Analysis: India Glycols Ltd

Modified on May 21, 2020

The current section of the “Analysis” series covers India Glycols Ltd, an Indian company manufacturing glycols, ethylene oxide derivatives using renewable raw material (alcohol, molasses), guar gum derivatives, alcohol & spirits, industrial gases, and nutraceuticals.

“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.

 

India Glycols Ltd Research Report by the Reader (Chetan Kumbhar)

Dear Vijay Sir,

It is a great learning experience to go through your analysis of companies. These articles provide not only the company analysis but also teach me the way to analyze any company.

Following your footsteps, I have carried the company analysis of India Glycols Ltd. It has a future application product and Coca-Cola is one of their big customers.

Please find attached the company analysis. I request you to provide your insight into this study.

Regards,

Chetan

 

Introduction of India Glycols Ltd:

India Glycols Ltd holds the distinction of being the only green petrochemical company of its kind. It is one of the leading manufacturers of glycols, ethoxylates and PEGs, performance chemicals, glycol ethers and acetates, natural gums and potable alcohol.

Subsidiaries:

As on 31st March 2019, India Glycols Ltd had four (4) subsidiaries and one (1) joint venture company

  • Shakumbari Sugar and Allied Industries Limited (the company is looking to sell this subsidiary)
  • IGL Finance Limited
  • IGL Chem International Pte. Ltd.
  • IGL Chem International USA LLC
  • Kashipur Infrastructure and Freight Terminal Private Limited

 

1. Financial Analysis of India Glycols Ltd:

a) Analysis of profit and loss statement:

a.i) Sales Growth:

India Glycols Ltd 2010 2019 Sales And Profit Margins

  • Sales have grown from ₹1,198 Cr in 2010 to ₹3,357 Cr in 2019 at CAGR of 12%.
  • OPM% is varying from 5% to 12%
  • NPM% was negative for so many years. However, in recent years, it has improved and has remained constant for the last 4 years. However, the margin is very thin.

There is a very steep fall in OPM% in 2014, for which the company directing towards a global economy, ethanol-blending program, which resulted in poor availability of alcohol (AR2014 P 16). The same saga continued for 2015 and 2016. Company had a negative profit for these years. However, to remove the dependency on ethanol, the company started the import route and the same is continuing from the last 4 years (AR2017 P13).

In AR 2016 P19, the company talk about the performance of the Company remained weak because of lower Monoethylene Glycol (MEG) cost. As oil prices increased in 2018 and 2019, the company has made profits.

This shows company profit is inversely proportional to the crude oil price.

Recently, the company is showing good profit which is from the liquor business revenue and due to high crude oil prices.

Therefore, the Sales and Profit Company wholly depend on global demand and crude oil prices. Which can be related to oil price and company profit

Query: As per screener sales for 2019 is 3357 cr but as per the annual report, it is 5116 cr. Which one is right?

Due to negative profit, the company did not give any dividend for 2015 and 2016 year. In addition, MD and WTD decreased their salaries. This is a good sign.

However, when profit increased the divided has been paid. This shows a promoter thinks about the minority shareholders.

 

a.ii) Tax payout ratio of India Glycols Ltd:

India Glycols Ltd 2010 2019 Tax Payout Ratio

You can see that the company is paying taxes at the rate of corporate tax.

 

a.iii) Interest coverage:

The company’s interest coverage ratio on an average is below three, which is not a good sign. However, in the last 4 years, the company is increasing its ratio. This is due to an increase in profit and a reduction in debt.

 

b) Analysis of balance sheet of India Glycols Ltd:

b.i) Debt to Equity Ratio (DE Ratio):

The debt to equity ratio was high during 201-2015, but the recent company has maintained a ratio less than 1. There is a sudden decrease in the ratio in 2016; this is due to ₹750 cr advance received from the customer. This shows that the company has long-term contracts with the customer to supply the products.

The company received a long-term export advance in FY16 due to that debt reduced. This also shows that the company has long-term customer agreement, which has locked with advance payment.

 

b.ii) Inter Company Deposits (ICDs) by India Glycols Ltd:

The company has given many ICDs to its own subsidiary and associates companies. I am unable to decode these transactions. Even in some of the annual reports, the company has waived off loans of ₹191 cr (AR 2018-19, P92). I request you to help me with the concepts of ICDs. Please also guide how to trace these transactions.

 

c) Analysis of cash flow statement of India Glycols Ltd:

Total cumulative profit for 10 years is ₹111 cr and cCFO is ₹2,511 cr. I can understand that inflated CFO in 2016 and 2018 is due to working capital change. In addition, when the company had a good amount CFO, then it tried to pay its loans. How do you interpret this? In addition, what to conclude from this?

 

2. Operating efficiency analysis of India Glycols Ltd:

a) Net fixed asset turnover (NFAT):

Fixed Asset Turnover ratio decreased in 2014 and 2015, but again increasing from the last 3 years. The fall in the ratio in 2014 is due to sales decline and that is due to a steep fall in guar gum prices. (AR 2014). However, recently, it is improving for the last 4 years.

 

b) Inventory turnover ratio:

Inventory Turnover Ratio is increasing in recent years; it shows there is an improvement in inventory management. However, in 2019 the inventory decreased again. Overall, management is focusing on improving inventory management.

 

c) Analysis of receivables:

Receivable days are decreasing this shows company able to collect cash from customer, which is good.

 

3. Self-Sustainable Growth Rate (SSGR) of India Glycols Ltd:

It falls in the category, which is SSGR less than growth rate and still company able to decrease debt with growth.

We can see that the Self Sustainable Growth Rate (SSGR) of the company is about 0%. However, the company has been growing at about 12% over the last 10 years. A comparison of past sales growth with SSGR would indicate that excess sales growth should have been funded by debt. It has been true in the past as we can see that the debt levels of India Glycols Ltd have increased from INR 1306 cr. in FY2010 to INR 2264 cr. in FY2015.

However, the improved inventory turnover in recent years from 4.5 to 5.2 has released the capital stuck in working capital. This has led to the generation of excess cash by way of cCFO over the last 4 years of INR 2182 cr. (1231+302+502+147) than cPAT of INR 207 cr. (-57+35+97+133) over the same period. The cash released from working capital could be used by the company to reduce its debt over the last 4 years from INR 2264 cr. to INR 1000 cr.

 

4. Management Analysis of India Glycols Ltd:

a) Check Promoters’ Background:

Nothing doubtful is found about the promoters

 

b) Promoter’s salary:

Promoters increased the salary if there is profit and decrease when there is no profit. This we have seen the previous finding as mentioned

 

c) Related Party Transactions of India Glycols Ltd: (Inter-corporate deposits):

The company has given many inter-corporate deposits (ICDs) to its own subsidiary and associates companies, also they have waived off loans of 191 cr (AR 2018-19 P92).

India Glycols Ltd is giving money to SSAIL, which is not operational now and they are looking to sell it. However, they are spending ₹9.64 cr each year.

Every year, India Glycols Ltd is increasing the receivables from its related parties. This shows that the company is diverting money through related party transactions.

Until March 2019, the company has receivable from related party stands to ₹207 cr. Please request you to give me more details on learning the related party transactions.

 

d) Pledging of Shares by India Glycols Ltd.

Recently, promoters have pledged 83% shares in Sept 2019.

I sent an inquiry mail to the company to get the reason for this pledging but they have not replied. In addition, I tried to contact them; but they are just postponing it.

In addition, FIIs have reduced their holding in the company.

 

e) Stock prices of India Glycols Ltd:

Recently there is a surge in volume and stock price. On 16 Jan, it went in the upper circuit. The reason is unknown. It might to due to a rise in crude oil prices and due to that; there might be heavy demand in bio MEG.

 

5. Valuation Analysis of India Glycols Ltd:

  • Price to earnings ratio (P/E ratio): Current PE is seven. Looking at the last 3 years’ PE ratio, the current PE is less. Looking at the future use of bio-glycol in all green PET bottles, this PE ratio is less. This may be re-rated to a PE ratio of 15.
  • Price to book ratio: PB ratio is less than one. This also gives an edge. Normally, the standard PB ratio should be three.
  • EV/EBITDA is four. This also is less than the standard of six.

Regards,

Chetan

 

 

Author’s Response

 

 

Hi Chetan,

Thanks for sharing the analysis of India Glycols Ltd with us! We appreciate the time & effort put in by you in the analysis.

While analyzing the past financial performance data of India Glycols Ltd, an investor would notice that the company has four subsidiaries and one joint venture company. As a result, India Glycols Ltd provides both standalone financials as well as consolidated financials in its annual reports.

Ideally, we believe that while analysing any company, an investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire group. Consolidated financials of any company present such a picture. Therefore, we have analysed the consolidated financials of the company.

Further advised reading: Standalone vs Consolidated Financials: A Complete Guide

Let us analyse the financial and business performance of the company over the last 10 years

India Glycols Ltd Financials FY2010 FY2019

 

 

Financial and Business Analysis of India Glycols Ltd:

While analyzing the financials of India Glycols Ltd, an investor would note that in the past, the company has been able to grow its sales at a rate of 10%-12% year on year. Sales of the company increased from ₹1,198 cr. in FY2010 to ₹3,357 cr in FY2019. Moreover, the sales have increased to ₹3,454 cr in the 12 months ending Dec. 2019 (i.e. Jan 2019-Dec. 2019).

In the last 10 years (FY2010-2019), the sales growth of the company has been highly fluctuating. The company witnessed an increase in sales initially from ₹1,198 cr to ₹3,423 cr in FY2010-FY2013. However, then the sales declined sharply to ₹2,324 cr by FY2016. Afterward, the sales recovered gradually to ₹3,454 cr in 12 months ending Dec. 2019 (i.e. Jan 2019-Dec. 2019). Such kind of sales performance indicates to an investor that the business performance of the company is exposed to cyclical factors.

While analysing the profitability of the company, an investor would notice that the operating profit margin (OPM) of India Glycols Ltd has also fluctuated significantly over the years. The OPM of the company improved from 6% to 12% over FY2010-FY2012. Subsequently, the OPM declined sharply to 5% by FY2015. Thereafter, the profitability of the company started improving and the OPM improved to 12% by the 12 months ending Dec. 2019 (i.e. Jan 2019-Dec. 2019).

When an investor notices such kind of cyclical performance in both the sales as well as profitability, then she acknowledges the need for a deeper understanding of the business of India Glycols Ltd to understand the factors influencing the business performance of the company. This is because, once an investor has understood the key factors for India Glycols Ltd, then she would be able to have a view about the expected future performance of the company.

An investor would acknowledge that annual reports of any company are the best resource to understand its business dynamics. India Glycols Ltd has provided its annual reports from FY2007 to FY2019 in the public domain.

Further advised reading: How to Read the Annual Report of a Company

An investor gets the following insights about the evolution of the business of the company after reading these annual reports.

Over the years, the company has delved into the following key business segments:

  1. Glycols [Monoethylene Glycol (MEG), Diethylene Glycol (DEG), Triethylene Glycol (TEG) and Heavy Glycols]) and Ethylene Oxide Derivatives (EODs)
    • The company has been able to shift production from Glycols to EODs and vice-versa based on the business environment.
  2. Guar gum products/derivatives
    • The company has shifted from food grade guar gum products to other derivatives specific for the oil exploration/shale oil industry.
  3. Ethyl alcohol (Potable), extra natural alcohol (ENA) and power alcohol.
  4. Smaller segments like:
    1. Nutraceuticals and herbal extraction,
    2. Industrial gases etc. and
    3. Private freight terminal at Kashipur

An investor needs to understand the dynamics of the large business segments of the company to have an overall perspective of the company.

 

A) Glycols and Ethylene Oxide Derivatives (EODs):

Glycols segment is the most important segment for the company. The major production of glycol is by using crude oil derivatives as raw material. However, India Glycols Ltd produces glycol using biodegradable/green raw materials of alcohol or molasses and targets customers who wish to make their products using environment-friendly chemicals.

FY2009 annual report, page 22:

Meanwhile, we are promoting our Glycols as BIO/ GREEN MEG to potential customers interested in meeting their objective of using environment friendly chemicals made from natural renewable resources. We are hopeful to convert this concept into a good business opportunity in the coming years.

However, the price of glycols is dependent on the crude oil prices and not on the bio-resources like alcohol/molasses.

FY2016 annual report, page 19:

The performance of the Company remained weak on account of lower Monoethylene Glycol (MEG) prices due to reduced crude oil prices.

The credit rating agency, India Ratings also highlighted this aspect of the business of India Glycols Ltd in its report for the company in January 2018 (page 1).

The realisations of the industrial chemical segment are largely determined by crude price, as most of the major players use crude as a raw material for manufacturing industrial chemicals. IGL is one of the few large players that produce industrial chemicals from bioethanol. Hence, its raw material cost is not dependent on crude price. However, realisations are dependent on crude price.

Advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

As a result, in the case of glycols, the company is stuck in a situation where the price of the end product (glycols) is dependent on the price of the crude oil; however, the prices of its raw materials (alcohol, molasses) are not directly related to crude oil prices. Therefore, many times, the company has faced such situations where the crude oil prices declined sharply leading to a fall in the prices of glycols. In such situations, the companies that make glycols from crude oil derivatives could continue production because for them both the prices of their raw material as well as the end product declined simultaneously. However, for India Glycols Ltd, it presented a difficult situation as its raw material prices did not decrease with the reduction of crude oil prices.

FY2009 annual report, page 10:

the Company has been adversely affected on account of dramatic global meltdown from August, 2008 onwards. The price of Glycols crashed from US$ 1200 per MT to US$ 450 per MT. However, the prices of feedstock like molasses and alcohol did not come down in line with international prices of crude oil, which came down from USD 150 per barrel to US$ 40 per barrel. The performance was further adversely affected as domestic prices of our feedstock viz. molasses and alcohol was high on account of poor availability of sugar cane. Consequently, Company was forced to regulate its Glycols production, as it was not economically viable.

The company could not sell glycols in the domestic market in FY2012, as it was not commercially viable due to the high costs of the raw material of alcohol and molasses.

FY2012 annual report, page 25:

The capacity utilisation, though showing improvement over previous year could not be fully utilised due to the prices of feedstock like molasses and alcohol did not come down in line with international prices of crude oil / Ethylene /MEG. Consequently, Company has regulated its domestic sales as it was not feasible to market MEG using expensive Ethanol

Similarly, in FY2014, when the crude oil prices declined sharply, then the company found that bio-MEG production has become commercially unviable.

FY2014 annual report, page 24:

Company has regulated its Domestic sales, as it was not feasible to market MEG using expensive Ethanol.

Therefore, an investor realizes that the glycols business division of the company is impacted by many factors, which are completely outside its control. From the above discussion, an investor notices that the price of its final product depends on crude oil because, for the customer, there is no difference between glycols produced from crude oil derivatives or bio-products (alcohol, molasses). Therefore, when the price of crude oil falls, then the price of glycols falls irrespective of the raw material used in its production.

An investor also notices that the availability as well as the prices of the raw material used by India Glycols Ltd in the production, i.e. alcohol or molasses is dependent on sugarcane production, which is dependent on rains/climate conditions.

FY2014 annual report, page 29:

Company manufactures various products using molasses as basic raw material. Molasses is the waste product of sugar mills. Sugar cane production is dependent on adequacy of rains. Thus, availability of feedstock is affected by climatic conditions.

In addition, an investor would acknowledge that in India, sugarcane is a highly politically influenced crop. As a result, the price of sugarcane and in turn the price of its products like sugar, alcohol or molasses is highly influenced by political factors as well as the govt. policies.

The company bore the brunt of these policies in FY2014 and FY2015 when the crude oil priced declined sharply from $110 to $35 leading to the fall of glycol prices. However, during this period, the company realized that the cost of its raw material (alcohol, molasses) did not come down because of the govt. policy of buying alcohol at an unrealistic price to blend with the petrol. This situation resulted in losses for the company.

FY2014 annual report, page 16:

The performance was further adversely affected as domestic prices of our feedstock viz. molasses and alcohol, was high on account of poor availability of alcohol and diversion of alcohol towards the implementation of Ethanol Blending with Petrol (EBP) Program of Government of India at an unrealistic price resulting in a sharp increase in the prices of alcohol.

Therefore, an investor notices that the performance of the glycols business segment of India Glycols Ltd is dependent on crude oil prices, rain/climate, and govt. policies/political interference in sugarcane/sugar/alcohol/molasses production. None of these parameters is under the control of the company. As a result, India Glycols Ltd frequently finds itself in a situation where it has to restrict the production of glycols due to commercial unviability.

Read: How to do Business & Industry Analysis of a Company

The helplessness of the company in countering these challenges is visible from one of its capital allocation decision, which proved bad for the shareholders. In FY2008, India Glycols Ltd purchased a sugar mill, Shakumbari Sugar & Allied Industries Limited (SSAIL), in order to do backward integration. However, the company could not manage the tough business environment of the sugarcane industry. As a result, even after the additional investment of hundreds of crores of rupees, by FY2012, SSAIL had become bankrupt resulting in significant value erosion for shareholders.

The company faces intense competition in the glycols segment. In the past, the company had to give steep discounts to its customers in order to increase sales.

FY2008, page 25:

To meet competition in MEG, the Company follows an aggressive pricing policy and follows the practice of giving special discounts to customers who purchase large volumes and have long-term contracts.

FY2009, page 26:

To meet competition in MEG, company follows an aggressive pricing policy and follows practice of giving special discounts to customers who purchases large volumes and have long-term contracts. This is to reward customers who procure their requirements from the company consistently over long term.

In addition, to counter the challenges mentioned above, in the past, India Glycols Ltd has taken certain steps like shifting production from glycols to Ethylene Oxide Derivatives (EODs), which offer a little more viable option than glycols.

FY2009 annual report, page 22:

IGL, in its long-term strategy, is shifting from commodity to speciality products and would divert EO molecule used for MEG production to more viable EO Derivative/ Speciality products, which will give us a much better returns.

FY2010, page 9:

Consequently, Company was forced to regulate its Glycols production and diversified toward production of high value Ethylene Oxide Derivatives (EODs), which could provide better margins as compared to Glycols.

In addition, when the company realized that the availability of its key raw material (alcohol) is impacted due to ethanol blending in petrol program, then it started importing alcohol.

FY2017 annual report, page 13:

The Company has increased reliance on imported alcohol instead of domestic alcohol due to diversion of alcohol towards Ethanol Blending in Gasoline given the exorbitant price offered by the Government for procurement of ethanol.

However, the company found that importing alcohol is not always cheaper. At times, it had to pay more to get alcohol from abroad in order to procure sufficient supplies.

The credit rating agency, India Ratings highlighted it as a reason for declined profits in its report for India Glycols Ltd in August 2015:

EBITDA margins declined to 5.4% in FY15 (FY14: 7.3%) with declining MEG realisations and higher raw material costs due to an increase in the proportion of costlier imported alcohol consumption.

An investor would note that despite these measures, the performance of glycols division has been highly fluctuating due to the cyclical nature of its influencing factors: crude oil, sugarcane industry, climatic conditions etc.

 

b) Guar gum:

India Glycols Ltd has been producing guar gum & its derivatives for a long time. In FY2008, the company decided to diversify from food grade guar gum to enter into the derivatives for the oil field industry.

FY2008 annual report, page 11:

The Company is diversifying into the field of guar gum derivatives used for the oil field industry and textile industry.

In addition, over the years, the company increased its guar gum derivatives capacity significantly.

FY2011 annual report, page 15-16:

The Company is modifying its existing Guar Gum Plant to upgrade the quality of the product of first hydrating Guar going for Oil Field Industry. The Company has enhanced the production capacity by 50% as against earlier capacity and is also further planning to increase capacity by end of August 2011 to cater to the growing international demand.

FY2012 annual report, page 16:

In order to tap potential and opportunities, your company has undertaken a plan for expansion of production capacity of Natural Gums Division. With the increased capacities, your company will position itself in world market as one of the largest producer of guar gum powder. The existing per month capacity is being expanded further and the expanded capacity will be operational by October 2012.

Further advised reading: Understanding the Annual Report of a Company

Because of increasing production capacity, an investor would notice that in FY2013, guar gum division contributed ₹742 cr to the revenue (almost 22% of the consolidated revenue of ₹3,385 cr).

FY2013 annual report, page 14:

Natural Gums business segment witnessed growth in profits due to higher sales realization. During the year under review, Guar gum powder and derivatives sales has increased to ₹74,243 Lacs as compared to ₹39,491 Lacs during previous year and registered a growth of 88% over the last year.

The key reason for this sharp growth until FY2013 was the increase in crude oil prices, which led to an increase in demand for guar gum derivatives by the shale oil exploration industry.

However, soon FY2014 onwards, the crude oil resumed its cyclical decline and the oil prices declined sharply over the coming years. As a result, the shale oil industry declined resulted in a steep reduction in demand and prices of guar gum derivatives affecting the business performance of India Glycols Ltd leading to losses.

FY2015 annual report, page 38:

The performance under the Natural Gums Division had suffered set back during the year under review due to steep fall in Guar gum demand, consequent upon the slump in Oil and Gas prices globally, which has forced the US market to decrease the drilling activities in the Oil and Gas sector.

FY2016 annual report, page 19:

Also, the demand for Guar Gum remained low due to sluggish demand from the major consuming sector which is US shale.

During FY2014-FY2016, when India Glycols Ltd reported net losses, then the poor performance of the Guar Gum division turned out to be a major contributing factor.

FY2014 annual report, page 24:

During the year under review, performance of the Company has been adversely affected on account of depressed global economic situation, which has resulted in reduction of commodity demand. The performance of the Company has been adversely affected due to loss on account of foreign exchange volatility and steep fall in Guar gum prices.

FY2015 annual report, page 9:

The performance of the Company has been adversely affected due to steep fall in prices of the Chemical products and the demand for Guar Gum.

Because of the sharp decline of crude oil prices during FY2014-2016 from $110 to $30, the prices and the demand for guar gum declined steeply. In fact, the guar gum division faced so many difficulties that its sales contribution declined from the high of ₹742 cr in FY2013 to a low of ₹24 cr in FY2016.

An investor would remember from the earlier discussion that in the case of glycols as well, the lower crude oil prices create difficulties for India Glycols Ltd. This is because, with lower crude oil prices, the final price of glycols decreases but the cost of raw material (alcohol, molasses) does not decrease for the company.

Looking at the impact of lower crude oil prices on both the glycols and guar gum divisions, an investor can easily appreciate that during the period of sharp fall in crude oil prices in FY2014-FY2016, India Glycols Ltd faced significant hardship. As a result, it reported a significant decline in its overall sales from ₹3,423 cr to ₹2,324 cr and reported net losses in each of the years during FY2014-FY216.

 

C) Ethyl alcohol (Potable), extra natural alcohol (ENA) and power alcohol:

From the above discussion, an investor would remember that India Glycols Ltd faced significant challenges in obtaining sufficient supplies of alcohol for its glycols division because the govt. procured a significant quantity of alcohol at very high prices for blending it with petrol.

FY2016 annual report, page 19:

The performance was further affected as domestic prices of our feedstock viz. molasses and alcohol, were high on account of poor availability of ethanol and diversion of ethanol towards the implementation of Ethanol Blending with Petrol (EBP) Program of Government of India at an unrealistic and exorbitant price resulting in a sharp increase in the prices of ethanol locally.

It seems that the management of the company has taken the optimal decision that if the prices of alcohol are increasing, which are causing difficulties for the glycol division, then why not put more resources on the alcohol division of the company.

As a result, the company started focusing on the alcohol division. It already had a bottling contract with Bacardi for long.

FY2012 annual report, page 17:

Company has a tie-up with Bacardi for bottling of their products at our Kashipur bottling unit.

Over the years, the company started producing its own alcohol brands including in the premium segment and started selling these to the canteen stores department (CSD) of Indian Armed Forces.

FY2016 annual report, page 20:

Your Company is having license for operations in and sale of Country Liquor and Indian Made Foreign Liquor (IMFL) in the States of Uttar Pradesh and Uttarakhand. Company had launched its premium products under the brand name of “V 2 O Vodka” in three flavors viz. Orange, Green Apple and Smooth in Vodka category and Soulmate in Whisky category. We have also extended the launch of Beach House Premium XXX Rum. Beach House Premium Rum for supply to Indian Defense forces through CSD has been approved.

Moreover, in FY2019, the company benefited immensely from the decision of the Uttar Pradesh govt. to open its liquor market to all the players.

FY2019 annual report, page 23:

With opening of liquor market for all players in State of Uttar Pradesh, the liquor business performed exceptionally well and became a major revenue contributor.

In addition, the company started the production of power alcohol to be sold to oil marketing companies for blending in petrol.

FY2019 annual report, page 48:

In our continued thrust towards manufacturing sustainable/renewable components, the Company has set-up Power Alcohol plants at Kashipur and Gorakhpur units each with a capacity of 100 KL per day. Power Alcohol shall be made available to Oil Manufacturing companies (“OMC’s”) for blending in Petrol as per Govt. Policy. Post receipt of necessary permissions for the Kashipur Unit, production and supplies of Power Alcohol to OMC’s were started from Kashipur Unit during the year under review.

Because of the timely focus by the company on the division facing a favorable environment, it does not come as surprise to the investor that over the years, the performance of the alcohol division improved significantly. The contribution of the alcohol division increased significantly over the years and in FY2019, it contributed ₹2,125 cr (incl. excise duty), which is about 42% of the consolidated revenue of ₹5,117 cr (incl. excise duty).

FY2019 annual report, page 141:

India Glycols Ltd 2019 Consolidated Revenue Break Up

(While analysing the above table an investor needs to keep in mind that the data is including excise duty. Therefore, different databases, which do not include excise duty in the revenue and therefore, show sales without excise duty, will show a lower amount of sales of the company for any financial year.)

Further advised reading: Understanding the Annual Report of a Company

Other business segments contribute a small portion to the overall business of India Glycols Ltd. As per the above table of consolidated revenue of the company in FY2019, the nutraceuticals segment contributed ₹160 cr and the industrial gases contributed ₹40 cr to the sales. The joint venture for private freight terminal had sales of about ₹8.3 cr in FY2019 (FY2019 annual report, page 118).

After taking a comprehensive view of the company’s performance by reading the annual reports of India Glycols Ltd from FY2007 to FY2019, an investor notices that the key factor influencing the two major divisions of the company (Glycols and Guar gum) is the crude oil price. As crude oil prices decline, both these divisions are hit.

  • Glycols: Reduction in crude oil prices reduces glycol prices but not the raw material prices for India Glycols Ltd. As a result, the glycols division makes losses during the phases of low crude oil prices.
  • Guar Gum: As oil prices decline, the shale oil drilling activity declines, leading to low demand and prices of guar gum derivatives. It leads to losses in the guar gum division.

An investor would appreciate that both these divisions perform well when the crude oil prices increase.

The chart below containing the crude oil price history from 2008 to 2020 (source: macrotrends), indicates the following phases/trends of the prices.

Crude Oil Price History Chart 2008 2020

 

I) 2008-2009: the decline of crude oil prices from $140 to $40 per barrel:

The glycols division of India Glycols Ltd. was hit hard and the company reported losses of ₹92 cr in FY2009 as compared to a net profit of ₹179 cr in FY2008.

FY2009 annual report, page 10:

India Glycols Ltd 2009 Financial Results

 

II) 2009-2013: increase in crude oil prices from $40 to $110 per barrel:

The performance of India Glycols Ltd improved significantly and the sales of the company increased from ₹1,163 cr in FY2009 to ₹3,423 cr in FY2013. Similarly, the profits increased from a net loss of ₹92 cr in FY2009 to a net profit of ₹96 cr in FY2013.

 

III) 2014-2016: the decline of crude oil prices from $110 to $35 per barrel:

The company witnessed a sharp decline in its business performance. Sales declined from ₹3,423 cr in FY2013 to ₹2,324 cr in FY2016. The profits declined from net profit of ₹96 cr in FY2013 to net loss of ₹57 cr in FY2016.

 

IV) 2016-2018: increase in crude oil prices from $35 to $75 per barrel:

During this period of rising crude oil prices, the business performance of India Glycols Ltd improved. The sales of the company increased from ₹2,324 cr in FY2016 to ₹3,034 cr in FY2018. The profits of the company increased from net loss of ₹57 cr in FY2016 to net profit of ₹97 cr in FY2018.

 

V) 2019 onwards: decline in crude oil prices from $75 to $25 per barrel:

During this period, despite a decline in crude oil prices, the business performance of India Glycols Ltd has improved. In the last 12 months (Jan 2019 – Dec 2019), the sales of the company have improved to ₹3,454 cr from ₹3,034 cr in FY2018. In the same period, the net profit has improved to ₹123 cr from ₹97 cr in FY2018.

Read: How to do Business & Industry Analysis of a Company

From the earlier discussion, an investor would notice that this dissociation of the business performance of the company from crude oil prices is due to its focus on the alcohol division. In the recent period, the alcohol division has increased to contribute almost 45% of the overall business of the company. The alcohol division has seen an improved performance due to govt. policies of relaxing licenses for liquor sales in states and procuring alcohol for blending in petrol at lucrative prices.

Going ahead, an investor needs to keep a close watch on the development of the factors affecting the alcohol division. It is the alcohol division, which has helped the company to report good business performance despite a decline in crude oil prices. However, any negative development for the alcohol division will accentuate the negative impact of crude oil price decline on the company.

To understand more about the alcohol/liquor industry and the factors that influence it, and the potential competition for the company, an investor may read the in-depth analysis of the following companies:

While looking at the tax payout ratio of India Glycols Ltd., an investor notices that for most of the years, the tax payout ratio of the company has been in line with the standard corporate tax rate prevalent in India.

During some of the years, where the tax payout is lower e.g. FY2017 (24%), she finds that the company has taken benefits of minimum alternate tax (MAT) credits and research & development (R&D) expenses.

FY2017 annual report, page 151:

India Glycols Ltd 2017 Tax Payout Reconciliation

Read: How to do Financial Analysis of Companies

 

Operating Efficiency Analysis of India Glycols Ltd:

a) Net fixed asset turnover (NFAT) of India Glycols Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of India Glycols Ltd in the past years (FY2010-19), then she notices that the NFAT of the company has been on an average at a level of 1.50-1.60. The NFAT increased during FY2010-2013 to 2.84 when the sales of the company increased along with an increase in crude oil prices. The NFAT declined to 1.21 by FY2017 while the business performance of the company was on a decline along with reducing crude oil prices. The NFAT has since increased to 1.55 along with the improvement of business of the company first due to increasing crude oil prices and then with the improved performance of the alcohol division.

Overall, it seems that the business of India Glycols Ltd has an NFAT of 1.50-1.60, which indicates a capital-intensive nature of its business.

 

b) Inventory turnover ratio of India Glycols Ltd:

An investor would note that over the years (FY2010-2019), the inventory turnover ratios (ITR) of the India Glycols Ltd has improved from 3.8 in FY2011 to 6.1 in FY2019.

Such a trend of ITR indicates that the company has kept its inventory management under control and as a result, not allowed money to be unnecessarily stuck in working capital.

Read on: How to Assess Operating Efficiency of Companies

 

c) Analysis of receivables days of India Glycols Ltd:

An investor would notice that over the years (FY2010-2019), receivables days of India Glycols Ltd, which used to be 29 days in FY2011 but deteriorated to 63 days by FY2016 while its business performance was declining. However, once the business of the company picked up FY2017 onwards, the receivables days improved to 36 days.

Overall, an investor would notice that over 10 years (FY2010-2019), the receivables days have remains nearly stable at 29-36 days. As a result, it seems that the company could avoid its capital from being stuck in working capital.

An investor observes the same while comparing the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of the company for FY2010-19.

Over FY2010-19, India Glycols Ltd Limited reported a total cumulative net profit after tax (cPAT) of ₹112 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹2,511 cr. An investor notices that the company has very high cCFO when compared to the cPAT over the last 10 years (FY2010-2019).

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)

Learnings from the above-shared article will indicate to an investor that the cCFO of India Glycols Ltd is significantly higher than the cPAT due to following factors:

  • Interest expense of ₹1,349 cr (a non-operating expense) over FY2010-2019, which is deducted while calculating PAT but is added back while calculating CFO.
  • Depreciation expense of ₹789 cr (a non-cash expense) over FY2010, which is deducted while calculating PAT but is added back while calculating CFO.

In addition, an investor notices that out of the cCFO of ₹2,511 cr, almost half (about ₹1,231 cr) is generated in one year (FY2016). Moreover, an investor notices that in FY2016, India Glycols Ltd reported a net loss of ₹57 cr. Therefore, to understand the cash flow generation by India Glycols Ltd over the last 10 years, the due diligence of CFO in FY2016 is crucial.

The below table from the annual report of FY2016 (page 101) shows the stepwise calculation of CFO of India Glycols Ltd from its profit before tax.

India Glycols Ltd 2016 Cash Flow From Operations CFO Calculation

In the above table, an investor notices that the maximum contribution to the CFO (₹909 cr) is from trade and other payables. An investor needs to analyse the balance sheet of the company for FY2016 to understand the source of this inflow of ₹909 cr shown as operating cash flow by India Glycols Ltd

India Glycols Ltd 2016 Consolidated Balance Sheet Equity And Liabilities

While analysing the liabilities section of the consolidated balance sheet of the company for FY2016 (page 100 of the FY2016 annual report), an investor notices that there are two sources, which show significant inflow during FY2016. Apart from these two sources, almost all the key items in the liabilities section show outflows during FY2016.

  1. Other long-term liabilities show an increase from ₹4 cr in FY2015 to ₹659 cr in FY2016 indicating an inflow of ₹655 cr (= 659 – 4) in FY2016.
  2. Trade payables show an increase from ₹247 cr in FY2015 to ₹480 cr in FY2016 indicating an inflow of ₹233 cr (= 480 – 247) in FY2016.

Together these two sources show an inflow of ₹888 cr (= 655 + 233) in FY2016, which nearly explains the inflow of ₹909 cr shown by the company under trade and other payables. Please note that investors may contact the company directly to understand the full detailed reconciliation of the cash flow statement and the balance sheet of the company. For the current discussion purpose, we will go ahead with the approximations as arrived above.

Out of the above two sources, an investor would appreciate that the trade payables include the money due to the suppliers, which is an operating activity and hence the inflow of ₹247 cr seems to be rightly classified under cash flow from operations.

To understand the nature of inflow of ₹655 cr from other long-term liabilities, an investor needs to extend the analysis further by reading the note number 6 from the notes to the consolidated financial statements of FY2016 (page 107 of the FY2016 annual report).

India Glycols Ltd 2016 Consolidated Other Current Liabilities

Further advised reading: Understanding the Annual Report of a Company

The above section containing the details of consolidated other current liabilities of India Glycols Ltd for FY2016 shows that during the year, the company received ₹654 cr as an advance from customers. While reading the explanations under the table, an investor gets to know the following things:

  • One customer has given an advance of ₹726 cr to India Glycols Ltd for supplying goods over 10 years.
  • State Bank of India (SBI) has given a guarantee to the customer on behalf of India Glycols Ltd. It means that if India Glycols Ltd does not fulfill its obligations or does not return the money, then SBI is bound to pay the money back to the customer.
  • Export Performance Bank Guarantee (EPBG) member banks have given a counter-guarantee to SBI. It means that if SBI had to pay the customer, then SBI will recover the money from EPBG member banks.
  • These guarantees are secured by assets of India Glycols Ltd.

Looking at the above information, the following interpretations come to an investors mind:

  • A customer has given an upfront advance to India Glycols Ltd for goods to be supplied over 10 years. This is very rare in business parlance. Usually, customers pay their suppliers after a few months of delivery of goods. Even if a company offers discounts to its customers for advance payment, even in those circumstances, the advance payments are limited to the goods to be delivered over the next few months. Giving an advance for goods to be delivered over the next 10 years is extremely rare, as the company itself may not remain in business for 10 years.
  • The customer realizes this risk and therefore, it has taken a bank guarantee to ensure the safety of its money.
  • If India Glycols Ltd does not supply the goods or does not return the money, then the customer will get the money from the bank and the bank, in turn, will sell the assets of India Glycols Ltd to recover their money.

If an investor looks at the essence of this transaction, then it seems that India Glycols Ltd has taken a 10-year loan by mortgaging its assets with multiple banks acting as intermediaries.

Moreover, while reading the annual report, an investor would notice that the company used this export advance to repay its existing debt.

FY2016 annual report, page 88:

Out of advance export proceeds which the Company has raised during the year of ₹72,641.64 Lacs (USD 114 Million) (note no 6) certain amount of long-term debt and working capital has been paid/ reduced.

In addition, the subsequent annual reports indicate that the company has made repayments to the customer towards this export advance.

FY2019 annual report, page 26:

The Company renewed the EPBG advance for USD 68.40 million (₹435.84 Crores) after meeting repayment obligations for 2 years. The Company repaid an amount of USD 17.80 million (₹113.42 Crores) to the customers against the commitments reducing the total liability to USD 68.40 million (₹435.80 Crores) as on 31 st March, 2019.

Therefore, from a practical point of view, an investor may consider this long-term advance from the customer, as a debt in her analysis instead of an inflow under cash flow from operations shown by the company.

Therefore, it is advised that an investor should do a deeper analysis if she finds that the financial parameters of the company are not in line with the general business expectations. In the case of India Glycols Ltd, the investor notices that the significantly high cCFO of ₹2,511 cr over FY2010-2019 reported by the company despite a low cPAT of ₹112 cr is primarily due to a long-term customer advance, which is practically debt secured by bank guarantees and assets of the company. Based on their analysis, investors may adjust the cash flow from operating and financing sources accordingly.

Read: How Companies Manipulate Cash Flow from Operating Activities (CFO)

 

The Margin of Safety in the Business of India Glycols 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.

An investor would notice that over the years, India Glycols Ltd has witnessed a negative SSGR. SSGR has been varying from -14% to nil 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) and net fixed asset turnover (NFAT) of a company.

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

  • 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 note that India Glycols Ltd has a low NPM over the years in the range of 1-4% over the years with even losses in four out of the last 10 years, which has affected the SSGR of the company. Moreover, as per the above discussion, the company has a low NFAT, which also has contributed to a low SSGR.

The sales growth achieved by the company over the years is about 10-12%, which is higher than its SSGR. Therefore, investors would expect that the company would have to take additional capital from debt and/or equity to fund its growth requirements.

While looking at the financial position of India Glycols Ltd over the last 10 years (FY2010-2019), an investor notices that the company raised equity in FY2013 by way of warrants to its promoters. In addition, even though, it looks like the company has reduced debt over the last 10 years from ₹1,306 cr in FY2010 to ₹1,000 cr in FY2019. However, an investor would remember from the above discussion that the company has resorted to inflows like long-term advance from customers, which is practically debt as it is secured by bank guarantees and assets of the company.

Therefore, an investor would appreciate that over the last 10 years, India Glycols Ltd has to rely on additional capital via equity as well as debt (including long-term customer advance) to meet its growth requirements.

 

b) Free Cash Flow (FCF) Analysis of India Glycols Ltd:

While looking at the cash flow performance of India Glycols Ltd, an investor notices that during FY2010-19, the company had a cumulative cash flow from operations of ₹2,511 cr. During this period it did a capital expenditure (capex) of ₹840 cr.

Please note that on the adoption of Indian Accounting Standards (IndAS) by the company, the assets of the company were revalued from FY2016 onwards. As a result, the fixed assets increased significantly in FY2016, which is not due to capital expenditure; but due to revaluation.

FY2017 annual report, page 155:

India Glycols Ltd 2016 Revaluation Of Assets Under IndAS

An investor would note in the above table that while adopting IndAS, India Glycols Ltd increased the value of its fixed assets by about ₹902 cr.

Therefore, while calculating the total amount of capital expenditure done by the company over 10 years (FY2010-2019), we have used ₹73 cr as capex for FY2016, which is taken from the fixed assets schedule from the FY2016 annual report (page 109).

India Glycols Ltd 2016 Capital Expenditure

As a result, an investor would note that over FY2010-2019, India Glycols Ltd had a free cash flow of ₹1,670 cr. ( = cCFO of ₹2,511 cr – total capital expenditure of ₹840 cr).

Further advised reading: Free Cash Flow: A Complete Guide to Understanding FCF

By looking at a free cash flow of ₹1,670 cr over FY2010-2019, an investor would feel that it is a huge amount of surplus money generated by the company. In such a situation, the company would be very cash-rich. However, an investor notices that at the end of FY2019, the company has cash & investments of only ₹137 cr. Therefore, an investor needs to analyse where the company might have used its free cash flow if it is not available as cash & investments.

While reading the past annual reports and analysing its financial data, an investor notices some of the following items, which seem to have consumed the free cash flow of India Glycols Ltd:

  • Dividend: Over FY2010-2019, the company paid dividends of ₹72 cr excluding dividend distribution tax (DDT). If an investor considers DDT of about 20% on the distributed amount, then she realizes that about ₹86 cr was paid out as dividends ( 72 * 1.20 = 86.4).
  • Advance from a customer with the nature of debt: From the above discussion, an investor would remember that in FY2016, India Glycols Ltd took a 10-year advance of ₹726 cr from one of the customers, which is secured by bank guarantee and assets of the company. The company has classified this advance as an inflow under cash flow from operations. However, from a practical standpoint, it is debt. Therefore, an investor notices that the cumulative cash flow from operations (cCFO) of the company during FY2010-2019, is high to the extent of this customer advance. To appreciate the true extend of free cash flow generated by the company over FY2010-2019, investors may ignore this customer advance, which has been present in the CFO and consequently is present in FCF.
  • Various writeoffs/loss of investments made by the company: During FY2010-2019, India Glycols Ltd made many investments in its subsidiaries/outside entities, which ultimately resulted in losses. The loss on these investments represents the utilization of free cash flow, which took away the money from the company & its shareholders.
    • IGL Finance Ltd (IFL)/National Spot Exchange Ltd (NSEL): Over the years, India Glycols Ltd has invested about ₹150 cr in IFL by way of equity and inter-corporate deposits. IFL primarily invested this money in the contracts offered by National Spot Exchange Ltd (NSEL). In 2013, the govt. sensed a fraud in NSEL and shut down the exchange. NSEL defaulted on its obligations and as a result, the investors in its contracts are yet to recover their money. Therefore, the investments done by India Glycols Ltd in NSEL via IGL Finance Ltd represent a loss of the money generated by the company from its operations.

FY2019 annual report, page 101:

In earlier year the company had given (included in current Loan) Inter Corporate Deposit (ICD) of ₹14,649.64 Lakhs (Previous Year ₹14,649.64 Lakhs) to its subsidiary IGL Finance Ltd. (IGLFL) (A 100% subsidiary). IGLFL in earlier year had invested funds for short term in commodity financing contracts offered by National Spot Exchange Ltd. (NSEL). NSEL had defaulted in settling the contracts on due dates, for which IGLFL has initiated legal and other action and in turn IGLFL did not pay back due amount to the company. Accordingly considering the prudence no interest on above ICD has been accrued for the period from 01-09-2013 onwards.

    • Shakumbari Sugar and Allied Industries Limited: in FY2008, India Glycols Ltd purchased a sugar mill, Shakumbari Sugar and Allied Industries Limited (SSAIL) for backward integration. Over the years, India Glycols Ltd invested about ₹160 cr in SSAIL by way of equity, preference share capital, inter-corporate deposits, and advances. By FY2012, SSAIL shut down its operations, its net-worth was fully eroded, it defaulted to its lenders and was declared sick/bankrupt. Now, India Glycols Ltd has written off its entire investment in SSAIL. The investment in SSAIL represents the loss of the money earned by India Glycols Ltd from its operations.

FY2019 annual report, page 101:

(i) Company has Investment of ₹5,427.50 Lakhs (Previous year ₹5,427.50 Lakhs) in equity share capital and 10% cumulative redeemable preference share capital in subsidiary company namely Shakumbari Sugar and Allied Industries Limited (SSAIL) whose net worth has been fully eroded and SSAIL has also been declared sick industrial undertaking as per provision of Sick Industrial Companies Act. 1985.

(ii) In earlier year, the company has also given to SSAIL-Inter corporate deposit (ICD) amounting to ₹1,915.13 Lakhs (Previous Year ₹1,915.13 Lakhs) (including interest thereon) and advances of ₹8,453.81 Lakhs (Previous Year ₹8,453.81 Lakhs) and also corporate guarantee extended of ₹ Nil (Previous Year ₹3,749.34 Lakhs) (excluding penal interest, penalty etc). No due certificate from Central Bank of India is awaited.

(iii) Based upon the application and adoption of fair value of the aforesaid investment, ICD and advances are carried at nil value.

SSAIL defaulted in repayments to its lenders (FY2014 annual report, page 92):

As stated above and in view of financial tightness SSAIL could not pay on time and made default in repayment of:

i) Principal:- Central Bank of India ₹742.11 Lacs (Apr-13 to Mar-14), Axis Bank ₹177.90 Lacs (Jan-14 to Mar-14) & IDBI Bank ₹208.33 Lacs (Jan-14 to Mar-14)

ii) Interest :- Central Bank of India ₹5.41 Lacs (Apr-13 to Mar-14), Axis Bank ₹40.57 Lacs (Feb-14 to Mar-14) & IDBI Bank ₹53.95 Lacs (Feb-14 to Mar-14)

The lenders initiated recovery proceedings against SSAIL (FY2015 annual report, page 113):

Central Bank of India (CBI) vide its letter dated 28.05.2014 had issued a notice under Section 13(2) of SARFAESI Act 2002 to SSAIL and IGL. The said notice was replied by SSAIL and IGL has challenged the legality of issuance of such notices. CBI, thereafter, on 11.09.2014 had issued another notice under Section 13(4) of SARFAESI on SSAIL and IGL, which has been challenged in DRT, Lucknow. As per the legal opinion, the notice is not valid since SSAIL has already been registered with BIFR as sick Company.

By looking at the above information, an investor would appreciate that the free cash flow (FCF) of India Glycols Ltd may be assumed high to the extent of long-term customer advance (in the nature of debt). In addition, the company has lost significant money on its investments in NSEL as well as the Shakumbari Sugar and Allied Industries Limited (SSAIL).

Further advised reading: How to Identify if Management is Misallocating Capital

As a result, the investor would appreciate that India Glycols Ltd still has a lot of debt and comparatively low cash & investments on its books in FY2019 despite a seemingly high free cash flow generation over FY2010-2019.

Therefore, it is advised that investors should always analyse the investments done by the company and its other utilizations of cash so that they may trace the funds generated by the company over the years from its operations.

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 India Glycols Ltd:

On analysing India Glycols Ltd and reading its publicly available past annual reports from FY2007 to FY2019, an investor comes across certain other aspects of the company:

 

1) Management Succession of India Glycols Ltd:

While reading about the company, an investor notices that currently, the following people represent the active leadership at India Glycols Ltd:

  • Mr. U. S. Bhartia, Chairman & Managing Director, aged 65 years.
  • Mr. Rakesh Bhartia, Chief Executive Officer, aged 50 years.
  • Mr. M.K. Rao, Executive Director, aged 61 years.
  • Ms. Jayshree Bhartia, Director, spouse of Mr. U. S. Bhartia, aged 62 years.

An investor notices that the current age group of the senior management of the company is 50-65 years. Moreover, an investor is not able to find details of any member from the next generation of the promoter family in the senior management.

Therefore, it is advised that an investor may contact the company directly to know more about the succession planning of the management as well as the promoter group.

The presence of a well thought out management succession plan is essential in the case of promoter run businesses as it provides for a 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) Capital allocation decisions of India Glycols Ltd:

An investor would notice that over the last 10 years, India Glycols Ltd has invested a significant amount of money in different subsidiaries, joint venture etc. However, in most of the case, the company could not generate returns for its shareholders.

 

a) IGL Finance Ltd:

In the case of IGL Finance Ltd, India Glycols Ltd invested about ₹150 cr in the subsidiary, which in turn invested most of the money in the contracts of National Spot Exchange Ltd (NSEL). The company lost almost all the money when NSEL defaulted on its commitments in 2013.

Such a large investment in the contracts at NSEL in a situation when the company is carrying a debt of about ₹1,500cr – ₹2,000 cr on its books indicates that the company attempted to venture out of its core competence to generate higher returns via NSEL. However, the decision did not turn out well for the shareholders of India Glycols Ltd when the company could not recover most of the money invested via NSEL.

 

b) Shakumbari Sugar and Allied Industries Ltd. (SSAIL):

In the case of SSAIL, India Glycols Ltd invested about ₹160 cr in SSAIL via different instruments. However, SSAIL stopped its operations in FY2012 and became a bankrupt company by defaulting to its lenders. SSAIL’s net worth was completely eroded. It represents another case of capital allocation decision leading to value erosion.

 

c) Other subsidiaries and joint venture:

India Glycols Ltd created a few other subsidiaries in Singapore, and the USA and a joint venture in India. However, if an investor analyses the performance of these subsidiaries and JV, then she notices that almost all of them have been making losses in their operations.

  • The USA subsidiary, IGL Chem International USA LLC has never reported a profit since it was established in FY2015.
  • The Singapore subsidiary, IGL Chem International Pte. Ltd seems to have lost money in nine out of the last 12 years, since its incorporation in FY2008. The company seems to have made small profits only during FY2011-2012-2013 and thereafter, it has made losses continuously since FY2014 onwards.
  • For the private freight terminal at Kashipur, India Glycols Ltd first entered into a joint venture (JV) with Fourcee Infrastructure Equipments Pvt. Ltd in 2011. However, after waiting for almost three years, it terminated the JV in June 2014. Thereafter, it entered into a new JV with Apollo Logisolutions Limited in 2015. Finally, the private freight terminal became operational in April 2017, after 6 years since it was first envisaged. However, as per the FY2019 annual report (page 27), the JV, Kashipur Infrastructure and Freight Terminal Pvt. Ltd. (KIFTPL), is currently making losses.

KIFTPL has achieved revenue growth during the year under review and shown marked improvement in its performance. In the near future, it is expected to continue to keep the same trend. During the year ended 31st March 2019, KIFTPL has suffered a loss of ₹279.61 Lakhs.

Looking at the above information, an investor may feel that the capital allocation by the company has a lot of room for improvement.

Further advised reading: Steps to Assess Management Quality before Buying Stocks

 

3) Sale of commercial/office building to the promoters by India Glycols Ltd via IGL Infrastructure Pvt. Ltd.:

While analysing the past annual reports of India Glycols Ltd., an investor notices that in FY2015, the company established a new wholly-owned subsidiary, IGL Infrastructure Pvt. Ltd (IGL Infra) and then transferred its commercial building (rental business division) to IGL Infra on March 31, 2015, for a consideration of ₹184 cr.

FY2015 annual report, page 79:

On receipt of approval of the shareholders and NOIDA Authority, during the year the Company had entered into a Business Transfer Agreement (BTA) with wholly owned subsidiary company, IGL Infrastructure Private Limited (‘IGL Infra’) (formed during the current year) for sale of its Rental Business Division on slump sale basis w.e.f. 30 th Mar 2015 for consideration of ₹18,420.00 Lacs, pending receipt of the final ‘NOC’ from 2 banks (approval since received). The consideration has been included under Short Term Loans & Advances Receivable. Profit on sale this amounting to ₹5,194.26 Lacs is included under exceptional items. (Refer Note No. 46(d)).

While searching about this commercial building on the internet, an investor comes across an equity research report of India Glycols Ltd prepared by PINC Research dated June 3, 2008, uploaded on the Business Standard website (Click here). The PINC report indicates that the building has three towers (270,000 sq.ft.) out of which one tower (about 70,000 sq.ft) is occupied by India Glycols Ltd as its corporate office.

PINC research report, June 3, 2008, page 7:

In FY04, IGL acquired 3.5acres land in Noida, worth ~ Rs64mn. It has constructed 3 towers with a total floor space area of 270k sq.ft. Of this, 70k sq.ft. (one tower) will be used for its new corporate office , while the rest will be leased out.

While analysing the subsequent annual reports, an investor gets the information about rent being paid by India Glycols Ltd to IGL Infra for occupying one tower of 70,000 sq.ft.

FY2017 annual report, page 147:

India Glycols Ltd 2017 Rent Paid To IGL Infrastructure

An investor gets to know that India Glycols Ltd is paying a rent of about ₹10 cr per year for 70,000 sq.ft. in the commercial complex.

Assuming the same rent for the remaining space, an investor may conclude that the entire area of 270,000 sq.ft. may fetch a rent of ₹38 cr per year (10 * 270,000 / 70,000 = 38.57)

Going by the usual capitalization rate (rental yield) of about 8% for commercial properties, a property providing rent of ₹38 cr per year may be valued at ₹475 cr (38 / 0.08 = 475)

In light of this calculation, it seems that India Glycols Ltd has sold the commercial property at a cheaper price. However, before an investor makes her final decision, she needs to keep in mind the following things:

  • It is assumed that India Glycols Ltd is occupying only 70,000 sq.ft. and paying a rental of ₹10 cr per year for this area. If the area occupied by India Glycols Ltd is different, then the entire calculations will need a revision.
  • It is assumed that the rental yield/capitalization rate of 8% is normal for commercial properties. Investors may do their own diligence to arrive at the rental yield by doing market research etc. This is because using a different rental yield will change the value of the property.

An investor may seek clarification about these inputs from the company directly so that she may make an informed decision.

Moreover, when an investor attempts to find out the counterparties to whom, India Glycols Ltd sold the rental business division via IGL Infra, then she notices that IGL Infra has been sold to the promoters.

The related party details section of the FY2016 annual report shows that the status of IGL Infra changed from a subsidiary to an enterprise over which key management personnel have a significant influence on Sept. 15, 2015.

FY2016 annual report, page 120:

India Glycols Ltd 2016 Related Party Status Of IGL Infrastructure

Moreover, corporate database website Zaubacorp shows that the current promoter-CMD Mr. Uma Shankar Bhartia and his wife Jayshree Bhartia are the current directors of IGL Infrastructure Private Ltd (checked on March 24, 2020) (Click here)

Directors Of IGL Infrastructure

Therefore, an investor would acknowledge that the sale of rental business division by India Glycols Ltd represents a transaction where a commercial building is sold by the public listed company to its promoters. In the transactions of sale of assets of the public listed company to the promoters, it is advised that investors should do in-depth due diligence. This because such transactions provide an opportunity for the promoters to benefit at the cost of minority shareholders if the assets are sold to the promoters at less than their fair/market value.

Therefore, it is advised that an investor should do further analysis in terms of the area occupied by India Glycols Ltd in the commercial building for which it is paying a rent of about ₹10 cr per year to IGL Infra. In addition, she should find out the total leasable area of the commercial building as well as ongoing rental yields in the market so that she can arrive at a reasonable independent value of the commercial building.

An investor may also contact the company directly to seek clarification/help for the above inputs to aid her analysis.

Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?

 

4) Changing/using accounting policies to report lower losses/higher profits:

a) Recognition of profits in consolidated financials on the transfer of assets to the wholly-owned subsidiary. Preponing recognition of profits from FY2016 to FY2015:

An investor would remember from the above discussion that in FY2015, India Glycols Ltd transferred its rental business division to its wholly-owned subsidiary IGL Infrastructure Pvt. Ltd (IGL Infra) for ₹184 cr.

As per the generally followed principles of consolidation, a wholly-owned subsidiary is included in the consolidated financials of the company. As a result, the transactions between the company and its wholly-owned subsidiaries are ignored while preparing consolidated financials i.e. whether a company keeps an asset on its own books or it transfers the asset to its wholly-owned subsidiary, its consolidated financials will not change.

However, in the case of the sale of rental business by India Glycols Ltd to IGL Infra, the company recognized this transfer as a sale to any third party. As a result, it recognized profit of ₹52 cr in its consolidated financials due to this sale of assets to its wholly-owned subsidiary.

FY2015 annual report, page 113 (notes to consolidated financials):

On receipt of approval of the shareholders and NOIDA Authority, during the year the Company had entered into a Business Transfer Agreement (BTA) with wholly owned subsidiary company, IGL Infrastructure Private Limited (‘IGL Infra’) (formed during the current year) for sale of its Rental Business Division on slump sale basis w.e.f 30 th March 2015 for a total consideration of ₹18,420.00 Lacs, pending receipt of the final ‘NOC’ from 2 banks (approvals since been received). The consideration has been included under Short Term Loans & Advances Receivable. Profit on sale on this amounting to ₹5,194.26 Lacs is included under exceptional items. (Refer No. 46(d))

An investor is confused when she notices that the company has recognized profit on a sale transaction of assets to its wholly-owned subsidiary in its consolidated financials. To find the reasons, upon further reading of the annual report, an investor notices that the company did not consider IGL Infra in its consolidated financials for FY2015 despite it being its wholly-owned subsidiary.

FY2015 annual report, page 97:

India Glycols Ltd 2015 IGL Infrastructure Not Considered For Consolidation

The company stated that it did not consider IGL Infra in its consolidated financials as it had plans to sell this subsidiary in the near future.

As a result, the company treated IGL Infra as a third party company and it recognized the profits of ₹52 cr in its profit and loss statement by merely transferring the rental business division to its wholly-owned subsidiary without the division actually being sold to any third party.

The company sold IGL Infra to its promoters in the next financial year in Sept 2015 (FY2016) because the company changed the status of IGL Infra in its related party details from subsidiary to an enterprise controlled by key management personnel from Sept 15, 2015.

FY2016 annual report, page 89:

India Glycols Ltd 2016 Related Party Status Of IGL Infrastructure

If the company had followed the normal customs of consolidation and recognition of profits on the sale of assets, then it would have recognized the sale of the rental business and its profit in its consolidated financials in FY2016 when IGL Infra was sold by the company to its promoters.

However, the company used different principles of consolidation and as a result, did not use IGL Infra for consolidation in FY2015 despite it being its wholly-owned subsidiary. Therefore, India Glycols Ltd recognized profit of ₹52 cr in its consolidated financials in FY2015 by merely shifting the asset from its books to the books of a wholly-owned subsidiary, without doing an actual sale to any third party.

An investor would appreciate that due to these events, the company preponed the recognition of the profit of ₹52 cr from FY2016 to FY2015 before the actual sale of rental assets to any third party. One reason for the same could be that the company reported losses during FY2015 and it might be an attempt by the company to show lower losses in FY2015 than what it might have had to report otherwise.

Nevertheless, it is advised that investors should go through different assumptions used by companies while preparing their financials so that they may assess the real financial position of the companies at any point in time.

Further advised reading: How Companies Inflate their Profits

 

b) Foreign exchange fluctuation losses:

In FY2009, India Glycols Ltd suffered significant losses because of foreign exchange movements. However, the company changed its accounting treatment in order to report lower losses in the profit and loss statement. As a result, in FY2009, it reported a loss lower by about ₹42 cr.

FY2009 annual report, page 78:

Had the Company continued to follow the earlier policy of charging foreign exchange differences on long term foreign currency monetary items to the profit & loss account, loss for the year would have been higher by Rs. 4167.69 lacs, General Reserve would have been higher by Rs. 1274.55 lacs and the net block of fixed assets would have been lower by Rs. 2731.85 lacs.

 

c) Depreciation/frequent changes in the useful life of assets:

In FY2015, the company changed the useful life of its fixed assets to report a lower depreciation and thereby reported losses lower by about ₹7 cr.

FY2015 annual report, page 113:

Had there not been any change in the useful lives of the fixed assets, the depreciation for the year would have been higher by ₹687.61 Lacs.

Moreover, in FY2016, the company once again changed the useful life of its fixed assets to report a lower depreciation and thereby reported losses lower by about ₹25 cr.

FY2016 annual report, page 87-88:

During the current year, the Company has upward revised the useful life of certain class of fixed assets (plant & machinery) based on technical study and assessment done by an external technical valuer as well as based on internal assessment carried out by the management. The Company believes that the useful life as certified by external technical valuer best represent the period over which Company expects to use these assets. Had there not been any change in the useful lives of the certain plant & machinery, the depreciation for the year would have been higher by ₹2,487.70 Lacs.

 

d) Delays in the write-off of investments in IGL Finance Ltd (NSEL):

In addition, an investor would notice that when the company adopted Indian Accounting Standards (IndAS), then due to the mandatory adoption of a fair value approach, the company wrote-off its investments in NSEL via IGL Finance Ltd.

FY2017 annual report, page 16:

On date of transition to Ind-AS, based on the expected credit loss policy and other estimation made by the IGLFL management, IGLFL has made a provision of ₹11,719.71 lacs against the total outstanding of ₹14,444.43 lacs from NSEL. Simultaneously, the same amount has been provided for against ICD’s received from the Holding Company. IGLFL is confident of recovery of its dues from NSEL over a period

Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?

An investor may note that the NSEL fraud took place in 2013 and the company could make the recovery of only about ₹10 cr in FY2015.

FY2015 annual report, page 11:

Company has so far recovered ₹10.31 Crores from NSEL.

Since then, it seems the company did not receive any money from NSEL; however, the company hesitated to write-down this investment until the new accounting standards (IndAS). An investor may believe that during this period of FY2013-2017, the company did not recognize the loss/write-down of the money due from NSEL and as a result, the financial statements of the company kept on reflecting that the entire investment in NSEL is safe. Investors may note that such delay in the non-recognition of the write-off of investments in NSEL presented a better picture of the financial position of the company than it actually was.

Moreover, the auditor of the company have repeatedly questioned such non-recognition of losses on the investment done in NSEL since FY2014 and highlighted the same in its audit reports.

FY2014 annual report, page 69:

Basis for Qualified Opinion:

Attention is invited to Note no 47 regarding non provision against total exposure amounting to ₹14,503.44 lacs in NSEL, where the management is confident about its recoverability for the reason as stated in said note, and our inability to comment thereon.

The National Stock Exchange (NSE) took up this matter and asked the company to revise its financials in the light of observations of the auditor. However, the company contested the objections of NSE and did not revise the financials.

FY2015 annual report, page 113:

Company has received letters dated 30th Oct 2014 and 05th May 2015 from National Stock Exchange of India (NSE), wherein the Company has been advised to reinstate its financials w.r.t. qualification raised by the statutory auditor of the company for the years FY 2012-13 on investments and loans to SSAIL and to suitably rectify the qualification raised for the year FY 2013-14 by the statutory auditor w.r.t. investment and loan to IGLFL respectively. For SSAIL, the Company has written letters to NSE for granting opportunity to represent the case and for IGLFL the Company has requested NSE to clarify the issue for effect to their directive.

Finally, the company has to recognize the loss in the value of its investments only when it adopted the new accounting standards (IndAS), which have stringent fair valuations criteria.

Nevertheless, an investor would notice that the company has recognized the reduction in the value of its investments directly in the balance sheet without recognizing it as a loss in the profit and loss statement.

FY2017 annual report, page 77:

India Glycols Ltd 2017 Provisions For Investments In NSEL IGL Finance Ltd

Looking at the above table, an investor would notice that the company has recognized the non-recoverability of the inter-corporate deposits (₹117.19 cr) in the balance sheet. However, when the investor analyses the profit and loss statement (see the table below), then she notices that the P&L does not have the deduction of ₹117.19 cr as an expense. Instead, the relevant section for recognition of losses on investments/advances etc. in the P&L recognizes losses of only about ₹2 cr in FY2017 and about ₹13.5 cr in FY2016.

FY2017 annual report, page 85:

India Glycols Ltd 2017 Provisions For Investments In NSEL Absent In The Profit And Loss Statement

Please note that the practice of the company to recognize losses on investments directly to the balance sheet without affecting the P&L may not be against the law. The company would have used the discretions provided to the management under the law for the recognition/classification of these items.

Nevertheless, irrespective of the method of representation in the financial statements, investors should remember that the money, which was invested by the company in NSEL, for which there is a very low probability of recovery, is effectively a loss of money. Therefore, investors may make suitable adjustments in their analysis.

 

e) Delays in the write-off of investments in Shakumbari Sugar and Allied Industries Ltd:

The company has followed a similar approach with respect to its investments in Shakumbari Sugar and Allied Industries Ltd. (SSAIL) where it invested about ₹160 cr in SSAIL via different instruments.

SSAIL stopped its operations in FY2012. It started defaulting to its lenders. Its net worth was fully eroded. It was referred to the Board for Industrial and Financial Reconstruction (BIFR) as a sick company. Its banker, Central Bank of India initiated legal proceedings to recover its money (SARFAESI Act). The statutory auditor started highlighting the doubtfulness of recovery of its investments in SSAIL since FY2013.

FY2013 annual report, page 36:

Qualification

Attention is invited to Note no. 34 of financial statements regarding non-provision against investment and loans & advances in subsidiary company Shakumbari Sugar and Allied Industries Limited (SSAIL) amounting to ₹5,427.50 Lacs and ₹1,713.30 Lacs (including interest accrued thereon) respectively,…

Net Profit for the year, investments, loans & advances and reserve & surplus are without considering the above which cannot be ascertained or otherwise for the reason stated in para above.

As discussed above, the National Stock Exchange (NSE) took up this matter and asked the company to revise its financials in the light of observations of the auditor. However, the company contested the objections of NSE and did not revise the financials.

Finally, with the adoption of new accounting standards (IndAS), the company recognized impairment/losses on its investments in SSAIL. Nevertheless, the company recognized these losses directly in the balance sheet without affecting the profit and loss statement.

Once again, investors may note that while recognizing these write-offs, the company may not have acted against the law. Instead, it may have used the discretions allowed to the management under the law for recognition/classification of these items.

However, investors will remember that the money once gone from the company, which it cannot recover, is a loss and therefore, investors can make suitable adjustments in her analysis.

Upon further analysis of the financials of India Glycols Ltd, an investor notices that in FY2018, the company recognized a profit on the one-time settlement (OTS) scheme offered by Central Bank of India to SSAIL under other income i.e. routed it through profit and loss statement, which results in showing higher profits of the company.

FY2018 annual report, page 134:

India Glycols Ltd 2018 Gain On One Time Settlement

The recognition of gain on one-time settlement by the company in FY2018 comes as a sharp contrast to its hesitation to recognize losses on its investments despite multiple observations by the auditors, follow up by stock exchanges etc. This is also pertinent in the light that Central Bank of India had not yet closed the matters on “One Time Settlement” at its end, as in the FY2019 annual report, the company highlighted that the bank has asked for further money from the company.

FY2019 annual report, page 145:

During the year, the Subsidiary Company (Shakumbari Sugar & Allied Industries Limited) paid the remaining amount in full in respect of one time settlement (OTS) amount of ₹ 4200.00 Lakhs to Central Bank of India in pursuance of OTS entered during previous year. However, the Bank has further demanded ₹ 208.86 Lakhs for uncharged commission on bank guarantees. The said Company has filed a writ petition against the said demand in the High Court, Allahabad.

Therefore, while analysing the events, an investor notices that the company has attempted to defer recognition of losses on its non-performing investments as long as possible despite observations from the auditor and national stock exchange. Even when it had to recognize the losses on these investments, then it deducted the provisions/write-offs directly to the balance sheet without affecting the profit and loss statement. On the contrary, the company recognized the profits/gains on the one-time settlement scheme from the bank immediately in its profit and loss statement even though the bank has still not settled all the dues at its end.

Advised reading: Finding out whether a Company is Cooking its Books/Manipulating its Numbers

 

5) Remuneration of promoters/senior management of India Glycols Ltd:

While reading the annual reports of the company, an investor notices that at times, the company has paid remuneration to its promoters, which was higher than the statutory limit. As a result, the company had to seek approvals from the central govt. However, the central govt. refused to approve the full remuneration proposed by the company to its promoters (Chairman & Managing Director) and the Chairman had to refund the excess remuneration. However, the company has requested the central govt. to reconsider its decision so that it can pay higher remuneration to its promoters.

FY2019 annual report, page 114:

During the FY 2017-18, Central Government (CG) approved remuneration for Chairman and Managing Director (CMD), which was lower than applied for by the Company, against which a representation has been made to reconsider the matter. During the FY 2018-19, pending any response from CG, as a good governance, a sum of ₹58.58 Lakh has been refunded by the CMD.

An investor notices that during FY2015, when the company made losses because of poor business performance, the promoter-chairman took home the maximum remuneration permissible under the law.

FY2015 annual report, page 34:

India Glycols Ltd 2015 Maximum Remuneration Paid To Chairman And Managing Director Promoter

Further advised reading: How to identify Promoters extracting Money via High Salaries

Similarly, the chief executive officer (CEO) took a higher salary in FY2015 than his salary of FY2014 despite the company making losses in both FY2014 and FY2015. As per the FY2015 annual report, page 36, the CEO took home a remuneration of ₹1,84,23,378 in FY2014 and a remuneration of ₹1,85,05,016 in FY2015.

During the next year, FY2016, when the company again reported losses due to poor business performance, the Chairman took home the maximum permissible remuneration of ₹1,37,30,000 under the law (FY2016 annual report, page 37).

Again, in FY2016, despite the losses of the company, the CEO again took home a higher salary than FY2015. As per the FY2016 annual report, page 39, the CEO took home a remuneration of ₹1,85,05,016 in FY2015 and a remuneration of ₹1,85,87,556 in FY2016.

In FY2017, when the company returned to profits, then the company maintained the trend to pay the near maximum allowable salary to the promoter. It paid a 77% hike in the salary to the Chairman over the previous year without waiting for the central govt. approval.

FY2017 annual report, page 31:

India Glycols Ltd 2017 Maximum Remuneration Paid To Chairman And Managing Director Promoter

While analysing the financial position of the company, an investor notices that due to continued losses over FY2014-2016, India Glycols Ltd had reached a position of financial stress where availing fresh loans became necessary for its continued operations. The credit rating agency, India Ratings highlighted the financial stress faced by the company in its report during FY2017.

India Ratings credit rating report, Nov. 2016, page 1:

Also, the company is negotiating a fresh EPBG-backed LTEA to refinance its existing term loans. Ind-Ra believes that without the fresh EPBG-backed LTEA, the company would be under stress to repay its debt obligations in FY18. However, management believes it has reasonable financial flexibility to avail refinancing.

Advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

Therefore, an investor would appreciate that the above trend of managerial remuneration indicates that the company is attempting to pay the maximum permissible salary to its senior management despite losses/poor performance of the company.

India Glycols Ltd increased the salary to the CEO in FY2015 and FY2016 despite losses by the company. Moreover, it seems that in FY2018, the company paid a remuneration higher than the statutory limit to the promoter-chairman, which was not approved by the central govt. As a result, the promoter-chairman had to refund the money to the company. However, the company has requested the central govt. to reconsider its decision so that it can pay a higher salary to the promoter-chairman.

 

6) Investments in promoter group entities by India Glycols Ltd:

a) Hindustan Wires Ltd: first write-down, and then evergreening:

While analysing the transactions of India Glycols Ltd with its promoter group entities, an investor notices that the company via its subsidiary, IGL Finance Ltd, had made investments in preference shares of one of the promoter group entity, Hindustan Wires Ltd (HWL) at least since FY2006 (the earliest available data in the annual reports).

FY2007 annual report, page 46:

India Glycols Ltd 2007 Investment In Hindustan Wires Ltd

India Glycols Ltd disclosed in the FY2009 annual report that Hindustan Wires Ltd is an entity over which the key management personnel have significant influence.

FY2009 annual report, page 56:

India Glycols Ltd 2009 Promoters Have Influence Over Hindustan Wires Ltd

Moreover, as per the corporate database Zaubacorp, Mr. Uma Shankar Bhartia is the director of Hindustan Wires Ltd since 1981. (checked on March 25, 2020, click here)

Directors Of Hindustan Wires Ltd

In FY2007 and some of the subsequent annual reports, the company reported only the net amount of investment after provisions. Therefore, it was not possible to ascertain the total amount invested by India Glycols Ltd in these preference shares.

However, the company provided additional information in the FY2012 annual report, which indicated that the company had invested about ₹4.90 cr in the preference shares of Hindustan Wires Ltd. (4.68 + 0.22 = 4.90). The company acknowledged that out of the total investment value of ₹4.90 cr in these preference shares, the value has already diminished by ₹4.16 cr (=3.97 + 0.19). Therefore, the current value of these preference shares is only 0.74 cr representing a loss of value of 85% (4.16 / 4.90 = 0.85).

FY2012 annual report, page 84:

India Glycols Ltd 2012 Investment In Hindustan Wires Ltd

In FY2014, India Glycols Ltd provided money to Hindustan Wires Ltd (HWL) by way of fresh investment in the company so that HWL could repay its earlier investment in preference shares.

FY2014 annual report, page 76:

The subsidiary company, IGL Finance Limited, was having a provision of ₹416.00 Lacs towards diminution in the value of investments in the Preference Share Capital of Hindustan Wires Limited. During the year, the entire amount so invested was received back on redemption of Preference Share Capital. However, further investment of the similar amount was made in the Preference Share Capital of the said Company by the subsidiary company.

An investor would appreciate that such an investment by the company in HWL to enable HWL to repay its earlier preference share amounts to evergreening.

Further advised reading: How Promoters benefit themselves using Related Party Transactions

In addition, during FY2014, the company gave additional ₹10 cr to HWL by way of capital advance.

FY2014 annual report, page 91:

India Glycols Ltd 2014 Capital Advance To Hindustan Wires Ltd

A reading of subsequent annual reports indicates that Hindustan Wires Ltd repaid the said capital advance after four years in FY2018.

FY2018 annual report, page 109:

India Glycols Ltd 2018 Capital Received Back From Hindustan Wires Ltd

An investor may appreciate that such a transaction where the money is given by the company to HWL and received back after a few years is tantamount to an interest-free loan from the company to HWL.

It is advised that going ahead investors should keep a close watch on the related party transactions of the company with its promoters. In case, an investor notices that the company has entered into transactions of significant size with the promoters, then she may take a decision accordingly.

Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?

 

b) Kashipur Holding Ltd: short-term funding:

An investor notices that in FY2016, India Glycols Ltd gave an advance of ₹26.63 cr to one of the promoter group entities, Kashipur Holding Ltd. An investor also notices that within the financial year, the company received the same amount back from Kashipur Holding Ltd.

FY2016 annual report, page 122:

India Glycols Ltd 2016 Funding To Kashipur Holding Ltd

An investor may appreciate that the nature of such transactions may represent a short-term loan/funding arrangement where the company first gave the money to the related party when it needed money and then the related party refunded the money when the need was over.

Further advised reading: How Promoters benefit themselves using Related Party Transactions

As mentioned earlier, an investor should keep a close watch on the related party transactions of the company with its promoters and take decisions accordingly.

 

7) Sale of stake in Kashipur Infrastructure and Freight Terminal Private Limited (KIFTPL) by India Glycols Ltd:

In FY2015, the company disclosed to its shareholders that it has entered into a joint venture (JV) agreement with Apollo Logisolutions Limited (ALS) for developing a private freight terminal. The company informed the shareholders that in the JV, India Glycols Ltd holds a 48.9% stake.

FY2015 annual report, page 10:

India Glycols Limited holds 48.9% of the capital contribution of the JV Company.

Over the years, an investor notes that the stake of India Glycols Ltd has been declining.

In FY2018, the stake of the company in KIFTPL declined from 48.9% to 44.99%. FY2018 annual report, page 112:

India Glycols Ltd 2018 Shareholding In Kashipur Infrastructure And Freight Terminal Private Ltd

In FY2019, the stake of the company in KIFTPL declined from 44.99% to 41.78%. FY2019 annual report, page 118:

India Glycols Ltd 2019 Shareholding In Kashipur Infrastructure And Freight Terminal Private Ltd

At another place in the FY2019 annual report, the company disclosed that on March 31, 2019, out of the total shareholding (48.91%) owned by the company in KIFTPL, it owns 41.78% whereas 7.13% is owned by its associates.

FY2019 annual report, page 27:

As on 31st March, 2019, your Company along with its affiliates hold 48.91% of the share Capital (41.78 % by the Company and 7.13 % by the affiliates) of KIFTPL while 51% of the share capital is held by ALS.

However, the annual report does not contain details about who are the associates to whom it has sold/transferred the stake in KIFTPL and at what valuation.

An investor may contact the company directly to seek clarifications about the same and ask whether promoters and their controlled entities are a part of the associates mentioned by the group.

Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?

 

8) Significant losses due to foreign exchange fluctuations over the years for India Glycols Ltd:

From the above discussion, an investor would remember that in FY2009, during the global financial shock, the company faced significant losses (about ₹42 cr) due to foreign exchange fluctuations. However, the company used the accounting policies to report a lower loss, which was highlighted by the auditor in the annual report.

FY2009 annual report, page 78:

Had the Company continued to follow the earlier policy of charging foreign exchange differences on long term foreign currency monetary items to the profit & loss account, loss for the year would have been higher by Rs. 4167.69 lacs, General Reserve would have been higher by Rs. 1274.55 lacs and the net block of fixed assets would have been lower by Rs. 2731.85 lacs.

While reading subsequent annual reports, an investor notices that FY2009 was not the only year in which India Glycols Ltd faced losses due to foreign exchange fluctuation. In different other years, the company witnessed large losses indicating that the foreign exchange exposure management policy of the company leaves a lot to be desired.

In FY2012, the company reported a loss of ₹101 cr due to foreign exchange fluctuations. In FY2013, the loss due to foreign exchange fluctuations was ₹65cr. FY2013 annual report, page 58:

India Glycols Ltd 2013 Foreign Exchange Fluctuation Loss

In FY2014, the company had a loss of ₹108 cr due to foreign exchange fluctuations, which it reported under the exceptional item. FY2014 annual report, page 92:

Exceptional item includes: a) Loss on account exchange rate differences amounting to ₹10,803.19 lacs (net of gain of ₹11,336.93 Lacs) for year ended 31st March 2014, on payment, settlement as well as reinstatement of short term foreign currency borrowings and other monetary assets / liabilities,

In FY2017, India Glycols Ltd lost an amount of ₹26 cr due to foreign exchange fluctuations. FY2017 annual report, page 142:

The Company uses derivative instruments for hedging possible losses and exchange fluctuation loss is ₹2,646.68 Lacs net off gain of ₹545.84 Lacs (Previous Year loss ₹209.99 Lacs net off gain of ₹1,193.91 Lacs)

In FY2019, the company again suffered a loss of ₹44 cr due to foreign exchange fluctuations out of which it reported ₹37.3 cr as a loss under other expenses and ₹6.8 cr as a finance cost. FY2019 annual report, page 100:

India Glycols Ltd 2019 Foreign Exchange Fluctuation Loss

An investor would notice that frequent large losses due to foreign exchange fluctuations indicate that the hedging policy of the company is not efficiently protecting it from the exchange rate movements. As a result, it seems that the hedging and the derivatives policy of the company has a scope for improvement.

Moreover, while analysing the financial history of the company, an investor notices that there have been a few instances that indicate the weak understanding of derivatives transactions and the underestimation of the risks involved by the management of the company.

  • In FY2008, the company entered into certain financial derivatives with Standard Chartered Bank (SCB). However, it seems that soon the company suffered losses and it filed a case against SCB questioning the validity of these derivative transactions.

FY2010 annual report, page 76:

The Company has challenged the legality and the validity of the financial derivative transaction dated 15 th January 2008 entered into with Standard Chartered Bank, New Delhi (SCB), which is the subject matter of civil suit (Original suit) pending before the Hon’ble High Court of Delhi at New Delhi. Accordingly, of the total provision considered in books on prudence basis of Rs.1923.98 Lacs (Previous year Rs.4169.56 Lacs ) excluding interest, if any, made against the said financial transaction dated 15 th January 2008 is disputed and is subject to the final outcome of the aforesaid court proceedings.

  • Another incidence, which shows an underestimation of risk in the derivatives contracts by the company, is the investment of significant money in the contracts at National Spot Exchange Ltd (NSEL), which defaulted in 2013 on its commitment. As a result, the company has lost almost all its money invested in the contracts at NSEL.

Further advised reading: Steps to Assess Management Quality before Buying Stocks

 

9) Sale of traded goods (chemical and oil products) by India Glycols Ltd at a loss:

While reading the annual reports of India Glycols Ltd, an investor notices that the company has been selling chemicals purchased for sale as trading items are sold by the company at a loss over the years.

The following table shows that the company has sold chemicals and oil products as traded goods continuously at a value less than their purchase cost from FY2013 to FY2019.

India Glycols Ltd 2013 2019 Sale Of Traded Goods At A Loss

 

10) Aspects of the annual report of India Glycols Ltd:

a) The money, which is received as well as not received by India Glycols Ltd at the same time:

The amount of ₹184 cr is shown by the company as receivable under short-term loans & advances receivables in FY2015, indicating that the money/cash is yet to be received by the company on March 31, 2015.

FY2015 annual report, page 71:

India Glycols Ltd 2015 Short Term Loan And Advances

However, when the investor analyses the cash flow statement of India Glycols Ltd for FY2015, then she notices that the company has shown receipt of this money in the cash flow from investing activities under the sale of fixed assets.

FY2015 annual report, page 60:

India Glycols Ltd 2015 Cash Flow From Investing Activities

Therefore, if an investor interprets the cash flow statement of the company, then it has already received the money from the sale of the office building in FY2015. Whereas if the investor interprets the balance sheet as well as the detailed explanation under notes, then she notices that the money is not yet received and is outstanding under short-term loans & advance receivables.

Anyway, when the investor analyses the short-term loans & advance section for the next year, FY2016, then she notices that the amount of ₹184 cr is not outstanding as receivables. It indicates that the money/cash is received by the company in FY2016.

FY2016 annual report, page 79:

India Glycols Ltd 2016 Short Term Loan And Advances

Further advised reading: Understanding the Annual Report of a Company

However, when the investor analyses the cash flow statement, then she is not able to find any such item reflecting receipt of cash (inflow) pertaining to the sale of fixed assets/commercial tower/investment in the rental business division.

FY2016 annual report, page 68:

India Glycols Ltd 2016 Cash Flow From Investing Activities

Looking at the above information, an investor may contact the company directly to understand whether it presented the sales consideration of ₹184 cr both as receivables in the balance sheet as well as received under cash flow from investing in FY2015. If yes, then how should an investor interpret these financial numbers?

On the contrary, if it is not the case. The amount of ₹184 cr was indeed due from IGL Infra on March 31, 2015, and it was received only in FY2016. Then the investor may seek clarifications regarding the following:

  • In this situation, under which head in the cash flow statement, the company has represented the cash of ₹184 cr received. This is not present in the cash flow from investing. Moreover, in case, the company has represented it under cash flow from operating activities, then whether it actually is operating cash flow.
  • If the company has received ₹184 cr as cash in FY2016 and represented it under operating activities, then what was the amount of ₹189 cr received by it in FY2015 from the sale of fixed assets under cash flow from investing activities?

 

b) Apparently an error in the annual report:
i) FY2019 annual report:

When an investor analyses the indebtedness table of India Glycols Ltd in FY2019 annual report to understand the change in debt over the year, then she notices that the table has some errors in the totals as the number do not match up.

FY2019 annual report, page 43:

India Glycols Ltd 2019 Indebtedness Table

As per the data presented in the above indebtedness table, India Glycols Ltd had a debt of ₹768.73 cr at the start of FY2019. During FY2019, the company increased its debt by ₹206.35 cr. As a result, at the end of FY2019, the debt of the company should be ₹975.08 cr.

However, as per the indebtedness table in the annual report, shown above, the debt at the end of FY2019 is shown as ₹931.05 cr.

An investor may contact the company directly to seek any clarification or to confirm whether it is a typographical error by the company.

 

ii) FY2016 annual report:

Similarly, an investor may note that the data presented by India Glycols Ltd in the indebtedness table in the FY2016 annual report also does not tally.

FY2016 annual report, page 36:

India Glycols Ltd 2016 Indebtedness Table

In the indebtedness table for FY2016, India Glycols Ltd has reported that at the start of the year, it had a debt of ₹2,141.55 cr and during the year, the debt declined by ₹1,271.61 cr. As a result, the debt at the end of the year should have declined to ₹869.94 cr (= 2141.55 – 1271.61).

However, an investor notices that the company has represented the year-end debt as ₹1,125.15 cr.

Upon analysis of the data of the table, an investor notices that the company has done a mistake in the summation of the debt data in the “Change in Indebtedness during the financial year” section of the table. In this section, the company has represented that during FY2016, there was an addition of ₹124.33 cr of debt and a reduction of ₹1,143.42 cr of debt. Alongside this, there was a change of ₹3.86 cr due to the exchange rate differential. When an investor calculates the net change due to these movements in the debt, then it turns out that in FY2016, the debt reduced by ₹1,015.23 cr (= +124.33 – 1143.42 + 3.86).

With a reduction of ₹1,015.23 cr of debt during FY2016, the year-end debt would be ₹1,126.32 cr (= 2141.55 – 1015.23), which is very near to the year-end debt level of ₹1,125.15 cr presented by India Glycols Ltd in the indebtedness table.

An investor may seek clarifications from the company about these errors in the annual reports.

 

11) Calculation of CSR liability by India Glycols Ltd:

In the FY2019 annual report, while analysing the CSR section, an investor notices that India Glycols Ltd has disclosed that it does not have any CSR liability for FY2019 as it has suffered an average net loss of ₹70.8 cr for the last three years.

FY2019 annual report, page 35:

India Glycols Ltd 2019 CSR Expenditure Calculations

However, an investor notices that India Glycols Ltd has reported profits for each of the last there years.

  • FY2019: net profit after tax (PAT) of ₹133 cr
  • FY2018: PAT of ₹97 cr
  • FY2017: PAT of ₹35 cr

Therefore, it seems that the disclosure by the company in FY2019 that it has suffered an average net loss of ₹70.8 cr for the last three years may not be correct.

An investor may contact the company directly for further clarification.

Further advised reading: Steps to Assess Management Quality before Buying Stocks

 

12) Weaknesses in internal controls of the company and its subsidiaries:

While reading the annual reports of India Glycols Ltd, an investor comes across certain instances where it seems that the company needs to improve its internal controls.

 

a) Internal controls of India Glycols Ltd.

An investor notices that the auditor of the company had highlighted that the internal controls of the company need to be strengthened since FY2009.

FY2009 annual report, page 89:

there is an internal control system commensurate with the size of the company and nature of its business for the purchase of inventory & fixed assets and for the sale of goods and services which needs to be further strengthened

The said weakness continued until FY2015 because the auditor repeated this observation in the reports for FY2010, FY2011, FY2012, FY2013, FY2014 and FY2015.

FY2015 annual report, page 56:

there is an internal control system which needs to be further strengthened to be made the same commensurate with the size of the Company and nature of its business

An investor would appreciate that when the internal controls in any company are not good, then it exposes the company to frauds etc. from unscrupulous elements/employees.

If a company has a history of weak internal controls in the past, then investors always have a risk that there might be misdeeds by someone from the past, which might not have yet come out but may present themselves as a negative surprise in the future.

An investor may read the analysis of National Peroxide Ltd (a Wadia group company) where the auditor has highlighted that the internal controls of the company are weak and need strengthening. Later on, the company was hit by a fraud conducted by the employees including senior management (Managing Director) of the company.

Read: Analysis: National Peroxide Ltd

The weakness in the internal controls in India Glycols Ltd in the past also becomes apparent when an investor notices that the company has had delays in the timely payment of undisputed dues to govt. authorities as well as lenders.

FY2009 annual report, page 38-39:

Custom duty amounting to Rs.331.35 lacs and interest thereon amounting to Rs.173.86 lacs outstanding for a period of more than six months from the date they become payable as at 31st March 2009.

FY2010 annual report, page 36:

…no undisputed amounts payable in respect of statutory dues which have remained outstanding as at 31st March, 2010 for a period of more than six months except Service Tax amounting to Rs.4,48,392/- and TDS Rs1,050/- (since paid).

In addition, the company has delayed payment of interest to its lenders despite it becoming due for payment in FY2015, FY2016 as well as in FY2017.

FY2017 annual report, page 133:

India Glycols Ltd 2015 2016 2017 Interest Accrued And Due

An investor would appreciate that such kind of delays of small amounts to govt. authorities and lenders may represent a lax attitude by the personnel responsible for making such payments or a weakness in the maker-checker mechanism in the process at the organization.

 

b) Internal controls at Shakumbari Sugar and Allied Industries Limited (SSAIL):

While reading the annual reports of India Glycols Ltd, an investor gets to know that the internal controls at the subsidiary company SSAIL have been weak for long.

An investor notices that SSAIL has been in the process of verification and updating its fixed assets since FY2008.

FY2008 annual report, page 77:

SSAIL is in process of updating the fixed assets records and physical verification of Fixed Assets. In view of the necessary security arrangements, management is of the view that there will not be any material discrepancies between book and physical stock of fixed assets on completion of physical verification of fixed assets

In FY2012, the auditor highlighted the weakness of internal controls at SSAIL along with the non-verification and non-updating of fixed assets of the company.

FY2012 annual report, page 73:

Attention is invited to the following notes related with subsidiary SSAIL:

(i) Note no. 40 regarding pending confirmation /reconciliation of balances of debtors, creditors, Loans & Advances {including capital advances), other liabilities and provision and internal control to be further strengthened for the reasons as stated in the said note and consequential impact whereof presently cannot be ascertained.

(ii) Note no. 37 regarding pending verification and updation of records of fixed assets as stated in the said note.

The auditor repeated these observations in the annual reports of FY2013, FY2014, FY2015, FY2016, and FY2017

FY2017 annual report, page 117:

Note No 45 & 43(i) in respect of subsidiary Company SSAIL regarding pending confirmation/ reconciliation of balances of receivables, payables, loans & advances {including CWIP}, current liabilities and internal control needs to be further strengthened for the reasons as stated in the said note and consequential impact whereof presently cannot be ascertained and pending verification and updation of certain fixed assets records as stated in the said note.

However, an investor notices that the subsidiary company, SSAIL has not carried out its verification of fixed assets in FY2018 (annual report, page 140) as well as in FY2019.

FY2019 annual report, page 148:

In respect of subsidiary company (SSAIL): (i) The Subsidiary Company has not carried out physical verification of fixed assets during the year.

The fact that the verification of the fixed assets is going on since FY2008 and is not yet completed raises a question in an investor’s mind. She thinks that whether there has been any verification of assets at all in all these years. Nevertheless, such observations in the annual reports indicate that the state of checks & balances and the controls in the company leave a lot of room for improvement.

As mentioned earlier, there have been instances that when the internal controls in any company are not good, then it exposes the company to frauds etc. Therefore, an investor should be cautious while analysing companies with a history of weak internal controls and she should increase her level of due diligence for taking a final investment decision.

Further advised reading: Steps to Assess Management Quality before Buying Stocks

 

13) Payment of dividends despite losses by India Glycols Ltd:

While analysing the financial history of the company, an investor notices that the company paid dividends in FY2011 and FY2014 even when the company had reported losses during these years. In FY2011, the company reported a loss of ₹15 cr and in FY2014; it reported a loss of ₹161 cr.

Moreover, if an investor focuses on the cash flow from operating activities (CFO), then she notices that during FY2011 and FY2014, the company had negative CFO indicating that it lost money during its operations. In FY2011, the company had a CFO of negative (₹42 cr) and in FY2016; it had a CFO of negative (₹234 cr). However, still, India Glycols Ltd paid out a dividend of about ₹4 cr in FY2011 and about ₹3 cr in FY2014 (excluding dividend distribution tax).

An Investor would appreciate that when any company pays out dividends while it suffers losses and has negative CFO, then it indicates that the dividends are funded by debt. This aspect is illustrated when an investor notices that in both the years, FY2011 and FY2014, the company reported an increase in debt during the year. In FY2011, the debt of the company increased from ₹1,306 cr to ₹1,690 cr. whereas during FY2014, the debt increased from ₹1,769 cr to ₹2,053 cr.

An investor would appreciate that during the periods of losses, companies should refrain from distributing money in the form of dividends and rather conserve resources so that they may use it for supporting business operations or repayment of debt. Otherwise, the company ends up paying dividends by raising debt from lenders and pays interest on the same, which increases the costs for the company and is not in the best interests of the company and its stakeholders.

Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?

 

14) Tax payments by India Glycols Ltd over FY2010-2019:

An investor would appreciate that a company has to prepare its financial statements as per two different acts:

  • According to the Companies Act in order to disclose its financial performance in the annual report and
  • According to the Income Tax Act to pay corporate tax to govt. authorities.

Many times, due to different treatment of expenses and different incentives etc. the amount of tax for the company in these two sets of financials, differs from each other in a financial year. This leads to the generation of deferred tax assets and deferred tax liabilities.

Read more: How to Calculate Deferred Tax Assets?

An investor may get the tax amounts calculated by the company as per both these acts in its annual report.

  • The amount of tax calculated as per the Companies Act is shown in the profit and loss statement (P&L) as tax expense, and
  • The amount of tax paid by the company to the income tax authorities as per the Income Tax Act is present as the income tax paid outflow (or inflow if refund) in the cash flow from operations statement.

It is advised that if an investor notices that there is a significant difference between the tax amounts as per the two acts (i.e. in the P&L and CFO), then she may increase her level of due diligence. She may even seek clarification from the company if she does not get satisfactory answers from the annual report.

In the case of India Glycols Ltd, an investor notices that many times there are significant differences between the tax expense as per P&L and tax paid as per CFO for the year. E.g.

  • In FY2019, the company reported a tax expense of ₹80.5 cr; however, during FY2019, as per the CFO statement, it paid taxes of only ₹5.0 cr.
  • Similarly, in FY2018, the company reported a tax expense of ₹50.7 cr; however, during FY2018, as per the CFO statement, it paid taxes of only ₹1.2 cr.

FY2019 annual report, page 127:

India Glycols Ltd FY2018 2019 Tax Expense

FY2019 annual report, page 129:

India Glycols Ltd FY2018 2019 Tax Payout CFO

Similarly, if an investor analyses this data for the last 10 years (FY2010-2019), then she notices that over the last 10 years, India Glycols Ltd reported tax expense of ₹129.8 cr shown in the P&L; but it paid taxes of only ₹59.9 cr to the income tax authorities (as per CFO).

India Glycols Ltd FY2010 2019 Tax Expense Vs Tax Payout

Investors may contact the company directly to understand the reasons for such large differences in the tax expense (P&L) and tax payments (CFO).

Advised reading: Finding out whether a Company is Cooking its Books/Manipulating its Numbers

 

15) Company is taking approvals for raising ₹250 cr by diluting its equity every year since 2012:

While analysing the resolutions put forward by the company for voting in its annual general meetings (AGM) over the years, an investor notices that the company has sought approval from its shareholders for raising equity of ₹250 cr every year since 2012.

FY2012 annual report, page 13:

…the Company proposes to issue Equity Shares and/or instruments….and /or Foreign Currency Convertible Bonds (FCCBs) convertible into equity shares at the option of the Company or the holder(s) thereof, up to an aggregate principal amount of ₹250,00,00,000 (Rupees Two Hundred fifty Crores) or its equivalent…

The company has taken approval from shareholders for raising equity of ₹250 cr every year from 2012 up to 2019.

FY2019 annual report, page 17:

the Company proposes to raise funds through issue of Equity Shares…..Qualified Institutions Placement (“QIP”)….in one or more tranches, up to an aggregate amount of ₹250.00 Crores (Rupees Two Hundred Fifty Crores) or its equivalent in any other currency on the terms and conditions as stated in Resolution no. 11 of this Notice.

However, it seems that the company has not raised the said equity until now. An investor may contact the company directly and do her due diligence about the reasons that the company did not or could not raise the required money by equity despite planning for it for the last 7 years.

Is it that the company is trying hard to raise money but none of the large investors is willing to back the company by making large equity commitments? Investors would need to do their due diligence to arrive at any final conclusion.

 

The Margin of Safety in the market price of India Glycols Ltd:

Currently (March 25, 2020), India Glycols Ltd is available at a price to earnings (PE) ratio of about 4.7 based on the last four quarters consolidated earnings from Jan 2019 to Dec 2019. The PE ratio of 4.57 provides a 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, even 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.

 

Conclusion:

Overall, India Glycols Ltd seems a company that has been able to grow its business at a rate of 10-12% year on year for the last 10 years (FY2010-2019). However, the business performance of the company over this period has been cyclical. The company reported increased sales and profitability from FY2010-2013. However, then things took a turn for the worse and the company reported declining sales and losses for the next three years (FY2014-2016). Since FY2017 onwards, the company has reported increased sales as well as profitability until the last 12 months (Jan. 2019-Dec. 2019).

While analysing the business of the company in detail, an investor notices that the performance of the company is linked to the movement in crude oil. When oil prices increase, then the prices of the company’s key product glycol increase. Simultaneously, the demand and prices of another key product, guar gum derivatives increases due to increased demand from the shale oil exploration industry. This results in higher sales and improved profitability for the company. On the contrary, when crude oil prices decline, then the prices of glycols decrease and simultaneously, the demand and the prices for guar gum derivatives decline as the demand from shale oil exploration declines.

Moreover, the company has been hit by higher prices of its key raw materials (alcohol and molasses) whose prices do not depend on crude oil. In addition, in the country, there is usually a shortage of alcohol along with high prices due to the purchase of alcohol by govt. at high prices to blend it with petrol (gasoline). As a result, at times, the company faces a situation when it is economically unviable to produce glycols from renewable sources like alcohol & molasses.

The company attempted to come over such difficult situations by giving steep discounts to its large customers, shifting from production of glycols to ethylene oxide derivatives, and importing alcohol from abroad. However, none of these steps could save the company from suffering losses when crude oil prices declined during FY2014-2016.

Recently, the company has realized that the business environment is favourable for the production of alcohol & spirits. As a result, the company has started focusing on the production of premium alcohol brands, supplying to canteen stores department (CSD) of defense forces as well as producing power alcohol for supplying to oil marketing companies (OMCs) for blending in petrol. The focus on alcohol segment along with favourable policy changes from govt. like permission to all the players to sell liquor in Uttar Pradesh has helped the company to improve its business performance significantly in recent years. As a result, now the alcohol segment has become the biggest contributor to the company’s revenue.

An investor notices that India Glycols Ltd has reported very high cash from operating activities (CFO) than its net profit after tax (PAT) over the years (FY2010-2019). Upon deeper analysis, an investor notices that a large amount of the reported CFO is due to the inclusion of a long-term export advance (LTEA) by the company under cash flow from operating activity instead of cash flow from financing activities. The long-term export advance (LTEA) is actually a debt as it is backed by a bank guarantee and secured by assets of the company. Moreover, the company is making repayments to the customer to reduce the liability of LTEA, which indicates that it is actually a debt instead of operating cash flow.

Moreover, when an investor analyses the utilization of the cash generated by the company over the years, then she notices that the company has made many investment decisions, which did not create value for the shareholders. It includes the investment of about ₹150 cr in contacts at National Spot Exchange Ltd (NSEL), which defaulted in its obligations and as a result, India Glycols Ltd lost most of this money.

The company purchased a sugar unit for backward integration. However, it could not successfully run this difficult business, which usually has a lot of govt. and political interference. The sugar unit became bankrupt within a few years and almost the entire investment of about ₹160 cr is stuck without any returns to the shareholder. The lenders to the sugar unit had to take a loss for their loans to the sugar unit despite corporate guarantee from India Glycols Ltd. One of the banks, Central Bank of India, is still trying to recover its dues, which are being contested by the company.

In addition, almost all the subsidiaries and the joint venture formed by the company over the years are making losses.

In the past, India Glycols Ltd had built a commercial office where it occupied part of the space for its own corporate office and leased out the balance area to other tenants. In FY2015-2016, the company sold this commercial office to promoters and started paying rent to the promoters. It is advised that investor should do their due diligence to assess this transaction because, if the office building is sold to promoters at lower than its fair/market value, then it may tantamount to shifting economic value from the minority shareholders to the promoters.

In addition, the investors notice that the company recognized profits from the sale of the office building in FY2015, one year earlier than the actual sale of the building to the promoters in FY2016. India Glycols Ltd could do this by refusing to consolidate its wholly-owned subsidiary in its consolidated financials to whom it had transferred the rental business (office building).

In the past as well, investors find many instances where the company changed the accounting policies it followed to report lower losses. It included instances like following policies for acknowledging losses due to foreign exchange fluctuations, changing depreciation by changing useful life of fixed assets as well as deferring the recognition of impairment in the value of its investments in NSEL contracts as well as the bankrupt sugar unit. The company has suffered significant losses on derivatives contracts for managing foreign exchange losses as well as NSEL contracts. The company also filed a court case challenging the validity of derivatives contracts entered with Standard Chartered Bank (SCB) when it suffered losses. It indicates that the understanding of derivatives by the management of the company along with the assessment of risk in such transactions requires an improvement.

Over the years, the company has paid maximum remuneration to promoter-chairman despite losses in the company. At times, it paid remuneration higher than the statutory limits and the company had to seek central govt. approval for the remuneration paid to promoter-chairman, which was denied by the govt. As a result, the chairman had to refund the excess remuneration received by him. However, the company has requested the central govt. to review its decision so that it can pay the higher remuneration to the promoter-chairman. Similarly, the company has given salary hikes to the chief executive officer (CEO) of the company even when the company was making losses in FY2015-2016.

There are many aspects in the annual report of the company for which investors may seek additional clarifications from the company. These include:

  • Sale of 7.13% stake in Kashipur Infrastructure and Freight Terminal Private Limited by the company to its associates in FY2018 and FY2019.
  • A significantly lower amount of taxes paid to the govt. authorities than the tax expense shown in the profit and loss statement.
  • Representing that the company does not need to do any CSR expense in FY2019 due to average losses of ₹70.8 in the past three years whereas as per the P&L, the company has had net profits in each of the past three financial years.
  • Selling traded goods at a loss in each of the years since FY2012
  • Showing ₹184 cr consideration on sale of the rental business division to IGL Infra as both receivables in the short term loans & advances as well as simultaneously showing the cash of ₹189 cr received from the sale of fixed assets in the cash flow from investing activities in FY2015.
  • Typographical errors in the annual reports in the indebtedness tables of FY2016 and FY2019.

An investor finds that the company has had instances of weak internal controls in the past, which comes across as a cause of concern to the shareholders. The subsidiary of the company, SSAIL, has not completed verification of its fixed assets since FY2008 raising doubts in the minds of investors whether there has been any attempt to verify the fixed assets of SSAIL by the management ever.

There have been certain transactions of the company with related parties, which indicate providing funding to the promoter group entities like the investments in the preference shares and giving capital advance to Hindustan Wires Ltd and giving advance and receiving it back with the same year to Kashipur Holdings Ltd.

Going ahead, an investor should monitor whether the company is able to continue its good business performance of alcohol segment, which has allowed it to show good performance despite the recent decline in crude oil prices. The investor should keep a close watch on the transactions of the company with various promoter group companies, remuneration to promoters, and selling more stake of the joint venture to its associates. Investors should monitor the financials of the company for classification of seemingly non-operating items in the cash flow from operating activities as well as using accounting policies to defer losses, prepone profits as well as adjusting provisions & write-offs directly in the balance sheet instead of profit & loss.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on India Glycols Ltd. However, investors should do their own analysis before making any investment-related decisions 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

I hope it helps!

Regards,

Dr Vijay Malik

P.S:

 

DISCLAIMER

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.

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