Q&A: Rattanmani Metals & Tubes Ltd, Small Cap Investing, Market Cycles

Modified on July 12, 2018

The current article in this series provides responses related to:

Query

Read: Analysis: Ratnamani Metals & Tubes Limited

  1. Receipt and repayment of exact loan amounts to a subsidiary and the MD
  2. Significant outstanding to promoters (~ Rs 23 Cr)

In the Contingent Liabilities section (AR 2015), I observe the following –

  1. Range of tax/custom/excise disputes
  2. Outstanding bills (to the tune of Rs 100 Cr

The above observations (coupled with the high salary paid to the promoters) make me uncomfortable

What are your thoughts?

Elaborations:

1. They have a long list of outstanding tax dues/disputes (pg. 69 of AR 2015). I have seen most firms have only 1 – 3 disputes

  • One of the above items relates to Employee State Insurance – are they not giving employees their due?

Answers to queries on Rattanmani Metals & Tubes Ltd, Operating Performance, Small Cap Investing, Market Cycles

2. There is a Contingent Liability worth Rs 100 Cr (pg. 123) with no details other than saying bills discounted but not matured

Answers to queries on Rattanmani Metals & Tubes Ltd, Operating Performance, Small Cap Investing, Market Cycles

3. In Related Parties Disclosure, there is a receipt and repayment of loans worth Rs 6.5 Cr with promoter and a subsidiary (pg. 127). Why receive and repay in such a short duration?

  • No info on the interest paid to promoter for this loan

 

Answers to queries on Rattanmani Metals & Tubes Ltd, Operating Performance, Small Cap Investing, Market Cycles

4. In Related Parties Disclosure, there are huge payables (Rs 23 Cr) to promoters (pg. 128). No clarity on what this is – unpaid commissions or something else?

Answers to queries on Rattanmani Metals & Tubes Ltd, Operating Performance, Small Cap Investing, Market Cycles

Author’s Response:

Hi,

Thanks for writing to me!

1) Outstanding tax dues/disputes:

These are normal in day to day business mostly due to difference in the treatment of certain items and related tax assessment. The number of disputes being 1-3 for other companies is mere co-incidence. Disputes may be higher depending upon the diligence of the tax assessing officer. Disputes do not tell anything about whether the company is at fault or the tax assessing officer has erred in assessment. Only thing to be focused by the investor is that whether there is any tax demand which is large enough that it might hamper the liquidity position of the company. If there is any such demand, then the investor should analyse it further before she takes a final decision about investing in the company.

2) Contingent liability of ₹100 cr. for bills discounting:

Many a times the seller sells the goods to the buyer on credit. These sales might be backed by a letter of credit (LC) or by invoices accepted by large corporate buyers. In normal parlance, the seller would receive the payment after 45-90 days, as per the credit period agreed by the seller and the buyer. However, the seller may take the LC/accepted bill to the bank and raise loan against it. The bank gives money today and get the repayment when the money is received from the buyer after 45-90 days. During the tenor of this loan taken by seller against the LC/bills, the seller has received the money which would be paid once the money is received from the buyer. However, if the buyer does not pay, then ultimate liability is on the seller to repay the bank. That’s why the loan/money received from discounting of LC/bills is shown as contingent liability until the buyer pays up the money.

Usually, the companies do not disclose the names of the buyers whose bills/LCs are discounted by them.

Read: Understanding The Annual Report Of A Company

3 & 4) ESI dispute, deals with the promoters:

I would suggest that you should write directly to the company and seek clarifications on the same.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

Follow Up Q:

Thanks for the response, Vijay.

Quick follow up question regarding Inventory Turnover – you mentioned Inventory Turnover improved from 3 to 5 from 2011 to 2015 which true, but over a 10 year period from 2007 to 2015, it has remained largely static at around 5. So, how would you interpret this? It appears the management hasn’t been able to make any meaningful progress in this front?

Author’s Response:

Hi,

Thanks for writing to me!

Both the interpretations are right. However, it depends upon the investor, which interpretation she assumes while taking the final investment decision. As investing is an art and not a science, therefore such situation of different investors interpreting same data differently and moreover, same investor interpreting same data differently at different times would always be common place.

Therefore, I advise that investor should not base their investment decision on any single parameter (like inventory turnover) and take a comprehensive view by factoring in multiple aspects.

All the best for your investing journey!

Regards

Vijay

 

Query 

Hello Vijay,

Could you please confirm how you relate Inventory and receivables with CFO & PAT?

As per my understanding PAT is outstanding balance from customer after sale of product, CFO is balance received against product sale.

I think it is very basic question but I don’t know how to relate this. I try to google it but I can’t understand.

Regards

Author’s Response:

Hi,

Thanks for writing to me!

The outstanding money to be received from product sales is called account/trade receivables. To understand the relationship between PAT and CFO, I would suggest you to read the cash flow statement in the annual report of any company, which would show step by step calculation of CFO from PAT/PBT.

This calculation would clearly show how the profits/funds get stuck in or get released working capital and the impact of depreciation. It would be a good learning exercise for you to understand in which cases PAT would be higher than CFO and in which cases it would be lower.

Read: Understanding The Annual Report Of A Company

In case after reading and analysing the cash flow calculation of company from its annual report, you have any query, then I would be happy to provide my inputs on your analysis and query resolution.

All the best for your investing journey!

Regards,

Vijay

 

Query

Respected Vijay sir, after getting through your investments and stock selection I came to know that you are investing in small cap stocks which are hidden gems. Is small cap stocks investing via SIP better than investing directly as they have some peculiarities like:

  1. they are high risk
  2. highly illiquid
  3. highly volatile
  4. less information public available

In such a situation how an investor can invest large amount of money even though it might be a fundamentally sound company, of course there are positives like

  1. huge growth potential
  2. low valuations
  3. early entrance advantage
  4. under researched
  5. emerging sectors

But small caps are double edged swords so going via mutual funds sip will benefit monthly saving investments in case of ups and downs in markets

Author’s Response:

Hi,

Thanks for writing to me and providing your inputs!

I believe that for stocks in any market cap segment the main difference between mutual funds and the direct stock investing is that in direct stock investing, an investor has full control over the stocks that she is buying in her portfolio and saves on the expenses related to fund management. There are many other key differences like mutual funds face redemption when markets fall and are not able to deploy funds at the very time when stocks become cheap, which hurts portfolio return over long time. On the contrary, while directly investing in stocks, an investor can take her decision without any such pressure and can earn returns as per her effort and conviction.

Nevertheless, market has a place for all kinds of investors. Some investors prefer to choose mutual funds and some investors choose direct stock investing. I believe that a person does not need to have a background in finance for becoming a successful stock market investor provided he/she is willing to put in the required time and effort for learning about stock analysis. Therefore, I recommend direct stock investing approach to investors.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

Query 

Read: 3 Principles to Decide the Investable P/E Ratio of Stocks

Hello Sir,

Please confirm my understanding:-

Point: – “I keep a rough guideline of a premium of incremental P/E ratio of 1 for every 10% cushion of free cash flow (FCF) % above minimum 25-30% for companies that have been growing their sales above 15% per annum for last 10 years”

My understanding: – If my FCF% is 40 % then my premium of incremental PE can be: – {(40%-25%)/10%} =1.5 so I can give premium of 1 to 2.

Please confirm.

Author’s Response:

Hi,

Thanks for writing to me!

It is great that you have got the concept right.

You may tweak this calculation as per your preference. You may keep any threshold that you prefer: higher or lower than 25-30%, a premium of higher or lower than 1 P/E for every 10% cushion. Similarly, I look for companies with annual sales growth of history of 15% or more. This is because, the companies which are not growing, they are not doing capex and therefore, are expected to report higher FCF. You may customize the growth parameter as well as per your preference.

All the best for your investing journey!

Regards,

Vijay

 

Query 

Respected Vijay sir, I read your article regarding Mr Nandakumar, promoter of Manappuram finance Ltd .If we come across such a promoter in our research can we invest in that company even fundamentals of such company are not so encouraging.

Author’s Response:

Hi,

Thanks for writing to me!

There can be different combinations of management and business.

  1. Good business + good management: Best possible investment opportunity
  2. Good business + not so good management: avoidable situation
  3. Not so good business + good management: investment decision is subjective to what the management is doing to turn the not so good business into a good business. If the management is not doing anything and is continuing with status quo, then the management is not a good management.
  4. Not so good business + not so good management: Avoid

Read: Why Management Assessment is the Most Critical Factor in Stock Investing?

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

Query 

Respected Vijay sir, in a time frame of 5 years how many bull &bear phases does the stock market face and the cycle is same or it changes

Author’s Response:

Hi,

Thanks for writing to me!

There is no certainty of any fixed period of cycles. I do not try to adjust my investing pattern to match it with expected turn of business/market cycles and do not advise it to other investors as well.

Moreover, you may find many articles about it on the internet, which would have views of many other investors on market cycles.

All the best for your investing journey!

Regards,

Vijay

 

Query 

Respected Vijay sir, can we buy fundamentally sound companies during stock splits irrespective of their margin of safety and irrespective that we already own some stock of the company.

Author’s Response:

Dear,

Thanks for writing to me!

1) Stock splits do not alter the fundamentals of the company. Therefore, stock splits are to be ignored as a factor affecting the investment decision

2) Margin of safety has to be looked into while making investment decision.

Read: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

3) It is preferable to invest in the companies, which are already in the investor’s portfolio.

Hope it clarifies your queries!

All the best for your investing journey!

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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