This article provides in-depth fundamental analysis of Virat Crane Industries Ltd, manufacturer & seller of ghee prepared from buffalo milk ‘Durga Ghee’ and from cow milk ‘Kamadhenu Ghee’, in Andhra Pradesh and Orissa.
Virat Crane Industries Ltd
Dear Dr. Vijay, PFA my analysis of “Virat Crane Industries Ltd” based on your checklist.
Since this is my first detailed analysis, it may need a lot of tweaking. Would love to hear your remarks/critiques and your own analysis of Virat Crane Industries Ltd.
Please note that unlike your 10-year data analysis, I have done a 5-year data analysis because the company changed its line of business from Gutka (after the government ban) to Dairy in FY2010-11.
Define the business:
- Virat Crane Industries Ltd is in the business of manufacturing and selling Ghee. But recently they have expanded the scope and desire to be a ‘milk value-added products’ company.
- The decision to be in the milk value-added space is a conscious one, due to higher margins compared to milk business.
- Their main product is a premium brand of Ghee called “Durga”.
- As of now, Virat Crane Industries Ltd is a regional player with very high popularity in Andhra Pradesh and has tasted some success in Orissa.
- The planned expansion of Virat Crane Industries Ltd from diversification in products range and geographical penetration is the opportunity that makes this business attractive
Note on Financial Data:
- Since business of Virat Crane Industries Ltd was restructured in 2010-11 (Infra demerged and Durga merged), analysis takes data from 2011 onwards. The financials before FY11 represent those of Gutka and Fruit Masala, which is completely different from the current business.
A) Sales Growth: 19%
- The sales have grown at a CAGR of 19% yoy from 2011 to 2015, with an acceleration in the pace in the last 2 years.
- This growth has been the result of 2 things:
- Geographical expansion (from Andhra Pradesh) to Orissa and Karnataka.
- Increased Advertising spend (From almost Zero to about 2.15Cr last FY)
B) Profitability: 9%
- Profitability of Virat Crane Industries Ltd has improved substantially and is now one of the best in the industry, with NPM of about 9% (OPM % of 13.5%). This is because Durga brand commands a premium over its competitors.
C) Tax payout: >33%
- Tax payout of Virat Crane Industries Ltd over the last 3 years has been >33%, which means they are paying out tax as required
D) Interest coverage: 13.9
E) Debt to Equity ratio: 0.01
- The company is almost debt free
F) Current ratio: 1.6
G) Cash flow:
- After the restructuring, Virat Crane Industries Ltd has been Cash-flow positive. Also, Net Cash flows are positive
H) Cumulative PAT vs. CFO:
- cPAT for the period FY11 to FY15 = 10.5Cr, which is not matching the cCFO = -2.5Cr. This difference is mainly due to a deduction of 13.4Cr under the head “Goodwill” following the merger/demerger in FY11.
A) P/E ratio: 17.44
- The stock is trading at 56.15Rs at a PE of 17.44. This does not provide any margin of safety. But compared to the competition, the PE ratio is quite low
B) P/E to Growth ratio (PEG ratio): 0.23
- Due to dilution of shares in FY12, the EPS went down. So EPS growth from FY11 to FY15 is only 2%. Thereafter EPS has grown at 75%CAGR. So the PEG ratio is 0.23.
C) Earnings Yield (EY): 5.7%
D) P/B ratio: 3.76
E) Price to Sales ratio (P/S ratio): 1.8
F) Dividend Yield (DY): > 0%
- Virat Crane Industries Ltd has started paying dividends for the last 3-4 years. But it has just started expanding. So it’s not very important
Business & Industry Analysis
A) Industry Size: ~20% CAGR
- As per company management as well as neutral reports, the milk value added industry is expected to grow at a CAGR of 20% for the next 4-5 years.
B) Comparison with industry peers:
- Expected to continue growing at higher than industry growth rate of 20% due to increased penetration across geographies
- In AP market, Virat Crane Industries Ltd is a market leader with considerable brand value. This is evident from the fact that it commands a premium compared to other competitors. Also, there are other small companies selling fakes of Durga brand. As a brand extension, VCIL is entering curd and paneer market in AP and expects sales increase here.
- Virat Crane Industries Ltd has had some success in Karnataka and Orissa. They are setting up a manufacturing unit in Orissa that will reduce the transportation cost and hence improve the margins and help increase penetration further in Orissa, Maharashtra and Bengal etc.
- Plans have been made to launch a new brand of ghee in north India
- Virat Crane Industries Ltd earlier relied on the dealership network of the successful sister concern Crane Betel Nut for its sales and did little promotions. Now TV commercials with South Indian actors has been started and is expected to further aid the expansion.
Due to the above mentioned industry expansion, Product diversification, Geography diversification and promotion plans, along with the successes of the company in Karnataka and Orissa, it is expected that Virat Crane Industries Ltd should be able to maintain its growth momentum of the last 2 years for the next 4-5 years.
C) Increase in production capacity and sales volume:
- Penetration is increasing. Is planning to become a national brand from a regional brand. Setting up a facility in Orissa
D) Conversion of sales growth into profits: Profit CAGR > Sales CAGR
- Sales has increased @19% CAGR, while PAT has increased @33% CAGR
E) Conversion of profits into cash: cPAT > cCFO
- After restructuring in FY11, cCFO>cPAT. But as discussed before, including FY11, this condition is not satisfied due to the 13.4Cr adjustment under the head of Goodwill after the merger/demerger
F) Creation of value for shareholders from the profits retained: 4.5 times
- From FY11 to FY15, Retained Profits = 8.3Cr and Increase in Market Cap = 37.4Cr. Hence Virat Crane Industries Ltd has created value 4.5 times of retained earnings
Other Business Parameters:
A) Product diversification: Focused on Milk value added products
- Before FY11, Virat Crane Industries Ltd was into unrelated businesses, but have since become focused after the restructuring. Though the group in itself is highly diversified into businesses like IT, Pharma, Betel Nut Powder etc.
B) Govt. influence: This industry doesn’t have any government influences.
A) Background check of promoters & directors: Good
- Grandhi “”Crane”” Subba Rao, a high school dropout, started with a very modest background and went on to build a 100Cr business out of Supari. Through his whole enterpreneural journey, he is known to have upheld quality as the most important aspect of the product and business.
- He is a well-known figure in his hometown for the success he has achieved and for his social activities.
- He seems to be a very down to earth person and seems to have inculcated the same values in his son, who was not given a silver spoon and was made to find his own place in the business, starting with doing menial jobs. Subba Roa even ststes that he didn’t give his son any financial help in the beginning.
- Currently the business is run by his son Kantha Rao, who is also a middle school dropout. But is responsible for the expansion and diversification of the group.
- Apart from this, Grandhi’s son-in-laws are also in his business.
- Here are 2 of the links that tell us about the promoters: http://www.deshvidesh.com/success2.htm; http://indiatoday.intoday.in/story/The+nutcracker/1/21357.html
Overall, even though the promoters don’t have fancy educational qualifications, they seem to be people with values considering their focus on quality, social activities, down-to-earth attitude.”
B) Management succession plans: No info found
- Could not find anything on Kantha Rao’s succession plan
C) Salary of promoters vs. net profits: Good
- Kantha Rao has been taking a salary of ₹200,000 per month for the last 3 years even though profits have increased substantially. His remuneration was 0.03% of PBT. This is a good sign.
- In the FY15, the overall salary increase of other employees increased by 10%.
D) Project execution skills: Good
- This business was started and nurtured by Kantha Rao himself. He bought the loss making Durga Dairy and turned it around.
- Though his success in Andhra Pradesh may be attributed to a great extent to his father (due to an already existing dealer network and goodwill), the foray into Orissa, Karnataka should be Kantha Rao’s success. Also, his father being old-school did not believe in Marketing and insisted that quality alone helps earn money. But Kantha Rao, with his vision to be a national brand began advertising campaigns that has started bearing results.
Overall, Kantha Rao seems to be an ambitious businessman willing to apply modern management methods. However, for becoming a national brand they would need a set of skilled professionals, which they seem to be lacking as of now.
E) Consistent increase in dividend payments: 5 to 10%
- Virat Crane Industries Ltd has just started giving dividends for the last couple of years. Last FY they announced 10% dividends compared to 5% before. But looking at the growth plans of the company, it is doubtful that dividends will be consistent for a few years.
F) Promoter shareholding: 74.88%
- Promoters’ holding has increased over time and is very healthy
G) Promoter buying the shares: No
- No buying since FY12. But their shareholding already quite high.
H) FII shareholding: No FII holding
Operating Efficiency Analysis
- Inventory Turnover: 13.9, 27.5, 14.0, 15.4, 15.3
- Days Receivables: 8, 7, 23, 8, 6
- Fixed Asset Turnover: 2.8, 3.2, 2.9, 3.7, 5.2
- Inventory Turnover looks healthy. But not best of industry. As per screener, a similar (though not identical) company like Prabhat Dairy has inventory turns of 23.
- Days receivable of around 7 days since FY11 look healthy, except in 1 year when Receivables increased.
- Fixed asset turnover is improving and is good compared Prabhat Dairy, which has 3.3 Turnover ratio
B) Using Free Cash to fund Future Growth: No spiraling debt levels.
- As of now the company is virtually debt free.
Overall, Virat Crane Industries Ltd looks like a high potential company being managed well by a down-to-earth management with reasonable success in the past. Though the current valuation is not cheap, but there is very high opportunity for growth (both due to the industry expansion and company’s own product and market expansion plans) and I believe that Virat Crane Industries Ltd can grow 10 times its current size in the next 5 years.
Thanks for writing to me!
I appreciate the hard work you have put to prepare this report on Virat Crane Industries Ltd. Your analysis is very useful for any investor who wishes to analyse Virat Crane Industries Ltd as a potential investment. I thank you on behalf of all the readers of www.drvijaymalik.com for the time & effort put by you.
Virat Crane Industries Ltd has restructured its business in the past by hiving off its infrastructure business and merging the milk products business in FY2011.
I believe that one of the purpose of the analysis is to understand the efficiency with which promoters have run the company and created value for shareholders in the past. This analysis is independent of the product/business line in which they made the company operate during this period as the shareholders of the company trust the promoter management with their money and expect them to deploy the money in areas which can provide maximum returns to shareholders. Promoters as the drivers of the business are free to take any decision at any point of time including launching new products, entering new lines of business and divesting existing businesses.
Therefore, I believe in analysing promoters’ efficiency by analysing the performance of the company under their control for at least last 10 years to understand whether they are worthy of handing over the hard-earned money of investors.
For Virat Crane Industries Ltd as well, I have tried to analysed its performance for last 10 years by taking standalone or consolidated financials of the company, whichever is applicable and available for any specific period.
Financial Analysis of Virat Crane Industries Ltd:
Virat Crane Industries Ltd had been growing its sales at a pace of 18-20% year on year, which has picked up mainly in last 3 years. However, its operating margins seem to be fluctuating over the years. Operating profit margins have been varying between 3-14% over the years in cycles. Recently, margins have improved significantly, which remains to be seen whether the said improvement is sustainable in future.
Similarly, net profit margin is also fluctuating between 1-9% over last 8 years (FY2009-15) and the sudden spike in the NPM in FY2015 raises the concern of its sustainability going ahead.
Also Read: How to do Financial Analysis of a Company
Over the years, the tax payout ratio of Virat Crane Industries Ltd has been fluctuating, however, in the last 3 years, its tax payout is hovering around 32-34%, which is in line with the standard corporate tax rate in India. An investor should keep monitoring its tax payout in the profit & loss statement and the tax payout in the cash flow statement to check whether the tax being factored in P&L is being paid out as cash tax to govt. authorities or not.
Operating Efficiency Analysis of Virat Crane Industries Ltd:
Operating efficiency parameters of Virat Crane Industries Ltd reflect that almost all the parameters have been fluctuating widely over the years.
Net fixed assets turnover (NFAT) has been varying from 1-5 over the years. Over last 3 years, the NFAT has seen significant improvement from 3 to 5.14. It remains to be seen whether the company is able to sustain this improvement in the utilization of its fixed assets. NFAT might go down a bit due to planned capacity expansion by a new plant in Orissa, however, over time, the level of NFAT as the utilization of new plant improves, would reflect the management efficiency.
Inventory turnover ratio of Virat Crane Industries Ltd has been declining over last 5 years since the focus on the milk products business and has declined from 21.4 in FY2011 to 17.8 in FY2015. It remains to be seen whether the company is able to improve its operating efficiency and avoid the funds getting locked in its inventory. As pointed by you, its inventory turnover has a scope for improvement as compared to its peers.
Receivables days have improved from 36 days in FY2008 to 5 days in FY2015. It’s a good achievement and effectively the change in line of business has led to better realization of money from their customers, thereby reducing the working capital costs, which affects the profitability margins positively.
When we analyse the cumulative profits and cash flow data for last 10 years (FY2006-15), we realize that during these years, Virat Crane Industries Ltd has not been able to convert its profits in to cash flow from operations. PAT for these years is ₹17cr. whereas the CFO over the similar period has been ₹5 cr. If we recollect the above observation about declining inventory turnover, then an investor would appreciate that the declining inventory turnover leads to higher funds getting stuck in inventory and thereby lower CFO.
Inability to convert profits into cash has ensured that Virat Crane Industries Ltd has to rely on alternate sources of money (like equity and debt) to fund the requirements of growing business. Virat Crane Industries Ltd has relied on raising equity to meet its fund requirements as witnessed by increase in share capital in the past years.
Margin of Safety in the Business of Virat Crane Industries Ltd:
Self-Sustainable Growth Rate (SSGR):
Self-Sustainable Growth Rate (SSGR) of Virat Crane Industries Ltd is about 6-7%, which improved to 13% mainly on account of improvement in profitability margins in FY2015. As mentioned in the article on Self-Sustainable Growth Rate, SSGR does not factor in working capital changes. However, we can estimate whether funds are being tied up in working capital by comparing cPAT with cCFO.
Analysis of SSGR indicates that if Virat Crane Industries Ltd can manage its working capital and operating efficiency properly, then it can grow continuously at about 6-7% growth rate without creating additional debt burden on the balance sheet. Moreover, if it can sustain its profitability margins as achieved in FY2015, then it can expect its business to sustain higher growth rates in future from internal sources.
However, as we have seen that Virat Crane Industries Ltd is growing at a pace of about 18-20% and its working capital management also leaves scope for improvement, therefore it becomes imperative that Virat Crane Industries Ltd raise funds from other sources to support its growth, which has been witnessed by equity raising by the company in the past.
These findings of SSGR get re-affirmed when an investor analyses the cash flow from operations (CFO) of Virat Crane Industries Ltd with its capital expenditure (Capex) requirements over last 10 years (FY2006-15).
Free Cash Flow Analysis of Virat Crane Industries Ltd:
During FY2006-15, Virat Crane Industries Ltd realized total CFO of ₹5 cr. whereas it had to spend ₹10 cr. into capital expenditure, thereby leading to negative free cash flow (FCF) of ₹5 cr. which had to be met from outside sources like equity dilution.
Virat Crane Industries Ltd has paid dividend to shareholders in some of the past years, but as rightly pointed out by you, looking at the cash flow dynamics of the company, its seems uncertain that the company would be able to keep generating surplus funds from its operating to declare dividends. Therefore, continuous monitoring of its profitability margins and working capital management becomes imperative for an investor.
Upon analysis of the annual report of Virat Crane Industries Ltd for FY2015, there are certain issues that stand out, which require an investor’s attention:
Additional aspects and annual report analysis of Virat Crane Industries Ltd:
1) Noncompliance to conditions of listing agreement:
Virat Crane Industries Ltd has not appointed a company secretary, which is mandatory as per regulations. As per Secretarial Audit Review, page 44 of FY2015 annual report:
“The Company has not appointed a Company Secretary as Key Managerial Person (KMP). This is a non-compliance of section 203 of the Companies Act, 2013 and clause 47 (a) of the Listing Agreement.”
2) Guarantees given to lenders, on behalf of loans taken by other entities (group companies, which are not subsidiaries of Virat Crane Industries Ltd):
As per annual report of FY2015, page 61:
“c. Corporate Guarantees given to Group Companies: i) Virat Crane Bottling Ltd for Rs. 10 Crores ii) Virat Crane Agri Tech Ltd for Rs. 13.24 Crores d. The company is contingently liable for equivalent amount of guarantees given to Group Companies and not provided in the books.”
Corporate guarantee means that if the above companies are not able to pay the loans taken by them from the lenders, then Virat Crane Industries Ltd would have to pay these loans to their lenders. Therefore, it effectively means that Virat Crane Industries Ltd has taken final responsibility to repay these loans whereas it is not clear from the annual report, what benefit the shareholders of Virat Crane Industries Ltd are getting from these guarantees.
3) Interest free loans given to group companies:
As per FY2015 annual report, page 61, Virat Crane Industries Ltd has given loans of ₹8.4 cr. to its group entities, which are not its subsidiaries. As highlighted, these loans are interest free, effectively meaning “free money”. It is not clear the benefit these free loans provide to shareholders of Virat Crane Industries Ltd.
4) Transactions with promoter’s personal firm:
As per Managing Director, G.V.S.L.Kantha Rao’s message to shareholders on page 7 of FY2015 annual report, Virat Crane Industries Ltd plans to use the distribution network of Crane Betel Nut Powder Works in future:
“Streamlining the distribution network: As part of our mission to reach remote markets in the states of our current presence, VCIL intends to sign an MOU with Crane Betel Nut Powder Works to leverage their robust distribution network which shall enhance our presence in the sub-urban and rural markets.”
As per page 28 of the annual report, Crane Betel Nut Powder Works is a personal firm of Managing Director G.V.S.L.Kantha Rao:
It remains to be seen whether the agreement entered by Mr. G.V.S.L.Kantha Rao as Managing Director of Virat Crane Industries Ltd with himself (i.e. Mr. G.V.S.L.Kantha Rao as proprietor of M/s Crane Betel Nut Powder Works) would be beneficial to shareholders of Virat Crane Industries Ltd.
As highlighted in the image above, Virat Crane Industries Ltd has been paying rent of ₹120,000 per annum to M/s Crane Betel Nut Powder Works. It might be for any property belonging to M/s Crane Betel Nut Powder Works, which might be used by Virat Crane Industries Ltd for office space/warehouse. An investor should cross check whether the rent being charged by Crane Betel Nut Powder Works to Virat Crane Industries Ltd is equal to market rate or not.
5) Virat Crane Industries Ltd has asked approval from shareholders for raising loans up to ₹50 cr:
An investor should monitor the usage of these loans taken by Virat Crane Industries Ltd, whether they are used for funding the new proposed plant in Orissa or given as loans & advances or investments to group companies.
6) Virat Crane Industries Ltd is one of the very few companies, where I have noticed glaring spelling mistakes in the annual reports like the spelling of city Guntur in the image above or the following para in FY2011 annual report:
“MERGER AND DEMERGER: During the year, 1) The infra divsion of the company has been demerged and the assets and liabilities related to the infra division hava been transferred to Crane Infra structure Ltd pursuant to the scheme of arrangement approved by the Hon’ble High Court of Andhra Pradesh 2) The subsidiary company i.e Durga Dairy Ltd was merged into the Company as per the order of the Honorable High Cour of Andhra Pradesh The Accounts for the financial year have been prepared for the company post demerger/merger.”
Also Read: Understanding the Annual Report of a Company
An investor should analyse the above mentioned transactions presented in the annual report of Virat Crane Industries Ltd to properly assess the management of the company and its shareholder friendliness.
Margin of Safety in the market price of Virat Crane Industries Ltd:
Virat Crane Industries Ltd is currently available at a P/E ratio of about 20.4, which does not offer any margin of safety as described by Benjamin Graham in his book The Intelligent Investor.
Also Read: Hidden Risks of Investing in High P/E Stocks
Overall, Virat Crane Industries Ltd seems to be a company, which has seen its business performance improve since restructuring of business in FY2011. However, the company does not seem to be free cash flow positive and has required equity dilution in the past. There are certain related party transactions like interest free loans and guarantees on behalf of group entities, which an investor should analyse in detail before taking any investment decision about Virat Crane Industries Ltd.
An investor should also monitor the usage of debt proposed to be raised by Virat Crane Industries Ltd.
Also Read: How to Monitor Stocks in your Portfolio
These are my views about Virat Crane Industries Ltd. However, you should do your own analysis before taking any investment related decision about Virat Crane Industries Ltd.
You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
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.
- 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.