The current section of “Analysis” series covers Kokuyo Camlin Ltd a leading manufacturer of stationery & related products owning brands Camel and Camlin. The company is now a subsidiary of Kokuyo Co. Ltd of Japan.
“Analysis” series is an attempt to share with all the readers, our inputs to the company analysis submitted by readers on the “Ask Your Queries” section of our website.
In order to benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.
Kokuyo Camlin Ltd Research Report by Reader
I need your guidance in the attached research report that I have made completely myself.
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Background of Kokuyo Camlin Ltd:
Camlin is an 80+ years old company started and owned by Dandekar family. It was incorporated as a private company in 1946 and was converted into a public limited company in 1988. The company and promoters have worked hard in creating a cult brand ‘Camlin’ that is a very well known in the stationary category. The company has a presence in multiple categories with stationary and has been a hallmark of good quality product for decades now. While the Dandekar promoters have created Camlin into a well-known and reputed brand, the operational side of the story has not been very pleasing. While sales have shown consistent growth for the past 10 years (CAGR 10%), profit margins have been fluctuating a lot and have been flat for 10 years. The company even slipped and made losses in FY 2013 and 2014.
In 2011, Japan stationary mammoth KOKUYO, a $3 billion company took over Camlin from Dandekar family and bought out all their holding @110 Rs/share approximately 2X of sale in 2011. The current KOKUYO holding in the company is ~73.5% and Dandekars only have 1.5%. Kokuyo has focused on Japan all its 100+ years’ history and has had a great record of accomplishment. Back home, in the last 5 years recently, while topline has shown steady growth, bottom-line has tripled. They have also dramatically reduced their interest costs by repaying the debts. Clearly, very good execution capability. However, since the Japanese market is saturating, Kokuyo, rightly so, is looking at markets with higher growth prospects. This endeavour brings them to India.
Why Kokuyo Camlin Ltd:
1) Operational efficiency:
As expected, KOKUYO has been serious about turning around the business from the moment they took over the operations. In the pre-Kokuyo term, Camlin had five different manufacturing units Vasai, Maharashtra: Markers, Ball pens, Correction Products and Adhesives; Taloja, Maharashtra: Inks and Adhesives; Tarapur, Maharashtra: Hi-Polymer Leads, Colours; Jammu, J&K: Colours; Patalganga, Maharashtra. As per the available information, some of these manufacturing units were a big drag on companies operations. Kokuyo is hence has come up with a jumbo manufacturing unit at Patalganga which will be manufacturing all 200 SKU that KCL sells. Moreover, the capacity will also take care of some requirements in other markets like Japan and hence will be a major export unit for Kokuyo. Recently, they also introduced KAIZEN, the Japanese philosophy and the concept of continuous improvement in manufacturing processes. The plant is a state of art manufacturing unit, which has been built with an investment of 100+ cr. The plant also houses a highly capable R&D centre to meet future trends and needs for the company.
2) Kokuyo Camlin Ltd sells nonproductive assets:
KCL in 2014 sold the alpha kids pre-school chain that was a drag on the company’s books.
The company is also in the process of shutting the other five manufacturing units, once the Patalganga unit is fully operational and settled. This will help the Japanese mammoth to further sharpen its focus on operations, which are of great importance in today’s competitive market.
3) Great brand of Kokuyo Camlin Ltd:
Kokuyo has no plans to dilute/shut the Camlin brand. In spite of being a big brand itself, Kokuyo aims at building and leveraging the strong brand recall that Camlin garners in Indian consumers. This is a great positive for KCL going forward. Camlin brand stands for a great quality product at a good value (price), a proposition loved by Indian consumers.
4) Huge opportunity for Kokuyo Camlin Ltd:
India stationary market is a ₹20,000 cr market growing at 15%. Given the fact that there is +24cr student strength that is pursuing an education in India + pool of artist and office goers AND increase in discretionary spends, which will, in fact, upgrade the spends on stationary, it is face to assume that the market will continue to grow in double digits moving forward.
Further, it is too be noted, that almost +60% stationary market in India is unorganised and with the push on GST and other measures by the government, there is a huge value migration play that is waiting to happen.
Valuation analysis of Kokuyo Camlin Ltd:
If we look at the PE and ROE, nothing makes sense. This is mainly because of losses and low efficiency that the company has exhibited in the last few decades.
However, with Kokuyo coming in, this is expected to improve significantly. In the first phase, the company has focused on increasing sales and has doubled the same in the last 3-4 years. Now, for the past 5-6 quarters, the company has been focusing on operational efficiency. This can be clearly seen in the net profit margin which has gradually increased from 1% (Dec 16) to 9% (Dec 17 and Mar 18).
Through scuttlebutt, I have gathered information that KCL distributors were offering 15days credit period until now, which has now officially reduced to 7 days only. This is further expected to reduce to ‘advance only’ system, something that KCL’s competitors like Faber Castle are following today. This is further free up working capital of the company.
The PE of the company at today’s EPS of 0.98 comes up to 100. This is very high and confuses my valuation attempt. I am worried as this PE will be corrected in the future and normalized as we move forward, irrespective of the company’s performance. Thus keeping the price low.
However, if I use other methods, like Sales to Mcap, then that currently stands at 1.5 X. This for a huge brand, in a growing category and with an MNC running the engine looks very low. Once operational efficiency starts kicking in and KCL having more money to spend on branding, a company of this profile should trade at 3x to sales (which in itself is expected to grow at 10-15% CAGR for the next 3-4 years).
Hence, assuming sales grow from 630crs (FY18) to 900crs (FY21) and efficiency on margins is maintained, the company should trade at 3x sales i.e. 900 X 3 = 2700cr Mcap.
This is roughly 2-3X return (pessimistic scenario) from current Mcap of 1000cr only.
Kokuyo Camlin Ltd: Category overview in India:
Stationery products are required by everyone from school to organizations. The target consumers of this industry are schools and offices. The stationery industry can be classified into two sectors.
1) School stationery:
It consists of a wide range of stationery products used by teachers and students in the schools. It includes popular stationery products like notebooks, erasers, pencils, rulers, sharpeners, writing boards, exam boards, graph book, pencil boxes, geometry boxes, notebooks covers, glue sticks, maps, children paper clips and binders, pencil grippers, calculators and many more.
2) Office stationery:
Products include correction products, book/magazine racks, business organizers, card holders, cash boxes, clipboards, dampers, desk calendars, desk organizers, document holders, glues, glue sticks etc. Other products include letter openers, message pads, stick-ups, plastic paper clips, paper trays, paperweights, pen holders, trays, stands, pen holders, cases, pocket planners, punches, rubber bands, scales, rulers, scissors, stamp pad inks, stamp pads, staple removers, staple pins, staplers, tapes and dispensers, and telephone diaries etc.
3) Writing instruments:
It includes ball pens, correction fluids, pens, tapes, synthetic, PVC Erasers, fountain pens, gel pens, highlighters, inks, markers, 0.5 and 2 mm pencils, micro tip pens, pen refills, pen sets, pencil leads, roller pens, sharpeners, marking pens.
4) Computer stationery:
It comprises of printer toners, computer CDs, floppy disks, computer paper, printer ink, printer cartridges, CD covers, etc.
Dr Vijay Malik’s Response
Thanks for sharing the analysis of Kokuyo Camlin Ltd with us! We appreciate the time & effort put in by you in the analysis.
Let us analyse the performance of Kokuyo Camlin Ltd over the last 10 years.
While analyzing the past financial performance data of the company, an investor would notice multiple aspects:
- The name of the company used to be Camlin Ltd until FY2011. In October 2011, Japanese company Kokuyo Co. Ltd bought a majority stake in Camlin Ltd. Therefore, from FY2012 onwards, the name of the company was changed to Kokuyo Camlin Ltd.
- While reading the past annual reports of the company (the company website has annual reports from FY2004 onwards), an investor realizes that the company has always had subsidiaries under it; however, in many years, the company decided to publish only standalone financials as the financial performance of its subsidiaries was very insignificant. For example in FY2009, the company chose to publish only standalone financial performance despite having two subsidiary companies, Camlin North America INC, USA and Camlin International Limited:
FY2009 annual report, page 56:
Company has two subsidiary Companies namely Camlin North America INC, USA and Camlin International Limited. As per the unaudited Financial Statements of Camlin North America compiled by the Management, during the year it has posted turnover of Rs. 2.92 Lacs (2007-08 Rs. 14.38 Lacs) which amounts to only 0.01% of turnover of Camlin. Its aggregate assets are Rs. Nil (2007-08 Rs. 16.16 Lacs). Further, during the year Camlin International Limited has not carried on any business activity, as such. Its assets are Rs.11.25 Lacs (2007-08 Rs. 11.40 Lacs). Keeping in view the insignificant quantum of business done by these subsidiaries as also the value of Net Assets, Management is of the view that, the affairs of the said subsidiaries do not have material impact on the operations of the Company. Hence, the Financial Statements and Cash Flows of these subsidiaries are not consolidated by the Company.
Moreover, when an investor studies the financial position of the subsidiary companies in the FY2009 annual report, page 66, then she realizes that the subsidiary companies have very insignificant business activity with very low assets, liabilities, sales turnover and net profit/loss.
Further advised reading: Understanding the Annual Report of a Company
- From FY2010 onwards, Camlin Ltd formed another subsidiary Camlin Alphakids Ltd for its new business activity of pre-school education. Therefore, the company started preparing consolidated financials from FY2010 onwards.
FY2010 annual report, page 89:
The previous consolidated financial statement was prepared for the financial year ended 31.03.2006. Thereafter, consolidated financial statement was not prepared up to the year ended 31.03.2009 due to insignificant volume of operations of the subsidiaries. However, in the year ended 31.03.2010, the parent company has promoted a new subsidiary company viz. Camlin Alphakids Ltd. which has necessitated the preparation of consolidated financial statement for this year.
We believe that while analysing any company, the investor should always look at those financials of the company that represent the business picture of the entire group. Therefore, while analysing Kokuyo Camlin Ltd, we have analysed standalone financials for FY2009 and consolidated financials from FY2010 onwards until FY2018.
Further advised reading: Standalone vs Consolidated Financials: A Complete Guide
Financial and business analysis of Kokuyo Camlin Ltd:
While analyzing the financials of Kokuyo Camlin Ltd, an investor would note that in the past, the company has been able to grow its sales at a rate of 8-9% year on year. Sales of the company increased from ₹284 cr. in FY2009 to ₹630 cr in FY2018. The trend of the sales growth of the company over the last 10 years seems consistent where the sales of the company have grown for almost each of the past 10 years. However, when an investor analyses the profitability of the company over the last 10 years, then she notices that the sales growth of the company has not translated into profits for the shareholders.
While analysing the operating profit margin (OPM) of Kokuyo Camlin Ltd over the last 10 years (FY2009-18), an investor notices that the OPM of the company has been highly fluctuating. The OPM has ranged from a high of 9% in FY2010 to operating loss in FY2013. Moreover, the profitability performance becomes worse when the investor focuses on the net profit margin (NPM) of Kokuyo Camlin Ltd for the past 10 years (FY2009-18).
The company has reported NPM varying from a high of 4% in FY2010 to losses in three years (FY2012, FY2013 and FY2014).
Further advised reading: How to do Financial Analysis of Companies
An investor would appreciate that such fluctuating profit margins indicate that Kokuyo Camlin Ltd does not have pricing power over its customers. The company seems to find itself unable to pass on increases in raw material and other costs to the customers. As a result, whenever the input costs increase, then the company has to absorb it on its own, which leads to a reduced profit margin.
Moreover, the fact that the company had to report operating and net losses in multiple years indicate that the company operates in an industry with intense cutthroat competition. In such industries, usually, the products are a commodity in nature and there are many suppliers. As a result, whenever, a customer finds that the price of the product of any company has gone up, then she can easily use the product of another company.
The stationery industry seems to be one such industry, where if the price of products e.g. a pen increases beyond a point, then the customer can easily replace the pen of one company with the pen of another company without any material impact on the functionality. As a result, the stickiness of the customer with a product of any particular company or brand seems low. Therefore, the companies find that they do not have the ability to increase the prices of their products to maintain their profit margins whenever raw material/input costs go up.
Further advised reading: How to do Business Analysis of a Company?
The credit rating agency, CRISIL in its May 2014 report for Kokuyo Camlin Ltd highlights this aspect of the business:
The stationery products market is highly commoditised and fragmented, with many unorganised players, leading to stiff competition. Furthermore, Camlin’s input cost is susceptible to volatility in prices of petrochemicals, which are its key raw materials.
The near commodity nature of most of the products coupled with many brands/manufacturers including unorganized players and cheaper Chinese imports has led to a situation where even the well-known brands/companies report losses in times of high raw material/input costs. The companies are not able to pass on an increase in input prices instead; they have to reduce prices due to cutthroat competition.
An investor gets to know this aspect of the business of Kokuyo Camlin Ltd in its FY2018 annual report, page 47:
In such operating context, the Net Revenue of the Company was ₹63850.03 lacs compared to ₹66315.46 lakhs. It is important to note here that the decline of 3.72% in net revenue was due to the price decrease and discounts.
The investor notices that the credit rating agency, CRISIL, in its report of Kokuyo Camlin Ltd in February 2019 has highlighted this aspect of the business. CRISIL also points out the fact that the low-profit margins of the company lead to a situation where even a slight change in raw material costs affect the profitability in a big manner.
Susceptibility to intense competition and volatility in raw material price: Intense competition may continue to constrain scalability, pricing power, and profitability. Further, since cost of procuring the major raw material accounts for a bulk of the production expense, even a slight variation in price can drastically impact profitability.
Further advised reading: Credit Rating Reports: A Complete Guide for Stock Investors
However, while analysing the business performance of Kokuyo Camlin Ltd, when an investor reads the past annual reports, then she notices that the situation of poor pricing power of stationery manufacturers is not a recent development. In fact, the company has highlighted this tough aspect of this business since long as the company has had years in which it reported losses in the previous years as well (FY2005 and FY2006).
The below table of the financial performance of the company over FY2002-2008 taken from FY2008 annual report, page 55 shows that the company has had such fluctuating profit performance previously as well.
In the above table, an investor would notice that in FY2004, the company reported a sharp decline in its profits, which was followed by net losses in FY2005 and FY2006.
In FY2004, the profits of the company declined by about 60% to ₹1.89 cr from ₹4.44 cr in FY2003. The company explained to the investors that despite the increase in sales, the company reported losses. The company said that the losses are due to increase in input costs and the company is not able to pass on these costs to the customers due to intense competition.
FY2004 annual report, page 5:
In spite of marginal increase in net sales, profit before extra-ordinary item and tax dropped steeply by 66.95% over the previous year. Fall in profit is attributable mainly to rising cost of inputs and need-based increase in quantities of free samples given for promoting products of Consumer Products & Pharmaceutical Divisions, as also to the inability of the Company to increase selling prices in the face of domestic as well as international competition.
The business situation worsened in future and the company still could not pass on the increase in input costs to the consumers. As a result, the company reported losses in FY2005 and FY2006.
FY2005 annual report, page 10:
In spite of marginal increase in net sales, the performance of your Company has resulted in a loss of Rs. 731.66 Lacs as against a profit of Rs. 309.40 Lacs, in the previous year.
The loss for the Current Year has arisen due to losses made by Consumer Products and Pharmaceutical Divisions.
Due to stiff competition, Consumer Products Division could not pass on the rising cost of inputs to the Consumers.
The management accepted that the state of the competition in the industry is so severe that despite all attempts by the management to cut costs and improve efficiencies, it is finding itself helpless to control losses.
FY2005 annual report, page 16:
Notwithstanding all out efforts of management in improving the sales and profitability, domestic as well as international competition and dumping of imported products at extremely low prices could still be cause of concern for the Company.
Over the years, the competitive situation in the business did not improve. In FY2011 annual report, when the profitability of the company witnessed a decline, the company acknowledged that currently there are many Indian and international players who are attempting to sell to the Indian consumer. This has led to a great availability of choice for the consumer but in turn, it has taken away the pricing power from the manufacturers.
FY2011 annual report, page 19:
Competition in last few quarters have been severe. With now many players both Indian and International vying for a share in this market, the consumer has a great choice but is overall reducing the pricing power.
Further advised reading: How to do Business Analysis of a Company?
This year of reduced profitability (FY2011) was followed by three consecutive years of net losses for the company (FY2012, FY2013 and FY2014). The company lamented its inability to pass on costs to customers in FY2013.
FY2013 annual report, page 13:
In spite of increase in net sales the performance of your Company has resulted in a loss of ₹ 1,343.69 lacs as against a profit of ₹ 133.81 lacs in the previous year.
The major contributory for this loss in the financial year under review were increase in Input material cost, manpower cost & overheads and our inability to pass on this increase fully to our customers.
The company attempted various cost reduction measures but despite all its attempts, it again reported a loss in FY2014.
FY2014 annual report, page 11:
Inspite of increase in net sales the performance of your Company has resulted in a loss of ₹ 1158.30 Lacs as against a loss of ₹ 1343.69 Lacs in the previous year.
Inspite of various cost reduction measures, the high operating cost continued to affect the profitability as the Company could not scale up its sales in line with the business plan owing to adverse market conditions.
Looking at the above situation, an investor would appreciate that the times of increasing raw material costs/commodity prices are bad for Kokuyo Camlin Ltd because it is not able to pass on the increase in inputs costs to its customers and as a result, it ends up reporting losses. However, while analysing the business performance of the company, the investor realizes that even the periods of declining commodity prices do not do any good for the company.
In FY2017, the company disclosed that competitive situation has worsened due to the decline in commodity prices. Kokuyo Camlin Ltd highlighted that due to low commodity prices:
- There was no possibility of an increase in the prices of its products.
- Manufacturers from the unorganized sector could import at a very low price. As a result, their profitability increased significantly. Therefore, many unorganized players started importing products under their own brands, which led to further competition to organized/branded manufacturers.
- As a result, the company had to reduce the prices of many of its products.
FY2017 annual report, page 4:
The Challenges: The Indian stationery market faced significant challenges during the year. One of the key factors that affected growth and profitability was the continued pressure on prices that started in December 2015. Low inflation throughout 2016 combined with lower commodity prices globally left little room for any price increase. Historically, the industry used to have a 4% – 5% price increase every year. but in 2016, prices had to be reduced in many categories. In other words. the only way to maintain growth was through volumes.
Another major challenge was the increasing competition in every category of the stationery market. Most players have expanded their presence into more categories to maintain growth. Due to global fall in commodity prices, the margin for small and unorganized players to import under their own brands became attractive which further ate into the share of organized players particularly for price elastic products.
Further advised reading: Understanding the Annual Report of a Company
As a result, an investor would appreciate that the Kokuyo Camlin Ltd operates in an industry that has a very tough business environment. As mentioned earlier, the intense cutthroat competition ensures that the manufacturers of stationery and related products get impacted whether the commodity prices go up or they go down.
When commodity/raw material/input costs go up, the players are not able to pass it on to their customers and as a result report lower profitability or losses. When commodity prices go down, then due to the resultantly increased competition, they have to reduce prices and again suffer on profitability.
As a result, investors would acknowledge that stationery & related products is not an easy industry to do business. Perhaps, similar thoughts might have been in the minds of the Indian promoters of Camlin Ltd (The Dandekar family) when they decided to give the majority stake in the company to Kokuyo Co. Ltd when the opportunity came in FY2012.
Operating Efficiency Analysis of Kokuyo Camlin Ltd:
a) Net fixed asset turnover (NFAT) of Kokuyo Camlin Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of Kokuyo Camlin Ltd in the last 10 years (FY2009-18), then she notices that the NFAT of the company has been continuously in the range of 5.75-6.50 over the years. The NFAT has declined to 4.84 in FY2018. However, this decline is a result of the capital expenditure done by Kokuyo Camlin Ltd on a new plant at Patalganga in Maharashtra, which started operations in FY2018.
FY2018 annual report, page 46:
The Company embarked on an ambitious integration strategy in 2013 when it started work on building its integrated manufacturing plant at Patalganga, MIDC, with an investment of approximately R 100 crores. Spread over 14 acres, the Patalganga plant is one of the biggest stationery plant in the Kokuyo Group and is a completely ‘Green’ plant. The plant was inaugurated by the Hon’ble Chief Minister of Maharashtra in April 2017 and is now operational in full swing, manufacturing over 200 SKUs. The Prime Minister of India has also sent his wishes for the Patalganga plant as a shining example of the Make in India initiative
An investor would appreciate that whenever a company starts a new manufacturing plant, then it may take some time before the plant reaches its optimal capacity utilization. As a result, during the initial phase, the expenditure done by the company on the manufacturing plant may not prove to be fully efficient. However, over time, the sales from the plant increase, which improves the efficiency ratios for the company.
Therefore, going ahead, if the production and the sales from the Patalganga reach its optimal utilization level, then the NFAT of Kokuyo Camlin Ltd may improve to match its historical trend.
b) Inventory turnover ratio of Kokuyo Camlin Ltd:
An investor would note that over the years, the inventory turnover ratios (ITR) of the Kokuyo Camlin Ltd has been declining. The ITR used to be 6.5 in FY2010, which has come down to 4.2 in FY2018.
Declining inventory turnover over the years indicates that Kokuyo Camlin Ltd is witnessing a reducing efficiency in its inventory management.
c) Analysis of receivables days of Kokuyo Camlin Ltd:
Over the years, Kokuyo Camlin Ltd has witnessed its receivables days deteriorate from 46 days in FY2010 to 63 days in FY2015. The deteriorating receivables days seem to corroborate the poor negotiating power in the hands of the company, which in the light of intensifying competition has to give higher credit period to the customers/supply chain.
When an investor looks at the inventory turnover and receivables days together, then she realizes that the business of Kokuyo Camlin Ltd is becoming working capital intensive year after year.
In such a scenario, an investor would expect that the cash flow from operations of the company would lag behind its profits indicating that most of the cash generated from business would be stuck in its working capital. However, when an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of the company for FY2009-18, then she notices that the company has been able to convert its profits into cash flow from operations.
Over FY2009-18, Kokuyo Camlin Ltd has reported a total cumulative net profit after tax (cPAT) of ₹25 cr. whereas during the same period, it reported cumulative cash flow from operations (cCFO) of ₹73 cr indicating that it has converted its profits into cash. The cCFO of Kokuyo Camlin Ltd is significantly higher than its cPAT primarily because of high depreciation (₹92 cr) and interest expenses (₹83 cr), which are deducted while calculating PAT, while these are added back to PAT when calculating CFO.
It is advised that investors should read the article on CFO calculation mentioned below, which would help them understand the situations in which companies tend to have the CFO lower than their PAT and the situations when the companies tend to have CFO higher than their PAT.
Further advised reading: Understanding Cash Flow from Operations (CFO)
Margin of Safety in the Business of Kokuyo Camlin Ltd:
a) Self-Sustainable Growth Rate (SSGR):
Further advised reading: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company
Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it is able to convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.
Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.
While analysing the SSGR of Kokuyo Camlin Ltd, an investor would notice that the company has consistently had a negative SSGR (0% to -22%) over the years. While studying the formula for calculation of SSGR, an investor would understand that the SSGR directly depends on the net profit margin (NPM) of a company.
SSGR = NFAT * NPM * (1-DPR) – Dep
- SSGR = Self Sustainable Growth Rate in %
- Dep = Depreciation rate as a % of net fixed assets
- NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
- NPM = Net profit margin as % of sales
- DPR = Dividend paid as % of net profit after tax
(For systematic algebraic calculation of SSGR formula: Click Here)
An investor would notice that the NPM of Kokuyo Camlin Ltd has been consistently very low and even negative (net losses) in the range of -3% to 4%. Therefore, the company consistently has a negative SSGR over the years.
As a result, an investor would appreciate that the company does not seem to have the inherent ability to grow from its business profits. However, the company has been growing at a rate of 8%-9% over the years. As a result, investors would appreciate that Kokuyo Camlin Ltd will have to continuously raise money from additional sources like debt or equity to meet its investment requirements.
Therefore, it does not come as a surprise to the investor when she notices that over the last 10 years (FY2009-18), Kokuyo Camlin Ltd had to raise additional funds by multiple sources:
- Debt (₹99 cr.): Total debt has increased from ₹39 cr. in FY2009 to ₹138 cr. in FY2018 (99 = 138 – 39)
- Equity (₹162 cr.):
- Preferential allotment to Kokuyo in FY2012 (₹59 cr): In FY2012, as a part of a deal to hand over majority shareholding to Kokuyo, the company allotted 6,934,000 equity shares on preferential basis at a price of ₹85/- per share. (6,934,000*85 = ₹58.93 cr)
FY2012 annual report, page 57:
During the year, the Company has alloted 69,34,000 Equity Shares of ₹ 1/- each at a price of ₹ 85/- per share (inclusive of Share Premium of ₹ 84/- per share) aggregating to ₹ 5,893.30 Lacs on Preferential basis to KOKUYO S&T Co., Ltd. on the terms and conditions approved by the Members at the Extra Ordinary General Meeting held on June 29th, 2011.
- Rights issue in FY2014 (₹103 cr): in FY2014, Kokuyo Camlin Ltd allotted 31,283,831 shares in the rights issue at ₹33 per share to raise ₹103 cr (31,283,831*33 = ₹103.24 cr)
FY2014 annual report, page 47:
On September 2nd, 2013 the Company pursuant to its rights issue of equity shares allotted 312,83,831 Equity Shares of face value of ₹ 1/- each to the eligible equity shareholders in the ratio of 14 equity shares for every 29 equity shares held on the record date i.e. August 2nd, 2013 at a price of ₹ 33/- per share (inclusive of Share Premium of ₹ 32/- per share). The aggregate amount collected pursuant to the rights issue was ₹ 10,323.66 lacs.
Therefore, an investor would appreciate that the poor business dynamics of the company limit the business growth that it can generate from its inherent profitability (as reflected by negative SSGR). As a result, in order to generate 8-9% of sales growth in the last 10 years, the company had to put in all its business profits and in addition, it had to put in ₹261 cr (99+162) of outside funds to support the business growth.
As discussed above, while reading the historical business performance of the company, an investor notices that this business has not developed this cash guzzling nature recently. When an investor reads the past annual reports (the company has annual reports from 2004 at its website), then she notices that in FY2008 as well, the company had to raise equity to fund its expansion plans.
In FY2008, the company raised ₹21 cr by issuing 1,200,000 shares of ₹10 each in preferential allotment to foreign institutional investors (FIIs) at a price of ₹175 per share (1,200,000*175 = ₹21 cr).
FY2008 annual report, page 41:
During the year, the Company has allotted 12,00,000 Equity Shares (which includes 3,00,000 Equity Warrants converted into Equity Shares) of Rs. 10/- each at a price of Rs. 175/- per share (inclusive of Share Premium of Rs. 165/- per share) issued to Foreign Institutional Investors aggregating to Rs. 2,100.00 Lacs under Chapter XIII of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 on the terms and conditions approved by the Members at the Extra Ordinary General Meeting held on 13 th September, 2007.
Further advised reading: Understanding the Annual Report of a Company
It indicates that the business of Camlin Ltd has been a continuous cash-consuming business ever since. As a result, the company had to frequently resort to equity dilution and additional debt to meet the growth requirements.
Therefore, it does not come as a surprise to investors that the company has a very irregular record of dividend payments and it has not declared any dividend since almost the last 8 years. The last dividend was declared by the company for FY2011.
An investor gets another evidence of the cash consuming nature of the business of Kokuyo Camlin Ltd when she analyses the free cash flow position of the company.
b) Free Cash Flow Analysis of Kokuyo Camlin Ltd:
While looking at the cash flow performance of Kokuyo Camlin Ltd, an investor notices that during FY2009-18, the company had a cumulative cash flow from operations of ₹73 cr. However, during this period it did a capital expenditure (capex) of ₹198 cr. As a result, it had a negative free cash flow of ₹125 cr. (198 – 73).
Further advised reading: Free Cash Flow: A Complete Guide to Understanding FCF
As per the discussion above, an investor would appreciate that Kokuyo Camlin Ltd raised an additional debt of ₹99 cr to met this cash flow gap. Investors would note that over the last 10 years, the company had debt on its balance sheet, which was consistently increasing. The company needed to pay interest on this debt. Part of the interest, which was capitalized by the company as a part of the project cost is already factored in the capital expenditure (capex) of ₹198 cr discussed above. Over and above the capitalised interest, Kokuyo Camlin Ltd had to pay additional interest of ₹83 cr, which was expensed in the P&L.
Therefore, an investor would appreciate that the total cash flow gap for the company comes out to be ₹208 cr (125 + 83). The company used debt and equity (preferential allotment and rights issue) to meet this cash flow gap.
Therefore, an investor would note that tough business dynamics of stationery and related products have led to a situation where the maintenance of a growth rate of 8-9% has gone beyond the inherent capabilities of the company. As a result, the company had to dilute its equity and raise additional debt.
In light of the above discussion, it seems that the Indian promoters of Camlin Ltd (The Dandekar family) might have been happy when they would have got the proposal to hand over the majority stake in the company to Kokuyo.
Free cash flow (FCF) is one of the main pillars of assessing the margin of safety in the business model of any company.
Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing
Additional aspects of Kokuyo Camlin Ltd:
On analysing Kokuyo Camlin Ltd, an investor comes across certain other aspects of the company:
1) Management Succession of Kokuyo Camlin Ltd:
An investor notices that the currently the majority shareholding is owned by Kokuyo Co. Ltd of Japan, which will be one of the sources of leadership in the company. Moreover, the Indian promoters (The Dandekar family), despite selling most of their shareholding in the company, are continuing in the management position.
- Mr. Dilip Dandekar is currently Chairman & Executive Director of the company.
- Mr. Shriram Dandekar is currently Vice Chairman & Executive Director of the company.
Therefore, investors would acknowledge that the Dandekar family continues to be a part of the key management team of the company.
While analysing the annual reports of Kokuyo Camlin Ltd, an investor notices that the next generation of the Dandekar family has also joined the business.
- Mrs. Aditi Dighe who is the daughter of Mr. Dilip Dandekar and is currently working as the General Manager – Marketing in the company.
- Mr. Rahul Dandekar who is the son of Mr. Dilip Dandekar and is currently working as the Deputy General Manager – Marketing in the company.
FY2018 annual report, page 177:
Mr. Subhash. Dandekar: Chairman Emeritus and brother of C & ED
Mrs. Aditi Dighe: General Manager – Marketing (Colour Group 2) and daughter of C& ED
Mr. Rahul Dandekar: Deputy General Manager – Marketing and son of C& ED (from 13 November 2017)
It indicates that the company has put in place a management succession plan in which the new generation of leaders are being groomed in business while the senior members are still playing an active part in the day-to-day activities.
Presence of a well thought out management succession plan is essential in businesses as it provides for smooth transition of leadership over the generations and provides continuity in the business operations of any company.
Further advised reading: Steps to Assess Management Quality before Buying Stocks
2) When Promoters prefer being Employees rather than Owners of the Company (i.e. prefer paycheques to the dividend cheques):
While analysing the past business performance and related aspects, an investor gets interesting insights about the faith of Indian promoters in their ownership of the company founded by their elders about 75 years back.
The investor finds that the Indian promoters of the company seem to have realized that the stationery and related business is too tough to make money as owners of the company. An investor would acknowledge from our discussion above that the business performance of the company has been very challenging. Despite all efforts of the management, the company could not avoid losses. Despite a huge amount of investment in plant & machinery as well as in advertising & promotions, the company is not able to ensure consistent profitability.
The company suffers when raw material/commodity prices go up as it lacks the pricing power to pass on increased costs to customers. The company suffer again when the commodity prices go down as the already cutthroat competition intensifies further and the company has to reduce the prices of its products.
The company’s business has been consuming cash at a fast pace. Apart from entire business profits, the company consistently has to feed the business with additional funds from debt as well as equity just to maintain nominal growth of 8-9%. Despite such significant funds infusion, the business has not generated surplus cash for its shareholders.
Investors would appreciate that the phase of shareholders consistently putting in money in the company to generate growth due to lack of sufficient business profits seems justifiable in startup companies, which are yet to prove their business idea. This situation of consistent equity infusion seems strange for a business, which has a history of more than 85 years.
Without a doubt, this is a tough business to operate and the promoters seem to be happy to let the Japanese company Kokuyo take up majority stake when the opportunity came in FY2012. Kokuyo infused money in the company by preferential allotment as well as gave an opportunity for the promoters to sell a significant portion of their holding at a premium to the prevailing market price.
FY2012 annual report, page 15:
- On July 8, 2011, Kokuyo put in money in the preferential allotment of shares of the company (10% stake) at a price of ₹85/- per share when the prevalent market price of the company was ₹72.5.
- On October 13, 2011, Kokuyo purchased additional shares in the open offer (20% stake) and purchased 20.27% stake from Indian promoters at ₹110/- when the market price was ₹45.65.
However, the stake sale by the Indian promoters did not stop on October 13, 2011, when they sold their 20.27% stake to Kokuyo. The Indian promoters kept on selling their stake to Kokuyo year after year. During FY2014, when the company came out with the rights issue, then investors may notice that only the stake of Kokuyo Co. Ltd went up in the company from 50.5% in FY2013 to 65.8% in FY2014. During the year of the rights issue, the stake of Indian promoters declined from 13.4% in FY2013 to 9.2% in FY2014. It indicates that the Indian promoters did not participate in the rights issue.
It seems that the Indian promoters have decided to completely exit from the company as shareholders as they are continuously selling their stake to Kokuyo year after year and as disclosed below and their current stake in the company at meagre 0.6%.
Further advised reading: Steps to Assess Management Quality before Buying Stocks
An investor would appreciate that since the sale of the majority stake, the Indian promoters of the company have only earning salary/remuneration from Kokuyo Camlin Ltd as the company has not declared any dividend due to meagre profits.
Looking at the above table, the investor would notice that selling their stake in the company, the remuneration of the Indian promoter has been consistently on the rise. The total remuneration taken by the Indian promoters from Kokuyo Camlin Ltd has consistently increased year on year from ₹1.9 cr in FY2013 to ₹3.2 cr in FY2018.
This is despite the fact that the profitability of Kokuyo Camlin Ltd has been very fluctuating during these years. The company reported losses in FY2013 and FY2014 and the company reported a significant decline in profitability in FY2017. However, it seems that by selling a stake in the company and taking over the role of employees, the Indian promoters have ensured that their economic benefits stay healthy irrespective of the financial/business performance of the company.
Previously, when the Indian promoters were the largest shareholders of the company, then their payout from the company depended a lot on the business performance of the company. This is because payouts to promoters like dividend are determined by the board of directors based on the company’s financial performance. However, now as employees of the company, they seem to have ensured a healthy payout whether sufficient profits are there or not. In case of insufficiency of profits, the company took approval from the central govt. to provide them remuneration above the normal statutory limits.
FY2016 annual report, page 76:
Based on the records examined by us and according to the information and explanations given to us and as described in note 26 (d) to the financial statements, the managerial remuneration paid /provided by the Company to one of its directors is in excess of the amounts specified in section 197 of the Act read with Schedule V of the Companies Act. As described in the aforesaid note, the Company is in the process of applying to the Central Government for the necessary approval of the same.
FY2017 annual report, page 150:
Due to inadequacy of profits, the Company has filed an appication with Central Government for approval of revised Managerial Remuneration effective from 10February 2016 and is awaiting approval.
Further advised reading: How to identify Promoters extracting Money via High Salaries
Based on above discussion, it seems that the Indian promoters after running the business for about 80 years decided that they are better off being employees of the company and taking a healthy payout as salary/remuneration instead of being owners of the company and facing the uncertainty of dividends by taking the business ownership risks. As a result, after Kokuyo took a majority stake in the company in FY2012, the Indian promoters sold almost their entire shareholding in the company to Kokuyo over the recent years.
It indicates that the Indian promoters have lost faith in owning this business or find the ability to produce profits too uncertain that they have finally chosen the certain of pay cheques over the uncertainty of dividend cheques from the company.
Further advised reading: How to know if Promoters are Losing Commitment to the Company
3) Camel and Camlin very expensive brands to maintain:
Kokuyo Camlin Ltd owns brands that are very well-known, old and established brands in India: Camel and Camlin. Therefore, an investor would expect that the company should easily charge its customers appropriate prices to protect its profits.
However, the above discussion about the very low pricing power of Kokuyo Camlin Ltd indicates that the company is not able to price its goods properly at its wish to maintain its profitability. Instead of enjoying healthy profitability due to established brands, at times, Kokuyo Camlin Ltd finds it tough to avoid losses. This business behaviour puts under question the utility of brands for the business.
When an investor analyses the amount of advertisement and sales promotion expenses done by Kokuyo Camlin Ltd to maintain these brands, then she realizes that the company is spending a large amount of money on these brands.
An investor would appreciate that the key reason for any company to spend money on advertising, sales promotions and branding is to generate higher profits. Otherwise, the entire advertising spend is money up in smoke (i.e. wasted).
Since FY2010, in the next eight years (FY2011-2018), Kokuyo Camlin Ltd spent an amount of ₹160 cr on advertisement and sales promotions. However, if the investor notices the result of this expense of ₹160 cr on the profits of the company, then she realizes that in concrete profitability terms, there is no value addition.
In FY2010, the company had reported a net profit after tax of ₹12 cr. After spending additional ₹160 cr on advertisement and promotions over the next eight years (FY2011-18), the net result was that Kokuyo Camlin Ltd.’s profits had declined to ₹10 cr in FY2018.
An investor may believe that the spending of ₹160 cr on advertising, sales & promotions is not entirely wasted. It has kept the brand alive in customers’ mind and in turn, has resulted in the customer choosing to buy Camel/Camlin products when she entered the shop. In the absence of this spending, the customer may have believed that the brands Camel/Camlin are no longer in the market and as a result; she would have bought products of other competitors.
The investor is right in the above assumption that the advertisement spending has led to the company earning its sales revenue. However, this spending has not led to the generation of profits. In fact, despite advertising, the company had to sell goods at prices where it is not able to make profits.
The investor is right in assuming that if the advertisement spending is stopped, then the sales of the company will witness a decline and over time, it may find itself out of business. This aspect of the business brings forward another face of the challenges of Kokuyo Camlin Ltd. The company has to keep spending a huge amount of money on advertisement to just stay in the business.
The company’s situation is like a player who has to keep running on a fast-moving treadmill to stay in the game irrespective of the fact whether the player has the energy/stamina/ability to bear this hardship or not. The moment the player decides to take a break or slow down the speed of the treadmill, then she is out of the competition.
From the above discussion, an investor would appreciate that Kokuyo Camlin Ltd has to keep spending money on advertisement to stay in business irrespective of the fact whether it is making sufficient profits from its business to spend this money on advertisement. The company may have to raise debt, dilute equity (i.e. beg, borrow or steal), but the advertisement spending is necessary to be in the business. Otherwise, the brand will be out of the customers’ mind and the sales will decline. The high advertisement spending by the companies in this business of very low pricing power seems a necessary expense whether the companies are able to make profits or not.
No wonder that the brands Camel and Camlin are very expensive to maintain!
Further advised reading: How to do Business Analysis of a Company?
4) The company starts a new business; the promoters being the managers run the business to the ground and then buy it themselves from the company at one-tenth of the investment:
While analysing the past business performance of the company, an investor notices that the company had started a new business line of pre-schools in FY2010. The company formed a wholly owned subsidiary, Camlin Alphakids Limited for this purpose and opened the preschool business in collaboration with “Headstart Parade” an early child development centre.
FY2010 annual report, page 29:
The Company has ventured into pre-school activity through, a 100% Subsidiary – Camlin Alphakids Limited. A model pre-school was opened in Andheri, Mumbai in collaboration with Headstart–Parade an early child development centre. This is not just a school but a medium to create awareness about drawing, painting and other extracurricular activities.
The management of the company was enthused by this new initiative and wanted to grow it to be a new revenue line. The Chairman of the company informed in its address to shareholders that the company has opened one pre-school in Andheri in FY2010 and it planned to open two more in Mumbai region in Thane and Kharghar soon.
FY2010 annual report, page 5, Chairman’s message:
New business opportunity: We serve India’s education space. We have closely followed the education opportunity in India. Within this, we feel there is a good opportunity to grow the pre-school space. Camlin has made a modest beginning by starting our own pre-school called Alphakids in Andheri, Mumbai. The response has been extremely encouraging. Consequently, we will be opening 2 more pre-schools in 2010-2011 in Thane and Kharghar respectively. Going forward, we intend to grow this business and create another revenue stream for Camlin shareholders.
The company was very bullish on pre-school business and started putting additional money in the subsidiary to grow the business.
FY2011 annual report, page 44:
The money was being put in the subsidiary in the form of equity (common shares and preferred shares) as well as interest-free loans.
FY2012 annual report, page 53:
The subsidiary was not making money and the company justified the investments stating that the management of the company is getting very good experience in running the pre-school business. FY2013 annual report, page 14:
The Companies subsidiary viz Camlin Alphakids Limited which is in the pre-school business incurred an operational loss of ₹ 161.87 lacs. The pre-school is in the fourth year of its operation. The Management of this subsidiary has got a good experience and learning from the past operations and the business is being restructured to ensure an early turnaround.
When an investor might have thought that the monetary and time investment is done by the company in the pre-school business would be bearing fruits, the company informed the investors that it is no longer interested in running the preschool business in which it had invested ₹5.35 cr as the business is making losses.
FY2014 annual report, page 17:
DISINVESTMENT OF ENTIRE STAKE IN 100% SUBSIDIARY CAMLIN ALPHAKIDS LIMITED (NOW ALPHAKIDS LEARNING AND ACTIVITY CENTRE LIMITED): Your Company had ventured into the business of running pre-schools in the year 2009 and had set up a wholly owned subsidiary namely Camlin Alphakids Limited. Unfortunately since inception, this business has been incurring huge losses & had never turned around. In the past 5 years, the financials have been EBIDTA negative and have been continuously seeking funding from the parent Company. Till FY 13-14 your Company had invested a total sum of ₹ 535.32 Lacs, out of which by way of equity & preference capital of ₹ 230.00 Lacs and advances of ₹ 305.32 Lacs, a significant portion of which was towards funding of the losses.
Moreover, the company intimated the shareholders that it is selling the business to promoters at one-tenth of the investment value i.e. the company received a total of ₹50 lac in sales consideration for the total investment done of ₹5.35 cr.
FY2014 annual report, page 17:
In April, the entire stake of equity & preference shares amounting to ₹ 230.00 Lacs was sold to one of the promoter Mr. Dilip Dandekar along with his family members and associate company for a total consideration of ₹ 50.00 Lacs. The consideration was finalised based on an independent valuation. Camlin Alphakids Limited ceases to be subsidiary with effect from 1 st April, 2014.
An investor would appreciate that many times companies sell businesses, which are not making money. Even Camlin Ltd has taken such a decision in the past like in FY2005 when the company decided to exit the pharmaceutical business. However, in the case of pharmaceutical division, the business was sold/handed over to a third party, Liva with the stock, receivables as well as transferring all the employees.
Management has carried out SWOT Analysis of Pharmaceutical Division which solely consisted of marketing activities and in order to pre-empt incurrance of further losses, Management has decided to substantially restrict the operations of this Division w.e.f. 1 st April, 2005. As per the understanding reached between the Company and Liva Healthcare Limited (Liva) in this regard, all stocks have been taken over by Liva, except a small stock of Oncology Products, which shall be liquidated by the Company during the current year. All employees of Pharmaceutical Division have been taken over by Liva with continuity in service. Liva has been arrange for recovery of receivables of the Division.
The case of sale of Alphakids to the promoters of the company at a fraction of the invested value creates a difficult situation. It is akin to seeding the new business and waiting out the initial tough establishment phase of the new business within the company at its cost and once the initial phase is over, then buy the business at a fraction of the cost.
Further advised reading: How to Identify if Management is Misallocating Capital
Currently, as per the website of Alphakids, it has expanded to Mumbai, Bangalore, Hyderabad, Kolhapur and Pondicherry.
As per the information available on the Alphakids website, the promoter family (Dandekars) still runs the business and it has attracted investment from Goenka group:
Alphakids International Preschool is one of the most renowned preschool chains in India and is ranked among the top 4 by Education World in its latest survey. It is promoted by one of the founding families of Camlin Pvt. Ltd., and the Goenka Family who are co promoters of a premium international school and college in India.
5) Investment in multiple businesses written off by the company over the years:
When an investor analyses the business activities of the company over the years (since FY2004), then she notices multiple instances where the company started business activities, established subsidiaries, partnerships, marketing tie-ups etc. However, the company existed almost all of them at a later stage.
We have already discussed two such instances: pharmaceutical division (FY2005) and pre-school business (FY2014) above. Let us look at a few other instances:
a) ColArt Camlin Canvas Pvt. Ltd:
In FY2006, Camlin Ltd formed a joint venture with ColArt Fine Art and Graphics Ltd. of UK for the manufacturing and export of canvas products. ColArt Camlin Canvas Pvt. Ltd established a manufacturing plant in Tarapur that started functioning in April 2006. (FY2006 annual report, page 5):
During the year, the Company entered into a Joint Venture with ColArt Fine Art and Graphics Ltd., UK for the manufacture and export of Canvas products. ColArt Fine Art and Graphics Ltd. UK is a world leader in the Art Material segment having presence in more than 15 countries. The joint venture Company has started commercial production and exports since April 2006.
However, within a few years of the start of the JV, in FY2011, the company disclosed that the JV has been making losses and all the attempts to restructure the business/revive the investment have failed. The company wrote-off its investment in the JV in FY2011.
FY2011 annual report, page 51-52:
Investment in/advances to Associate Company: The Company holds shares in ColArt Camlin Canvas Pvt. Ltd. at a carrying cost of ₹ 52.20 Lacs and has given advance (including interest accrued thereon) of ₹ 54.47 Lacs to the said Company. The net worth of the said Company stands eroded by accumulated losses. The turnaround business plans have failed to bear fruition. Therefore, provision is made for decline the value of investments as also for the apprehended non-realisability of the advance. Accordingly, as amount of ₹ 106.67 Lacs is provided in the Profit and Loss Account and shown as an exceptional item therein.
Further advised reading: Steps to Assess Management Quality before Buying Stocks
b) Camlin North America, Inc., U.S.A:
As per FY2004 annual report, Camlin Ltd started a business in the USA from Oct. 2003 via its wholly owned subsidiary Camlin North America, Inc. USA.
FY2004 annual report, page 5:
Camlin North America, Inc., U.S.A., a wholly owned subsidiary, started its commercial activities in October, 2003. Management expects the operations to reach satisfactory level during the current year.
In FY2013, the company wrote off the entire investment done in this subsidiary. (FY2013 annual report, page 50):
During the year, the Company had taken a decision to wind up the operations of its 100% subsidiary, Camlin North America Inc. and the carrying cost of investment in the said subsidiary was fully provided for. The said investment, having received necessary approvals, has been fully written-off during the year 2012-13.
c) Camlin International Limited:
As per FY2004 annual report, Camlin Ltd was exporting to South Korea via Camlin International Limited.
FY2004 annual report, page 5:
Camlin International Limited, a wholly owned subsidiary, exported Rs. 42.13 Lacs worth of goods, to South Korea and earned a net profit of Rs. 4.40 Lacs, Directors have recommended maiden dividend of 30% for the year ended 31 st March, 2004.
However, it seems that the company stopped this activity in FY2008. This is because, in FY2018, Kokuyo Camlin Ltd decided to write-off all its investment in Camlin International Limited and stated that it had not done any business activity for the last 10 years.
FY2018 annual report, page 21:
M/s. Camlin International Limited, wholly owned subsidiary of Kokuyo Camlin Limited was not engaged in any business operations for over 10 years. Hence, it has made an application on 30 th March, 2018 to the Registrar of Companies for striking off the Company by removal of name from the Register of Companies. The final approval from the Registrar of Companies is awaited.
It may seem like a situation where the promoters/management of the company has started many new initiatives/businesses, failed in them and then kept on exiting/closing them down one after another. The sequences seem to end now when they have sold off their almost entire stake in the main entity (Camlin Ltd/Kokuyo Camlin Ltd) and have settled to be employees rather than shareholders.
Further advised reading: How to Identify if Management is Misallocating Capital
6) Investing money in other listed companies while the company’s own businesses need money:
By reading the discussions in the article until now, an investor would appreciate that the core business of Camlin Ltd has been very cash consuming. The company has to resort to additional debt and equity funding to meet the cash shortfall. In addition, the company has to close down its other business initiatives for the want of funds.
However, at the same time in FY2011, the company invested additional money in Camlin Fine Chemicals Ltd (probably by subscribing to the rights issue with a record date of August 2, 2010)
FY2011 annual report, page 44:
An investor would appreciate that at a time when the company’s core business along with other initiatives like pre-schools etc. need a lot of cash, then it may not be the best decision to invest money in other listed entities.
Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?
7) Suboptimal capital allocation decisions by Kokuyo Camlin Ltd:
When an investor analyses the business profits generated by the company for its shareholders over the years (FY2012-2018), then she notices that Kokuyo Camlin Ltd has not done a great job. The following table indicates that the pretax return generated by the company on its equity has been consistently low.
The pretax business return generated by Kokuyo Camlin Ltd on the equity provided by shareholders is about 1%-3% over the years with negative returns in FY2013-FY2014. The pretax return has only recently increased to 6% in FY2018.
An investor notices that in the Indian context, shareholders can invest their money in a risk-free manner to earn a pre-tax return of 7.51% provided by Government of India Securities 10-Years (2028) (Source: RBI Website on April 11, 2019).
The next best risk-free alternative of deploying money, a fixed deposit with State Bank of India (SBI) offers an interest rate of 6.85% (pre-tax return) on deposits exceeding ₹10 cr. (Source: SBI website on April 11, 2019)
An investor would note that a pretax (PBT) return of 1%-3% over the years with negative returns in FY2013-FY2014, which is generated by earned by Kokuyo Camlin Ltd on its equity is low when compared to other hassle-free and risk-free avenues like govt. securities or fixed deposits with banks.
Therefore, an investor may notice that instead of investing the money in the company, taking the business risk of creating large plants & machinery, the added stress of selling the products in the market, an investor may simply invest the money in govt. securities or fixed deposits and earn a higher return.
Further advised reading: How to Identify if Management is Misallocating Capital
Margin of Safety in the market price of Kokuyo Camlin Ltd:
Currently (April 10, 2019), Kokuyo Camlin Ltd is available at a price to earnings (PE) ratio of about 59.5 based on standalone earnings of the last four quarters from January-December 2018. The PE ratio of 59.5 does not provide any margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- Further advised reading: 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- Read: How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Further advised reading: Hidden Risk of Investing in High P/E Stocks
Overall, Kokuyo Camlin Ltd seems like a company, which has been growing its sales at 8-9% year on year in a very competitive industry. The sales growth has not translated into the growth of profits for the shareholders. Kokuyo Camlin Ltd operates in an industry where most of the products are a commodity in nature and a customer can easily replace the product of one company with the product of another company without much impact on the utility. As a result, Kokuyo Camlin Ltd has very low pricing power in the business.
The intense competition in the stationery manufacturers from both organized and unorganized sectors along with the cheaper imports have ensured that whenever inputs/raw material prices go up, the company’s profits take a hit. There have been multiple instances in the past when Kokuyo Camlin Ltd reported losses because it could not pass on the increase in input costs to its customers. Moreover, the competition in the industry is so intense that at the time of declining commodity prices also the companies are not able to enjoy high profits. This is because the competition from unorganized players and dumping from imports increases and as a result, the Kokuyo Camlin Ltd has to reduce prices of its products. Therefore, the company suffers both in times of rising and declining raw material prices.
Investors may have an impression that the brands owned by Kokuyo Camlin Ltd, Camel and Camlin are very well-known, old and established brands. Therefore, the company may have the ability to charge higher prices and in turn enjoy superior profitability. However, upon analysis, investors come to know that these brands are in fact very expensive to maintain where the company has to spend a very high amount on advertising & sales promotions, which does not lead to superior profits. Investors saw that over FY2011-2018, Kokuyo Camlin Ltd spent ₹160 cr on advertising & sales promotions whereas, despite all this spending, the net profit of the company declined from ₹12 cr in FY2010 to ₹10 cr in FY2018.
The business of Kokuyo Camlin Ltd, stationery & related products has proved to be very cash consuming over the years. The requirement of funds to achieve a sales growth of 8-9% year on year has proved to be beyond the inherent cash generating ability of the company. As a result, the company has to resort to additional debt and equity funding to meet the fund requirements. The company has witnessed an increase in debt over the last 10 years. Moreover, it has raised equity funds multiple times in the past, e.g. rights issue in FY2014 and preferential allotment in FY2012 and FY2008. The continuous requirement of the cash in the business has ensured that the company has not paid any dividend after FY2011.
The high cash requirements of the business & brands, suboptimal returns on the investments, inability to ensure consistent profits seem to have led to the founder Indian promoter family giving up control over the shareholding to a Japanese company (Kokuyo Co. Ltd.). Ever since Kokuyo acquired a majority stake in the company in FY2012, the Indian promoters have shown signs that they are no longer interested in being the owners of the business.
Currently, the Indian promoters are working as employees in the senior management Kokuyo Camlin Ltd and are earning salary/remuneration from the company. They did not participate in the rights issue in FY2014 and they have been consistently selling their stake to Kokuyo year after year. Currently, their stake in the company has come down to 0.55%. The Indian promoters seem to be happy with this situation where they are able to get a paycheck from the company instead of relying on uncertain dividend cheques.
Multiple decisions of the Indian promoters need to be kept in mind by investors before they make up any final opinion about Kokuyo Camlin Ltd. These include the failure of multiple business initiatives with the complete write-off of investments. The sale of the pre-school business by the company to the promoters at a fraction of invested amount is also another such decision. An investor may believe that with a change in the ownership, the company will have fewer such decisions. However, an investor may note that the two key executive positions of Chairman and Vice Chairman are still occupied by the Indian promoter family and the probability of similar decision in future cannot be completed denied.
We believe that going ahead; investors should keep a close watch on the profitability of Kokuyo Camlin Ltd, debt levels and the related party transactions. In case, investors notice that the profitability of the company does not improve and the cash requirements of Kokuyo Camlin Ltd are not coming down, then they make take a decision accordingly.
Further advised reading: How to Monitor Stocks in your Portfolio
These are our views on Kokuyo Camlin Ltd. However, investors should do their own analysis before taking any investment related decision about the company.
You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”
Hope it helps!
Dr Vijay Malik
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- We have used the financial data provided by screener.in and the annual reports of the companies mentioned above while conducting analysis for this article.
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Registration Status with SEBI:
I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013
Details of Financial Interest in the Subject Company:
Currently, I do not own stocks of the companies mentioned above in my portfolio.