: 

Thanks for writing to me! I am happy that you found the article useful.

The past history of price rise or fall is not relevant till the time a stock is available at reasonable prices when compared to its fundamental strengths. Stock prices do not have any ceiling.

Regards,

Query

Shilp Gravures Limited (Read- Analysis: Shilp Gravures Limited)

Sir, as we see retained earnings are ₹30 cr and mkt cap has just risen by ₹13 cr over last 10 years. Doesn’t it make the stock more attractive by Graham’s standards?

Sales have not risen that much as company is part of capital goods industry in which the capex from industry seems to be cyclical and next phase of growth might be good.

Author’s Response: 

Thanks for writing to me!

There are different ways of interpreting the financial data and different investors take different decisions based on same data.

I do not like to invest in companies which show deteriorating operating performance, however, there would always be another person at the opposite end of the trade whenever someone sells or buys a share.

If you believe that the numbers present a good opportunity, you should take your investment decision accordingly.

Regards,

Query

In between Sunteck Realty Limited and Poddar Developers Limited, which one offers great value?

  • If I look at Sunteck Reality Limited; in terms of financial performance they are one of the best financial performance in the sector. Sunteck Reality Limited had the track record of working with Larsen & Toubro Limited and other renowned players known for timely delivery and quality.
  • Whereas in case of Poddar Developers Limited; they are working in the space, which most of Indians ask for – low cost housing. Financial performance is also good.
  • Though Sunteck Realty Limited has low P/E and Poddar Developers Limited has high P/E.
  • These companies are doing better in last 5 years whereas most of the players in this industry are struggling with debt and inventory.

Can I hold any of them for 5-10 years?

Does it come under cyclical nature of realty stocks?

How come they can able to manage to maintain their debt while operating under capital intensive business?

Author’s Response: 

Thanks for writing to me!

Real estate is a sector where the financial data presented by various websites like screener, money control etc. is not of much use to assess the business of the company. One needs to understand the individual projects being executed by the company.

Therefore, I would not be able to give any opinion about the two companies mentioned by you.

Regards,

Query

Hello Mr. Doc. Hats off to you! You really doing excellent work. My question is on International Paper APPM Limited:

  • The ratios are not good at all.
  • But looking at International Paper buying stake in Andhra Pradesh Paper Mills Limited (APPM) in 2011 for about $257 million.

Management’s view as per John Faraci, chairman and chief executive officer of International Paper:

Andhra Pradesh Paper Mills Limited is an excellent platform for International Paper to grow within the Indian paper and packaging markets. We believe that International Paper’s global operations and technical expertise can accelerate that growth and create value for customers as well as International Paper and Andhra Pradesh Paper Mills Limited shareholders.

What is your take on whole paper and packaging market?

Some ratios:

  • Return on equity last 10 years 2%.
  • Stock is trading at 3.15 times its book value
  • Contingent liabilities of Rs.583.82 Cr.
  • The company has delivered a poor growth of 11.70% over past five years

I am not interested is past results. But can the management turn around the company in next decade?

What is your take on this company?

Author’s Response: 

Thanks for writing to me!

You main query seem to be related to:

1) Outlook of paper industry:

I am indifferent to industry in my analysis. I prefer buying good performing companies in stagnant industries.

Read: How to do Business Analysis of a Company

2) Turnaround of Andhra Pradesh Paper Mills Limited by International Paper:

Your guess is as good as mine. History is full of example for both good turnarounds as well as investors throwing good money after bad in hope of turnarounds and finally burning their fingers. However, instances of failed turnarounds are more.

This is not to indicate that Andhra Pradesh Paper Mills Limited would not see the turnaround, but only that no one know as of now. It is more of a speculative call.

I think that an investor should wait for the impact of new management to get reflected in financial results before taking any investment decision in this company.

Query

Hi, I want to ask two very basic questions which I am stuck with since I have very little financial knowledge. They are:

  1. How do you analyze the working capital cycle of a company?
  2. How to analyze the capacity expansion and utilization from a company’s balance sheet?

Author’s Response: 

Thanks for writing to me.

1) Working capital cycle is Inventory days + Receivables days – payables days. You may find the formulas about calculation of these easily on google. You can calculate all these from the data in the balance sheet.

2) Total capacity and utilization are usually given in annual report (esp. directors’ report or management discussion & analysis). You may find them sometimes in the credit rating reports as well. It may be mentioned by equity research report of the company published by brokers who interact with management.

Also Read: Understanding Annual Report of a Company

Also Read: 7 Important Reasons Why Every Stock Investor should read Credit Rating Reports

Hope it helps!

Query

Dear sir, First of all, thanks for your dedicated work on Indian stocks in fundamental analysis. Basically I am technical investor nowadays. I began to invest in good fundamental companies with some distance stop loss.

Your articles amazed me that the way you pick stocks and your conviction to hold the stocks even when it goes below buying price. This attracts me to work more on fundamental analysis.

Actually I wanted to ask about this company in your Q&A Analysis. It’s my luck that you have already given your analysis about this company.

Now I working in fundamental analysis based on the guidance given on your website. I took Metalyst Forgings Limited (erstwhile Ahmednagar Forgings Limited) for studying purpose.

Read: Analysis: Ahmednagar Forgings Limited

The calculation which I got for receivable days and inventory turnover was not matching with your calculation

How to Analyse Operating Performance of Companies

I could not understand how to get these figures using screener data. Here are the figures I got from screener default excel sheet of this company. Please see the attached file.

So please guide me about how you derive these numbers from screener Data

Thank you!

Author’s Response: 

Thanks for writing to me! I am happy that you are doing your own analysis and calculating all the ratios at your end before you take any final decision about the company.

The difference between the ratios calculated by you and me is due to the data assumptions:

You have taken inventory and receivables at the year-end values, whereas I have taken the average of values of inventory & receivables at start and end of the year.

Financial analysis is mix of science and art. Science is in calculation and art is in assumptions, interpretation & taking the decision.

In case, you believe that the year-end value is better to calculate the ratios, then you should use it and take the investment decision whether buy or avoid or hold or sell.

Hope it clarifies your concerns!

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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“Peaceful Investing” approach is the result of my more than a decade of experience in equity markets. This approach helped me invest even when I had a full-time corporate job and could not spare a lot of time for stock analysis. During my investing journey, I have faced all the common challenges of the investors, the biggest one being “scarcity of time”. “Peaceful Investing” approach keeps in mind that an investor will have limited amount of time to spare for stock investing. 

The objective of “Peaceful Investing” approach is the selection of such stocks, where once an investor has put in her money, then she may sleep peacefully. Therefore, if later on, the stock prices rise, then the investor is happy as she is now wealthier. On the contrary, if the stock prices fall, even then the investor is happy as she can now buy more quantity of the selected fundamentally good stocks.

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