Q&A: DHFL, KRBL, HMVL, Shilpi Cables & Others

Modified on July 2, 2018

The current article in this series provides responses related to:

  • Reader’s (Krishnakumar) inputs about Dewan Housing Finance Limited
  • Clarifications on analysis of:
    • Shilpi Cables Technologies Limited,
    • KRBL Limited,
    • Hindustan Media Ventures Limited
  • Queries on assessment of management quality of companies
  • Clarifications about analysis of Cash Flows & Profitability of any company
  • Lump sum or staggered investments

Dewan Housing Finance Limited

Dear Dr. Vijay,

I have learnt a lot about analyzing companies by reading your blog. Thank you very much.

I could not find your analysis on any NBFC/Bank in you blog. Can you please give your views on Dewan Housing Finance Limited?

  • Market Cap = ₹6,418 Crore

 

Pros:

  • 10 year sales growth = 43%
  • 10 year profit growth = 36%
  • Zero annual drops in sales/profit in last 10 years, i.e., the company results are not cyclical even though it is lending for a business which is cyclical (real estate).
  • P/E ratio = 9.5
  • P/B Ratio = 1.29
  • P/E * P/B = 12.255 < 22.5, providing a good margin of safety
  • Credit rating has been increased last year to AAA.
  • Current ratio = 4.85
  • Has paid dividend on every year since 2000.
  • Total salary of all Directors including Managing Director (FY-2015) = ₹2.32 crore out of net profit of ₹621 crore

 

Cons:

  • Frequent equity dilution – Equity capital increased from 67.79 March 2006 to 145.68 in March 2015; All Housing finance companies seem to be doing this.
  • Promoter holding < 35%
  • FII Holding > 25%
  • Return on capital employed has decreased from 22% in 2010 to 15% in 2010 according to valueresearchonline data.
  • Gross NPA = 0.95%, Net NPA = 0.68% has been increasing for past 3 years.
  • Dividend payout ratio has been decreasing.
  • Interest coverage ratio has always been just around 1.2-1.3.
  • Tax rate for past 5 years has been increasing from 24% to 34% in past 5 years.

Regarding NPA, I find that other housing finance companies like Gruh Finance, HDFC and Can Finance have much lower numbers. However DHFL’s NPA is lesser than that of banks. I feel that NPA is less relevant in case of housing finance since they can get most of the money owed by selling off the property, unlike banks which may be lending to corporates. Please correct me if I am wrong.

I find that cash flow statement for Financial institutions are very different from other companies and that their CFO is negative, hence PAT and CFO are not matching.

Same is the case with Debt to equity which is at 10.54.

I could not understand how tax rate for company in FY2015 is 34% while corporate tax rate is 30%. Why would the company pay extra tax?

From FY15 Annual report, I found that the company has issued Zero coupon debentures worth ₹191 crore which is increase from ₹49 crore in FY14. How is the interest cost calculated for such debentures every year? Will there be a huge expense on premium when the debentures are redeemed?

Thank you,

Regards,

Krishnakumar.

Author’s Response:

Thanks for writing to me!

I appreciate the time & effort put by you in the analysis of Dewan Housing Finance Limited. It clearly shows the amount of hard work that you have done.

Unfortunately, I do not analyse Bank/FI stocks on the blog. I have already communicated about it on the page above as P.S.

“4) Currently, I do not provide analysis of companies of following sectors, therefore, I request readers not to ask queries for companies in these sectors: IT/ITeS: I do not understand this sector, Banking/FI/NBFC: the data needed for their analysis like asset-liability mismatch, funding profile, CAR & its breakup, NPA movement, borrower-wise concentration etc. are not available on open sources like moneycontrol, screener etc.). “

I would not be able to provide my inputs on Dewan Housing Finance Limited currently.

However, I appreciate the effort that you have put and would keep note of your analysis on Dewan Housing Finance Limited. If any time, I start analysing Bank/FIs for putting their analysis on the blog, then I would analyse Dewan Housing Finance Limited and respond to your this query again.

Currently, I would suggest that you go ahead with your analysis.

Regards,

Query

Hello Sir,

Superb detailed analysis.

Analysis: KRBL Limited (“India Gate” Basmati Rice)

As you said about the company paying dividends with borrowed money, is extremely correct. I too have the same view. The company should ideally stop paying dividends and instead pay off the debt over the years. This would have increased the profits and hence shareholder value.

Running only behind growth can be disastrous. It is a double edged sword. Cash is always THE king.

Let me know your views.

Author’s Response:

Hi ,

Thanks for your inputs.

I have provided my views regarding companies (Ahmednagar Forgings Limited and Amtek India Limited) where growth is associated with increasing debt in the following articles:

Also Read: Q&A Analysis: Ahmednagar Forgings Limited

Also Read: Q&A Analysis: Amtek India Limited

You may refer to those articles to see the impact such business models have on financials of any company.

Regards,

Vijay

Query

I was going through the annual reports of Shilpi Cables Technologies Limited but I could not understand one thing that since the company exports finished products outside India still foreign currency outflows are 3 times higher than inflows for past few years (₹330 crores of foreign exchange outflows vs ₹110crore inflow last year). Can someone explain this to me?

Analysis: Shilpi Cables Technologies Limited

Author’s Response:

Hi,

Forex outflows would involve sum total of all the payment sent outside India including those for raw material purchases, principal & interest payment if the company has taken a loan in foreign currency, travel & consultation expenses, sales commissions etc.

You should read the annual report of the said company again to find out whether it has any other liability to be paid in foreign currency other than raw material purchases.

Read: Understanding the Annual Report of a Company

Hope it clarifies your query.

Regards,

Vijay

Query

Thanks Sir for detailed analysis of Hindustan Media Ventures Limited. How do you judge the management team as they have been low on dividend payment terms and holding cash for long time?

Analysis: Hindustan Media Ventures Limited

Author’s Response:

Thanks for writing to me!

An investor needs to take this decision on her whether she would want to partner with any management. Some of the aspects have been highlighted in the above article.

You may read more about management analysis of any company in the following article:

How to do Management Analysis of a Company

All the best for your investing journey!

Regards,

Query

Thanks Vijay.

This raises a follow-up question. What risk management process do you have in place? It is possible that the stock you have invested in can crash after your purchase due to various reasons. Usually the bad news comes in after the stock has completed a huge decline and the investor suffers huge losses. You may be following a process to get out of the stock in the event of a huge decline and minimize your loss.

Author’s Response:

Hi,

Thanks for writing to me!

I understand from your comment that you believe that fall in stock price is bad for an investor. I believe that it is not so. It gives the investor to accumulate the stock at lower levels.

It is possible that the stock an investor has invested in can crash after her purchase due to various reasons. However, if the investor becomes worried about every decline in market price, then she should learn about the required qualities from a stock market investor. One may read the below article for my view on required attributes from a stock market investor, in which patience and emotional stability in times of price declines/market corrections is paramount:

Getting the right perspective towards Investing

I do follow a framework to sell stocks. However, none of my selling criteria is dependent upon the current market price of stock. You may read my criteria for selling a stock in the following article:

When to sell a stock

Hope it clarifies your queries!

Regards,

Query

Hello Mr. Vijay,

I have read your detailed analysis on Fine Yarn maker Ambika Cotton Limited, on the same lines I found another company names Century Enka Limited (A BK Birla Group Company). It manufactures Nylon Yarn and has very good margin too. Based on your inputs on how to financially analyse the stock, I found this company to generate free cash flow, low debt and healthy dividend. I would like to know of how to judge the management of the company and also if the lower crude oil prices will affect the company’s input cost.

Thanks

Author’s Response:

Hi,

Thanks for writing to me!

You may read the following article to get an idea of assessment of management of a company:

How to do Management Analysis of a Company

You may read the annual report of the company to get an idea about how much of its raw material is crude oil derivatives and further study the impact of changes in crude oil prices on its raw material costs in past year. This exercise would help you judge the impact of crude oil prices on company’s input costs.

All the best for your investing journey!

Regards,

Query

Hi Dr. Vijay,

I learnt from your blog that we should always look Net profit along with CFO.

While looking at calculation of Cash flow from Operations in annual reports, I observe that, interest paid and depreciation are added into the net CFO. I find that CFO in some high debt companies like Suzlon energy is much greater than net profit since interest is included in CFO and not in net profit. This could seriously mislead our analysis.

Shouldn’t we remove these from CFO when we are comparing 10 year cPAT and cCFO? – Or, shall we compare (cCFO + tax paid) with cEBITDA.

Regards,

Krishnakumar.

Author’s Response:

Thanks for writing to me!

I am happy that you are doing your own stock analysis and are envisaging different scenarios/ratios/formulas which as per you represent the correct picture of financial position of the company.

I congratulate you for questioning the set mindset of company analysis.

Krishna, the annual reports are prepared in a standard format as per the accounting rules of any country. Rules dictate that interest should be shown as CFF and not CFO, that’s why it is added back in net profit to arrive at CFO.

Read: Understanding the Annual Report of a Company

However, the analysis in finance by the investor is not bound by any rules. You may use any formula as you deem fit for gauging the correct situation of any company.

I would suggest that you try analysing companies on the tweaked formulas presented by you and take a call whether these new formulas are able to present the actual financial strength or weakness of the company, better than rule bound CFO.

All the best for your investing journey!

Regards

Query

Hi Vijay,

I have a question about investing in a stock. If you have decided to invest ₹1 Lakh in a stock of your selection, do you put the entire ₹1 lakh in hat stock in one go or do you segregate the purchase over a time.

Thanks.

Author’s Response:

Hi,

Thanks for writing to me!

The answer would differ from person to person depending upon her risk taking appetite.

However, as you have asked what I would do if I have to invest ₹1 Lakh in a stock, I would invest this amount in one go.

Regards,

Query

Hi Sir,

I am currently investing through mutual funds. I have full time job and is it possible to invest in stocks with full time job in hand? I would like to invest in stocks with only surplus cash which I do not need for 10 years.

How to start?

Author’s Response:

Hi,

Thanks for your feedback!

I believe that a person does not need to have a background in finance as well as dedicate full day for becoming a successful stock market investor provided he/she is willing to put in the required time (over weekends) and effort for learning about stock analysis.

I suggest that you read all the articles in the series:

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

After that, you should read books of great investors:

Investment Books For Beginners

I am sure that once you have read these, you would be very confident about stock market investing.

Regards,

Query

Hi Vijay Malik,

I really admire and follow your articles, especially step-by-step analysis series.

I have two questions. Could you please clarify that?

1. Where do you read the financial statements in newspaper or screener sites (of course I know you recommend screener.in)? Just want to know.

2. As Buffett style, we should invest in the companies that we are aware about the business. Where can I learn about the business? I see only stock recommendations in internet where can I get true knowledge about business and evaluate them. Say how I can read business like banks, cements (Where can I read to understand these businesses).

Author’s Response:

Hi,

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

1) I read financial statements on BSE company filings, Annual reports, screener and currently moneycontrol

2) You may read about how to learn new businesses, in the following article:

How to Analyze Companies in Industries new to you?

Regards,

Vijay

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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