Analysis: WPIL Ltd

The current section of the “Analysis” series covers WPIL Ltd, an Indian company involved in fluid handling by way of making pumps and execution of turnkey water supply projects for irrigation, oil & gas, power, and other industries.

“Analysis” series is an attempt to share with all the readers, our inputs to the company analysis submitted by readers on the “Ask Your Queries” section of our website.

In order to benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.

WPIL Ltd Research Report by Reader

Respected sir,

I am Gaurav Khandelwal, a retail investor and an engineer by profession. I have been going through your website and have learned a lot. Thank you for sharing your thoughts openly!

Based on my learning experience, I have done research on WPIL Ltd, which is attached below.

My purpose to send you the research report is not to get any recommendations. I wanted to know if my approach is good and my level of understanding of the business is ok. It would be a great honor if you could spend time to read the report and guide me regarding the same.

Best Regards

Gaurav Khandelwal

About WPIL Ltd:

65 years in designing, developing, manufacturing, erecting, commissioning and servicing of pumps & pumping systems. Manufacturing operations in India, the United Kingdom, Italy, France, Switzerland, South Africa, Zambia, Australia, and Thailand.

a) Business verticals:

• Engineered pump division
• Standard pump division
• Infrastructure division

b) Management:

• Mr Prakash Agarwal – Executive Director(Managing director) and Promoter
• Mr VN Agarwal – Non-Executive Director and Promoter
• Mrs Ritu Agarwal – Non-Executive Director and Promoter
• Mr KK Ganeriwala – Executive Director
• SN Roy, Shyamal Mitra, Biyana Kapoor – Independent director

VN Agarwal is the father of Prakash Agarwal. Ritu Agarwal is the wife of Prakash Agarwal.

c) Shareholding:

• Total number of Shares: 9,767,080
• Floating: 3,045,576
• Promoters hold 68.82%
  • 197843 (2.03%) – Mr Prakash Agarwal
  • 3861659(39.54%) – Hindusthan Udyog Limited – Mr Prakash is a non-executive director
  • 1906650(19.52%) – Asutosh Enterprises Limited – Mr VN Agarwal
  • 755352(7.73%) – VN Enterprise – Mr Prakash Agarwal

d) Remuneration:

• The promoters, P. Agarwal and Ganeriwala, together had ₹1cr of remuneration as of AR2015 page47 and page59
• It is near to 5% of profit before tax (PBT), which is very high. However, in AR2018 page 33 shows a hike of ₹0.5cr. Total remuneration is ₹1.5cr.
• Mrs Ritu Agarwal draws very nominal remuneration, which is a good sign.

Inference:

WPIL Ltd is a family run business with many subsidiaries controlled by the Singapore subsidiary. The promoters hold positions in related parties, which are invested in WPIL Ltd. The remuneration of promoters is high at 5% of the profit. After VN Agarwal, Mr Prakash Agarwal and his wife hold for the succession of the management. Mr Ganeriwal plays a key role in the management.

Financial Statements Analysis (2012 – 2019) for WPIL Ltd:

• Growth: Sales 15%, operating profit (OP) @ 23%, net profit (NP) @ 24%. There have been fluctuations in operating profit margin (OPM) @ Mar16 and Mar 17
• Other income is been significantly rising.
• The tax rate is fluctuating. Mar 16 and Mar 17 shows tax paid more than net profit (NP).
• cCFO > cPAT shows that the company is able to receive cash
• Net fixed asset turnover (NFAT) has been improving and near consistent
• The receivables days are high but have significantly gone from 190 days to 102 days.
• Inventory turnover ratio (ITR) was high at 102 in Mar17 but then reduced to 62.
• The working capital cycle has reduced from 241 days to 163 days. It shows the company’s efficiency to collect money. Reduction in inventory is improving the working capital cycle.
• The debt to equity ratio has reduced to 0.3. The company’s interest coverage ratio is healthy.
• Shareholders’ value creation is 2.25. Present market capitalization has reduced to ₹585cr
• Cash flow shows that the company has invested most of its cash in investing activities.

The company sales are dependent on projects related to irrigation, power, infrastructure and municipal projects. These projects are driven by high valued orders, which drive the profit of the company. To expand the sales the company enhanced its vertices to other parts of the world through Singapore subsidiary. With growing years, it is found out that the company is increasing stakes in these global acquisitions. In addition, the company is merging some of the entities and simplifying subsidiaries. The loss-making UK subsidiary has been shut down (AR 2018 page 13)

AR 2012:

• Page – 4 – WPIL Ltd gives a corporate guarantee to Singapore subsidiary.

WPIL International Pte. Limited, the Company’s Subsidiary in Singapore had made financial arrangements for availing a Facility of USD 8.62 Million (comprising of a Term Loan of USD 5.62 Million and a stand-by Letter of Credit of USD 1.00 Million and Working Capital of USD 2.00 Million) from a Syndicate of Banks and Financial Institutions (“Lenders”) arranged by AXIS Bank Limited, Singapore Branch (as Arranger and Agent of Lenders) for its business purposes

WPIL International Pte. Limited had approached to WPIL Limited, its Holding Company to issue a Corporate Guarantee in favour of the Finance Parties for securing its obligations

AR2014:

• Page30 31 – Loans and corporate guarantee to Singapore subsidiary – 2 times (18.62million USD) 120cr INR

Corporate Guarantee issued on behalf of WPIL International Pte. Limited, Singapore in favour of the ‘Finance Parties’ for securing the obligations of WPIL International Pte. Limited, Singapore towards Facility of USD 10 Million

AY 2017:

• Page 118 – Minority shareholder invested 12cr in Singapore subsidiary. The shareholding pattern changed.

Inference:

The parent company WPIL India has issued corporate guarantee and personal guarantee and expanded its business globally through Singapore subsidiary. There has been continuous investment by Mother Company to its subsidiaries to meet working capital.

Operating profit of WPIL:

• The operating profit seems to be increasing with sales. However, the operating profit margin (OPM) is cyclical. It ranges between 22% and 8%.
• FY2016 and FY2017 show a high dip in profit margin and after that, there has been significant improvement.
• Domestic profits are driven by orders related to government projects- Infrastructure, irrigation, power, municipal.
• The margins are affected by the following

a) Corruptions in government:

AR2012 Page – 7

This was caused by series of scams and revelations which eroded the decision-making process. As our Company deals with the Governments in both the Municipal and Irrigation sectors, a large number of decisions were pending leading to a shortage of orders in the market

b) Rise in coal prices:

The rise in coal prices affects power plants leasing to fewer orders.

AR2012, Page – 7

Furthermore, the power sector which had been robust till 2010-11 was plagued by coal supply issues on one end and deteriorating financial health of State Electricity Boards on the other end. The cumulative effects of these lead to less availability of orders.

c) Rising in dollar rate:

An increase in the dollar against INR increases the cost of interest on debts by the international subsidiary. AR2015 Page 9.

d) Volatility in raw material (mostly steel):

The increase in raw material imports increases the CIF value of imports and cost.

AR2012, Page 9 – Threat of raw material

The biggest concern are the volatile raw material prices and impact of surging inflation on the other item of inputs. This increase in commodity prices combined with uncertain availability threaten to affect despatches and profitability.

• Major revenue is generated by Accessories of pumps (50%) and pumps (35%) and spare of pumps (15%)
• The major raw material is the motor engine, starters (15%), spare, and others (50%)

e) Poor recovery from customers (receivables):

AR2014, Page19 – Threats:

The biggest concern are the volatile raw material prices and impact of surging inflation on the other item of inputs and poor recovery from customers. This increase in commodity prices combined with liquidity crisis threaten to affect despatches and profitability. The biggest concern presently is the domestic industrial environment along with credit worthiness of large clients.

Also, the receivable days shows the lack of management to collect receivables. However, the figures are getting better.

f) Drop in crude oil prices:

Since the company is dependent on oil & gas and nuclear plants, any drop in crude oil prices affects the order book.

g) Government initiatives:

AR2018, Page 13

The Indian orders were good and resulting in a boost of net profit:

“ enhanced public expenditure on the municipal and irrigation sectors helped the company to grow”

• Infrastructure division, which finally gained traction with revenues of 170 crores

AR2017, Page 14:

Domestic operations are dependent on government orders in infrastructure, municipal, irrigation. The new added waste water is giving benefit after Swatch Bharat.

h) Segment subsidiary performance:

The company has invested in foreign companies under the Singapore subsidiary (Aturia). The company has been investing continuously though there are repeated losses up to 2018. The European division is profitable.

The European division has been doing well after the acquisition. The company has planned to sell UK subsidiary Mathers foundry but it has performed well in 2019

There has been a minority interest of ₹31.62 cr, which is a burden for the company. AR2019, page 189

Inference:

Due to acquisitions, the revenue outside India has increased from 82cr to 807cr. However, most of the acquisitions seem unprofitable. The profit of parent company is consistent due to good orders from the government in irrigation, municipal and infrastructure orders. The recent acquisition in Europe is profitable.

Working capital position of WPIL Ltd:

The Company is facing a hard time to collect money. The other main issue is volatility in raw material, which the company is unable to pass to its customers. The interest cost goes high due to dollar appreciation as all loans are taken outside India.

Fund flow analysis of WPIL Ltd:

a) Standalone:

• 2012 – Company managing its working capital from the profit and long term borrowings
• 2013 – The company used profits and borrowings to invest in its subsidiary. Also, the working cap is managed by payable in advance from customers. Long-term borrowing is also reduced.
• 2014-Company used its profits to reduce long-term borrowings and used short-term borrowings to manage the working capital.
• 2015-Company used its profits and share capital (100cr) to reduce loans. In addition, the company is able to collect cash, which shows improvement in its efficiency.
• 2016-Company used borrowing and profit to invest in subsidiary and manage its subsidiary’s working capital.
• 2018-Company has used the profit to reduce borrowing and managed working capital by billing advance to customers and increasing payable. The company efficiency is reduced as receivable are very high
• 2019-Company has used profits to reduce borrowings. Also, contract advances are taken and receivable are long term shows lack of efficiency of the company

Inference:

Overall, the company when profitable uses the money to reduce borrowings and investing in subsidiaries. Moreover, the company is facing a hard time to manage working capital in downtimes. The receivables are re-categorized in the long term and short term, which shows the company, is not able to collect cash sooner. On the contrary, the contract liabilities demonstrate the advance collection before the execution of the job, which is a good sign.

b) Consolidated:

• 2013- Profits, borrowings, minority interest has been used to buy fixed assets. Short borrowing and other liabilities are used to manage the working capital.
• 2014- Profits were used to create assets and reduce long-term borrowings. Short term borrowing was used to finance working cap
• 2015- The company used its profits and share capital (100cr) to reduce loans. Also, the company is able to collect cash which shows improvement in efficiency
• 2016- Huge borrowings were taken to manage the working capital. The efficiency of the company reduced drastically.
• 2017- Company reduced borrowings and disposed of some assets. The payables have increased.
• 2018- The company is able to collect advances from which the long term borrowings are reduced. The rest is used to manage the working capital.
• 2019- The profit is generated by the execution of orders but the advance has been reduced showing fewer orders in the coming time.

Inference:

Overall, the company is highly working capital intensive. It uses profits and borrowings to manage its working cap. Contract liabilities serve major importance for future growth.

Peer Comparison of WPIL Ltd:

a) Revenue and profit:

Revenue of WPIL has been growing at 15% CAGR. Shakti pumps enjoy a growth of 29% CAGR. Comparing margins OPM WPIL enjoys an NPM of 15%, which is lesser than KSB ROTO and Shakti. ROTO has an OPM of 20%, which is the highest. The NPM of WPIL is again lesser than the market average of 8-9%.

b) Working capital efficiency:

WPIL is seen is having very high receivable days compared to competitors.

Inference:

WPIL faces tough competition from its competitors in the same segment. Moreover, the working cap cycle is very high shows the company facing difficulties in collecting money; this is due to credits given to large clients.

Credit report of WPIL Ltd:

The credit report shows that the company is highly working capital intensive. The company is not able to receive the full amount in the right time to meet its requirements. In addition, there is a huge competition globally, which is affecting the profit margins. The volatility in the raw material is a major factor in the decline of profit.

Valuation Analysis of WPIL Ltd:

• Trailing P/E – 9.88
• Dividend yield – 1.15%
• Earning yield – 10%

Total expected return – 11.15%

• Total Retained earning – 264cr
• Change in Map – 593

Shareholders value – 2.25

• Average FCF – 50cr
• Discount rate – 10%
• Growth – 10%(1st 5 years) and 5%(last 5 years)
• 10th year cash * 4.5 times
• Total estimated Cash at tenth year = 2573cr
• Outstanding shares – .9767cr
• Maximum price = 2,634 Rs/share
• Discount 50% – 1,300 Rs/share

Inference:

The valuation shows the company is available at a discount and provides a margin of safety. However, DCF valuation is not applicable to cyclic business, but taking a conservative approach of 50cr FCF is reasonable.

The present price is near 600. In the max period, the company has never crossed 1000rs /share hence the DCF looks abnormal.

Summary:

WPIL Ltd is a company with a business of pumps and accessories. It indulges itself in service contracts, design, and manufacturing of pumps. The company operates globally through its Singapore subsidiary WPIL Aturia. The Indian company has a sustainable profit. The sales have been increased due to foreign subsidiaries. However, after reading annual reports we can conclude that the foreign subsidiaries have been unprofitable until 2018. Only the European subsidiary is profitable. The margins of the company are heavily affected by the volatility of raw material prices. The raw material, if imported, very high depleting the profit margins. Over that the interest cost is affected due to appreciation in dollar rate as loans are taken from outside.

The company faces a hard time to manage its working capital, as the receivables are very high. The company has borrowed money for managing working capital and even diluted capital to repay borrowed amounts.

The company history shows that many of the acquisitions have failed due to which they have merged within subsidiaries. The recent acquisition of the European subsidiary is a profitable deal. The company’s growth depends on government initiatives, which suddenly boosts revenue. Comparing it to its peers the company’s efficiency and profitability seem lower.

Please provide your inputs to the above analysis.

Regards,

Gaurav

Dr Vijay Malik’s Response

Hi Gaurav,

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

While analyzing the past financial performance data of WPIL Ltd, an investor would notice that until FY2011, the company used to report only standalone financials. This was because the company did not have any subsidiary. Since FY2012, the company has created many subsidiaries and joint operations. As a result, FY2012 onwards, WPIL Ltd provides both standalone financials as well as consolidated financials in its annual reports.

We believe that while analysing any company, the investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire group. Therefore, while analysing WPIL Ltd, we have analysed standalone financials for FY2010-FY2011 and consolidated financials from FY2012 onwards.

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.

Financial and business analysis of WPIL Ltd:

While analyzing the financials of WPIL Ltd, an investor would note that in the past, the company has been able to grow its sales at a rate of 18%-20% year on year. Sales of the company increased from ₹211 cr. in FY2010 to ₹1,156 cr in FY2019.

The growth of the company has not been a smooth journey as it witnessed its sales decline in FY2015 and FY2017. In FY2015, the sales of WPIL Ltd declined by 5% and in FY2017, the sales of the company declined by 3% over the respective previous years. An investor would notice that in the reported results of the last 12 months (Oct. 2018-Sept. 2019), the sales of WPIL have declined to ₹1,018 cr, which is about 12% down from the FY2019 sales of ₹1,156 cr.

An investor would note that such a cyclically fluctuating performance of the company is not limited to its sales growth. The operating profit margin (OPM) of the company has also shown similar fluctuations.

The OPM of the company was 14% in FY2011, which declined to 12% in FY2012. Later on, the OPM improved to 16% in FY2014, only to decline to a low of 7% in FY2016. Since FY2016, the OPM started improving and reached 20% in FY2019. However, during the last 12 months (Oct. 2018-Sept 2019), the OPM declined to 15%.

In order to have a better understanding of the business model and the factors affecting its performance, an investor needs to analyse the reasons for such fluctuations in its sales and profit performance over the years.

While analysing the credit rating report for the company by the rating agency, CARE Ltd, for Oct. 2019, an investor gets to know that the company is exposed to cyclicity in the demand in the general economy and its end-user industries.

Oct. 2019 credit rating report of WPIL Ltd by CARE, page 3:

the company is also exposed to the demand cyclicality which is inherent to the economy and end-user industries.

While reading the past annual reports of WPIL Ltd, an investor finds that the company had a decline in its business performance on many occasions due to the tough economic environment.

In FY2013, the company witnessed its standalone sales, primarily domestic sales in India, decline 11% to ₹268 cr from ₹299 cr in FY2012. The company intimated the shareholders that the decline in sales is due to the poor economic environment.

FY2013 annual report, page 6:

decline in profit over the last year is primarily attributable to the drop in turnover due to deterioration of domestic business environment for capital goods

The company could report an overall growth in FY2013 due to the better performance of its international operations.

FY2013 annual report, page 7:

Further, the focus on its International business yielded good results and allowed the Company to achieve sales of Rs.534 Crores on a consolidated basis. The Company aims to continue its focus on export and development of its International business to protect it from the vagaries of the domestic market.

However, the company could not save itself from the deteriorating business environment in FY2015 when both the domestic, as well as the international business divisions, suffered. As a result, both the sales and profitability of the company suffered in FY2015.

FY2015 annual report, page 11:

DOMESTIC: The operations of the Company were adversely affected by the poor environment in the infrastructure and capital goods sectors. Government investment in the Irrigation and municipal sectors were affected due to elections and Govt. change and private sector investment by poor demand scenario. There was a large amount of uncertainty regarding project execution and a slowdown in new project enquiries.

The International operations of the company were also affected by adverse conditions, drastic strengthening of the US dollar led to mark to market currency losses on the outstanding loans and a steep drop in crude prices led to production cutbacks and hence lower demand in the sector.

The company again reported a decline in sales as well as very low-profit margins in FY2017. In the FY2017 annual report, WPIL Ltd intimated its shareholders that the company suffered in its international operations esp. UK operations where its subsidiary, Mathers Foundry Ltd, reported large losses, which overshadowed the good performance of Indian operations. The company highlighted that the losses in the UK subsidiary, Mathers Foundry Ltd are due to deep correction in the crude oil prices, which has stalled the project executions in the oil & gas sector. Another parameter influencing the results was exchange rate fluctuations.

FY2017 annual report, page 16-17:

The performance of the company was tempered due to good performance at the Indian operations being offset by further losses at Mathers UK. Further the year end consolidated numbers were affected by exchange variation due to drastic appreciation of the rupee.

MATHERS UK operations are highly dependent on orders from the Oil & Gas sector. With prolonged pricing pressure in the sector all new investments are on hold. This has resulted in a further fall in revenues and losses.

Similarly, while looking at the performance of the company in the latest period (Oct. 2018-Sept 2019), an investor notices that one of the reasons for the recent decline in performance is also the subdued economic environment. The slowdown has affected the execution of projects by the corporates, which in turn has influenced the business of WPIL Ltd as it executes these projects for its customers.

The credit rating agency, CARE has highlighted it in its report for the company in Oct. 2017.

In Q1FY20, WPIL reported net loss of Rs.5.19 crore on total income of Rs.196.55 crore on a consolidated basis as against PAT of Rs.16.74 crore on total income of Rs.272.91 crore in Q4FY19. The loss was partly on account of reduced turnover due to slow movement in orders in both Indian and international operations and partly on account of booking of additional costs related to consolidation of Finder for the first time.

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

From the above discussion, an investor would appreciate that the business performance of WPIL Ltd depends a lot on the general economic scenario. When the economy is doing well, then its customers focus on the execution of projects and as a result, WPIL Ltd gets more business. On the contrary, when the economy/customer industries are not doing well, then the customers go slow on their projects. As a result, WPIL Ltd reports lower profits and even losses like in the case of UK subsidiary, Mathers Foundry Ltd, which executed projects for the oil & gas industry and reported losses when crude oil prices declined significantly. Eventually, WPIL Ltd had to shut down the operations of Mathers Foundry Ltd in FY2018, as it did not see any hope of its turn around.

FY2018 annual report, page 18:

The Company closed its operations at Mathers UK in July 2017 due to the continued downturn in the offshore oil market . After completing all closure formalities it is now exploring opportunities to monetize its assets.

An investor would note that the operating profit margins of WPIL Ltd have fluctuated from 20% to 7% over the years. Such fluctuations in the profit performance of a company indicate that the company has a low negotiating power over its customers. As a result, it finds it difficult to pass on the increase in the cost of raw material to its customers. Such situations usually force the company to absorb the raw material price increase on its own and in turn, reduce its profit margins.

While analysing the prospectus released by WPIL Ltd for its qualified institutional placement (QIP) in Dec 2014, an investor finds that the company has described the nature of its contracts with its customers. In the QIP prospectus, WPIL Ltd intimated potential shareholders that most of the contracts entered by it with its customers are fixed-price contracts where the impact of any change in raw material, later on, has to be borne by WPIL Ltd. The company clarified that only some of its contracts had escalation clauses to cover the increase in raw material costs.

2014 QIP prospectus, page 49:

We are vulnerable to fluctuations in raw materials costs. This may affect our margins and in turn our operations, financial condition and cash flows.

Certain raw materials that the Company uses in its operations, particularly steel/ alloy steel castings, motors, engines and starters, mild steel sheets, steel shafting, pig iron/ferrous scrap, pipes and tubes, may be subject to significant price fluctuations.

We contract to provide services mostly on the basis of a fixed price or a lump sum price for supply of pumps and turnkey project execution. Under the terms and conditions of such fixed-price or lump-sum contracts, we generally agree to a fixed price for supplying pumps or providing engineering services for the part of the project contracted to us. In the case of turnkey contracts, we generally agree to deliver completed facilities which are in a ready-to-operate condition. Increases in the costs of raw materials resulting in an increase in the expenditure are sometimes covered by suitable escalation clauses under such contracts.

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

Due to primarily the fixed-price nature of its contracts, WPIL is exposed to commodity price changes, which are generally very volatile. Therefore, an investor would appreciate that the operating profit margins (OPM) of the company have been very fluctuating over the years.

The company has highlighted its vulnerability to raw material prices in its various annual reports as well.

FY2012 annual report, page 9:

The biggest concern are the volatile raw material prices and impact of surging inflation on the other item of inputs. This increase in commodity prices combined with uncertain availability threaten to affect dispatches and profitability.

An investor may believe that the above observations by the company are about 5 to 7 years old and the business situation might have changed in recent years. However, when she reads the latest annual report of FY2019, then she notices that the company has again highlighted commodity price changes as a major risk to its business.

FY2019 annual report, page 18:

The biggest concern remains geo political risks such as major currency fluctuation, political stability and commodity price swings.

After reading analysis of multiple companies at our website, an investor would know that most of the time, the companies that face the risk of commodity price fluctuations are the ones that operate in highly competitive industries. In such industries, customers have the option of choosing from many suppliers. The customers negotiate hard on the prices and the contract terms with the suppliers. As a result, suppliers are not able to pass on the increase in raw material costs to the customers and, in turn, whenever the raw material prices increase, the suppliers take a hit on their profit margins.

The credit rating agency, CARE, highlighted the competitive nature of the business of WPIL Ltd in its report of Oct. 2019.

Intense competition in the pump industry: The global and Indian pumps industry is characterized by co-existence of small and large manufacturers and a few established players. Moreover, the company is also exposed to cheaper imports of pumps from China & Korea. Most of the manufacturers in the unorganized segment cater to the agricultural sector. Thus, WPIL is facing competition from the organised as well as unorganised sector players.

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

An investor would notice that WPIL Ltd faces competition from organized as well as unorganized players. In addition, it also faces competition from cheap imports from countries like China and Korea. While reading the annual reports of the company, an investor would notice that almost all the major global pump-manufacturing companies are present in India, which also poses a competitive threat to WPIL Ltd.

FY2010 annual report, page 9:

The presence of all major international pump companies in India would be a threat to Company’s growth.

From the above discussion, an investor would appreciate that WPIL Ltd operates in a highly competitive industry where the customers have a high negotiating power over their suppliers. As a result, the suppliers are not able to pass on the increases in the raw material costs to the customers, which results in fluctuating profit margins.

The business WPIL Ltd is linked to the project executions by its customers, which in turn, is linked to the general economic situation at any given point of time. As a result, the business of the company is exposed to all cyclical economic parameters like commodity prices, foreign exchange changes, oil & gas prices etc.

Looking at these aspects of the business model of WPIL Ltd, an investor would appreciate that the business performance of the company is dependent on many macroeconomic parameters, which are not in its control. As a result, an investor would appreciate that the business performance of the company is expected to witness periods of increase and decrease in its sales growth as well as profitability going ahead.

Therefore, when an investor notices that the sales, as well as profit margins of the company, have declined in the latest 12 months period (Oct. 2018-Sept 2019), then it does not surprise her. The investor realizes that such fluctuations are not an aberration in the company’s performance, but these reflect the nature of its business model.

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

The net profit margin (NPM) of WPIL Ltd has followed the trend of its operating profit margin. NPM of the company was 7% in FY2011, and then it declined to 6% in FY2012. The NPM increased subsequently to 8% in FY2013 only to decline to almost 0% in FY2016. In recent years, the NPM of WPIL improved to 11% in FY2019. However, in the latest 12 months period (Oct. 2018-Sept 2019), the NPM has declined to 8%.

To understand more about the impact of industry cycles on the companies, investors may read the analysis of following companies:

• Analysis: HEG Ltd
• Analysis: Escorts Ltd
• Analysis: Gandhi Special Tubes Ltd
• Analysis: Ion Exchange (India) Ltd

While analysing the tax payout ratio, an investor would notice that the company used to have a stable tax payout ratio of 32%-34% until FY2012 before it established its international subsidiaries. Such a tax rate was in line with the standard corporate tax rate prevalent in India.

However, FY2013 onwards, the impact of foreign subsidiaries and cross border tax treaties and rules have started affecting the net tax payout ratio of WPIL Ltd. As a result, the tax payout ratio of the company since FY2013 has been highly fluctuating.

The recent annual reports prepared in line with the new Indian Accounting Standards (IndAS) contain a table of reconciliation of tax payouts of the company with the standard corporate tax rate. An analysis of this table provides an idea to the investor of the reasons for the differences in the tax payout ratio of the company.

While analysing the tax-payout reconciliation table for FY2018-2019, an investor notices that the major items that have led to significant differences in the actual tax payout from the standard tax payout are related to the subsidiaries.

FY2019 annual report, page 165:

The above table indicates that the two items: (i) Losses and deductible temporary difference against which no deferred tax asset created for some subsidiaries and (ii) Effect of different tax rate from foreign subsidiaries have led to the major variations of the actual tax payout ratio of WPIL Ltd from the standard corporate tax rate in India.

Further advised reading: How to do Financial Analysis of Companies

Operating Efficiency Analysis of WPIL Ltd:

a) Net fixed asset turnover (NFAT) of WPIL Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of WPIL Ltd in the past years (FY2010-19), then she notices that the NFAT of the company used to be 9 in FY2011, which declined to 3 in FY2015. Since then, the NFAT has improved to 6 in FY2019.

An investor would notice that the decline of NFAT from 9 to 3 during FY2011-FY2015 coincides with the large investments done by WPIL Ltd in capacity expansion by both acquiring new companies abroad as well as creating new capacity within Indian operations.

The company took the following expansion steps:

• FY2011: expansion of Ghaziabad plant
• FY2012: acquired Mathers Foundry in the UK, Sterling Pumps in Australia and started WPIL Thailand, a joint venture in Thailand
• FY2013: acquired Mody Pumps and completed the modification of the foundry at Ghaziabad plant
  • acquired WPIL South Africa and its business of APE Pumps, Mather & Platt and PSV Zambia
• FY2014: completed first phase of the manufacturing facility at Nagpur
• FY2016: acquired Gruppo Aturia, Italy along with its subsidiaries

These capacity expansion initiatives seem to have led to a situation where WPIL Ltd took some time to utilize these assets fully. As a result, for the interim period, these assets could not produce results at maximum efficiency, leading to lower NFAT. However, as the acquisitions & expansion were integrated, then the business’s result improved esp. from the Italian operations. As a result, the NFAT of the company increased to 6 in FY2019.

An investor would notice that in the normal course of business, manufacturing companies usually have an NFAT in the range of 1-4. An NFAT of 6-9 like in the case of WPIL Ltd indicates that the business of pumps needs comparatively low investment in plant and machinery.

As a result, any person/entity with a small amount of effort can raise the capital and put up a competing manufacturing plant. An investor would appreciate that this may be one of the reasons for the intense competition faced by WPIL Ltd because many firms in the unorganized sector may be able to compete with it by investing a small amount of money in the water treatment plant manufacturing set up.

As per the Oct. 2019 report of the credit rating agency, CARE for WPIL Ltd, the company faces intense competition from the unorganized sector especially in the agricultural sector.

Oct. 2019 credit rating report of WPIL Ltd., page 3:

Most of the manufacturers in the unorganized segment cater to the agricultural sector. Thus, WPIL is facing competition from the organised as well as unorganised sector players.

The low capital requirement and the resultant intense competition from unorganized sector as well as from cheaper imports seem to be one of the key parameters leading to the fluctuating business performance of WPIL Ltd over the years.

Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors

b) Inventory turnover ratio of WPIL Ltd:

While analyzing the inventory turnover ratios (ITR) of WPIL Ltd, an investor would note that during FY2010-2019, the ITR of the company has witnessed a significant decline. In FY2011, the ITR used to be 16, which declined to 4 in FY2018. Only recently, in FY2019, the ITR has witnessed recovery to 6, which is still lower than the previous inventory turnover levels exceeding 10.

It indicates that the efficiency of the company in managing its inventory has deteriorated over the years. It remains to be seen whether the company is able to improve its inventory management going ahead.

Advised reading: Inventory Turnover Ratio: A Complete Guide

c) Analysis of receivables days of WPIL Ltd:

An investor would notice that over the years, the receivables days of WPIL Ltd have witnessed many fluctuations. In FY2011, it used to be 177 days, which declined to 148 days in FY2013. Later on, receivables days increased to 175 days in FY2015 and have since then improved to 102 days in FY2019.

An investor would notice that receivables days of 100-175 represent a very high credit period to the customers.

While analysing different aspects of the business model of WPIL Ltd, an investor notices that the nature of clients, as well as the nature of contracts of the company, lead to high receivables days.

As per CARE, the majority of clients of WPIL Ltd are either govt. departments or public sector undertakings (PSUs).

Oct. 2019 credit rating report of WPIL Ltd by CARE, page 1:

The client portfolio of the company is diversified comprising irrigation department of various states especially Telangana, Madhya Pradesh, central utilities, large PSUs and various private sector entities.

An investor would appreciate that usually, companies find it difficult to get the money released from govt. departments on time, which contributes to high receivables days.

Moreover, CARE in its report has also highlighted the pattern of cash collection in the usual contracts entered by WPIL Ltd with its customers.

WPIL’s business is working capital intensive with long operating cycle. It receives 10-15% of the contract value on finalization of design, 50-60% on delivery of pump and the balance on successful erection and commissioning. Further, the clients withhold a percentage (generally 10-15%) of the contract price as retention money, and the same is paid after six to 12 months of completion of contract. This leads to high collection period…

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

An investor would note that in cases of milestone-based payments, there are chances of disagreement between the parties on the achievement of the milestones. As a result, many times, there are delays in payments, which even lead to disputes between the parties.

Many times, the differences in the assessment of the milestone completion reach such an extent that the customer asks for more work whereas the company may believe that it has already completed the entire work. In such cases, companies like WPIL Ltd may realize that in order to fulfil customer’s demand they will have to spend more money on the project/contract, which would be higher than the economic value that it would get out of it. These cases represent a certain loss to the company and in turn, it has to provide for these future losses.

WPIL has described such situations in its FY2019 annual report, page 168:

As per the requirements of IND AS 37, the management has estimated future expenses with regard to onerous contracts where the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

In FY2019, WPIL made provisions of ₹1.15 cr for such future losses. FY2019 annual report, page 171:

The nature of the business of WPIL Ltd, which includes convincing the customer about meeting the milestones for release of payment, has historically resulted in high receivables days.

In recent years, when an investor analyses the patterns of receivables dues, then she realizes that at any point in time, a large amount of the receivables of the company are overdue. Some of the receivables are overdue for more than a year from the date they were supposed to be paid to WPIL Ltd.

FY2019 annual report, page 185:

Further advised reading: Understanding the Annual Report of a Company

As per the above table, in FY2019, about ₹25 cr of receivables were due for more than one year since the date they were supposed to be paid by the customers. The similar number for FY2018 was even high at ₹73 cr.

An investor would appreciate that in cases of such high delay in collection of receivables, usually, there are underlying disagreements between the parties about whether the money is due at all and if it is due then the amount of money that is due. In such cases of disagreements, usually, it becomes difficult for companies to collect the complete amount of money. As a result, companies witness frequent bad debts i.e. they are not able to collect the stated amount of receivables and in turn, write them off.

The situation is no different for WPIL Ltd. While reading the past annual reports of the company, an investor notices that the company had to write off receivables almost every year.

• In FY2019, it wrote off ₹11 cr and in FY2018, ₹10 cr. In addition, the company provided for about ₹4 cr of additional bad debts. FY2019 annual report, page 171:

Similarly, in the past, the company wrote off receivables every year. In FY2017 (₹2.6 cr), FY2016 (₹1.9 cr), FY2015 (₹2.3 cr), and in FY2014 (₹1.3 cr).

In FY2013, the problem of delayed receivables hit the company hard and as a result, WPIL Ltd decided to cut off supplies to those customers who were not paying it on time. As a result, the company reported that its business suffered and it reported lower sales.

FY2013 annual report, page 6:

The turnover registered marginal drop compared to last year due to conscientious monitoring and withholding of dispatch to certain customers for delay in execution and clearing dues following liquidity tightness.

Moreover, the company realized that delays in collecting money from its customers can destabilize its business and highlighted the same to the shareholders in the FY2013 annual report.

FY2013 annual report, page 9:

The biggest concern presently is the domestic industrial environment alongwith credit worthiness of large clients.

FY2014 annual report, page 21:

The biggest concern are the volatile raw material prices and impact of surging inflation on the other item of inputs and poor recovery from customers.

The credit rating agency, CARE also highlighted this aspect of delays in collection of receivables by the company as one of the risk factors. CARE disclosed the delayed receivables and the resultant working capital intensive nature of its business in its report for WPIL Ltd in Oct. 2019.

The ratings continue to be constrained by the susceptibility of profitability to volatility in raw material prices, working capital intensive nature of operations marked by high collection period and competition in the pump industry due to fragmented industry structure.

An investor would note that from FY2010 to FY2019, the trade receivables of the company have increased from ₹91 cr to ₹293 cr. It indicates that over FY2010-2019, ₹201 cr of funds of WPIL Ltd were stuck in its working capital because of trade receivables.

However, when an investor analyses the payables days of WPIL Ltd, then she notices that the company is able to get generous terms from its suppliers. As per CARE, Oct. 2019:

This leads to high collection period (136 days in FY19) which was matched to an extent by creditors days of 80 days in FY19.

Over the years, the trade payables of the company have increased from ₹42 cr in FY2010 to ₹216 cr in FY2019. It indicates that the company could use ₹173 cr of money of suppliers in its operations, which covered a significant part of the money of WPIL Ltd that was stuck in trade receivables over the last 10 years (FY2010-2019).

Further Advised Reading: Receivable Days: A Complete Guide

As a result, when an investor compares the cumulative net profit after tax (cPAT) of the company with the cumulative cash flow from operations (cCFO) for FY2010-19, then she notices that WPIL Ltd has been able to convert its profits into cash flow from operations.

Over FY2010-19, WPIL Ltd has reported a total cumulative net profit after tax (cPAT) of ₹315 cr. whereas during the same period, it reported cumulative cash flow from operations (cCFO) of ₹382 cr.

It is advised that investors should read the article on CFO calculation mentioned below, which would help them understand the situations in which companies tend to have the CFO lower than their PAT and the situations when the companies tend to have CFO higher than their PAT.

Further advised reading: Understanding Cash Flow from Operations (CFO)

Margin of Safety in the Business of WPIL Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Further advised reading: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it is able to convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.

While analysing the SSGR of WPIL Ltd, an investor would notice that the fluctuating sales and profit performance of the company over the years has led to a varying SSGR. The SSGR, which used to be high in the range of 30-40% in the initial years, has now declined to negative levels in FY2016-2018. Only recently, the SSGR improved in FY2019 because of the better performance of its overseas subsidiaries, which as per the above discussion led to the improvement in the net fixed asset turnover (NFAT) of the company.

While studying the formula for calculation of SSGR, an investor would understand that the SSGR directly depends on the NFAT and net profit margin (NPM) 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 notice that the NFAT of WPIL Ltd used to be 7-9 in FY2011-2012, which declined to 3 in FY2015. Recently, the NFAT has improved to 6 in FY2019. Therefore, in the initial years of this decade, the company used to have a higher SSGR, which declined in later years and has again picked up recently.

An investor would appreciate that the company has been growing at a rate of 18%-20% over the years, which is more than the SSGR. As a result, investors would note that WPIL Ltd would have to raise money from additional sources like debt or equity to meet its investment requirements.

Investors would note that over the last 10 years, the debt levels of the company have increased from ₹34 cr in FY2010 to ₹138 cr in FY2019 indicating that the company has used about ₹104 cr (138-34) from debt to meet its growth requirements. In addition, an investor would also note that WPIL Ltd did a qualified institutional placement (QIP) in FY2015 in which it raised about ₹100 cr by issuing 1,800,000 shares to institutional investors.

FY2015 annual report, page 89:

Therefore, an investor would notice that over the last 10 years (FY2010-2019), WPIL Ltd had to use an additional ₹204 cr (= ₹104 cr debt + ₹100 cr equity) over and above its business profits to meet its growth requirements.

An investor is able to observe this aspect of the company’s business when she analyses the cumulative cash flow position including free cash flow for the company over the last 10 years (FY2009-18).

b) Free Cash Flow Analysis of WPIL Ltd:

While looking at the cash flow performance of WPIL Ltd, an investor notices that during FY2010-19, the company had a cumulative cash flow from operations of ₹382 cr. However, during this period it did a capital expenditure (capex) of ₹268 cr. As a result, it seems that the company had a free cash flow of ₹114 cr. (382 – 268).

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

However, an investor notices that WPIL Ltd has continuously had a significant amount of debt on its books. As a result, it had to pay interest to service this debt over the years.

Investors would appreciate that a part of the interest is capitalized by the companies in fixed assets and the remaining part is shown in the profit and loss statement as interest expense. The capitalized interest is already factored in the FCF calculations when we deduct capital expenditure from CFO.

Advised reading: Understand Capitalization of Interest and Other Expenses

However, to fully factor in the impact of interest on the cash flow position of the company, an investor needs to deduct interest expense as well in order to arrive at the free cash flow to equity shareholders (FCFE).

In the case of WPIL Ltd, the company had an interest expense of ₹187 cr over FY2010-2019, which is in addition to the interest that is capitalised in the fixed assets. As a result, after factoring in the interest expense, WPIL Ltd is left with a cash flow gap of ₹73 cr (114 – 187).

Looking at this cash flow gap after meeting capital expenditure and interest payments, an investor would appreciate that the company will have to raise debt to meet its other outflows like dividend payment etc. This is visible to the investor in the increase in the total debt of the company over FY2010-2019.

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 WPIL Ltd:

On analysing WPIL Ltd and reading the annual reports since FY2010, an investor comes across certain other aspects of the company:

1) Management Succession of WPIL Ltd:

WPIL Ltd used to be a loss-making under B.M. Khaitan group until 2002 when the current promoters, Agarwal family, took over and turned it around. As per CARE, Oct 2017:

It used to be a loss making company till 2002. In 2002, it was taken over by Mr. Prakash Agarwal (MD) from the erstwhile promoters (B. M. Khaitan Group) and the performance of the company turnaround since 2004.

Currently, the Managing Director, Mr. Prakash Agarwal (aged 48 years), his father Mr. V. N. Agarwal (aged 80 years) and his wife Mrs. Ritu Agarwal (aged 44 years) are a part of the board of directors of the company.

FY2019 annual report, page 33:

• Mr. Prakash Agarwal is the son of Mr. V.N. Agarwal.
• Mrs Ritu Agarwal is the wife of Mr. Prakash Agarwal.

FY2019 annual report, page 13:

The annual reports of the company are unclear whether the next generation of the promoters has joined the company in an executive capacity or not. Investors may directly contact the company to understand the management succession plans of the company.

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

2) WPIL Ltd buying companies from the promoters:

While reading the FY2019 annual report, an investor notices that WPIL Ltd is in the process of buying a manufacturing unit from a company named Hindusthan Udyog Limited (HUL) and in turn, has given an advance of ₹42 cr to HUL.

FY2019 annual report, page 192:

The Board of Directors of the Parent Company at its meeting held on July 14, 2017 have approved a proposal for acquisition of an Alloy and Stainless Steel Castings Foundry unit in Nagpur from Hindusthan Udyog Limited (HUL) as slump sale on a going concern basis. The Company has paid advance of Rs. 4,200 lacs to HUL for the transaction.

While reading about Hindusthan Udyog Ltd (HUL), an investor notices that HUL is the company, through which the promoters own 39.54% shares of WPIL Ltd.

FY2019 annual report, page 56:

Effectively, the above transaction represents a situation where the promoters of the company are selling a manufacturing unit personally owned by them to WPIL Ltd.

An investor may note that in such transactions where promoters sell their assets to the company, the public shareholders need to be very cautious. This is because these transactions carry the potential of providing undue economic benefits to the promoters if the assets are sold by the promoters to the company at an inflated value. In the corporate history, there have been many instances where transactions involving the sale of assets at inflated prices are used by promoters to siphon off funds from the company.

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

It is advised that the investor should do their independent due diligence about the actual fair value of the Nagpur unit to be purchased by WPIL Ltd.

3) Promoters seem to enter into partnerships with WPIL Ltd:

While analysing the business of WPIL Ltd, an investor notices that currently more than half of the revenue of the company is generated by its international subsidiaries. In FY2019, the standalone revenue of WPIL was ₹533 cr and the consolidated revenue was ₹1,156 cr. It indicates that the subsidiaries of the company are currently playing a very important role in the overall business of WPIL Ltd.

Out of these international subsidiaries, the most important subsidiary is Aturia International Pte. Limited (Singapore), which was previously named WPIL International Pty Ltd. – Singapore. WPIL Ltd holds its stake in most of the other international subsidiaries through the Singapore subsidiary.

The importance of the Singapore subsidiary becomes clear to the investor when she notices that along with its subsidiaries, it contributes about 72% of the consolidated profits of WPIL Ltd.

FY2019 annual report, page 191:

In the FY2019 annual report, an investor notices that WPIL Ltd currently holds a 61.53% stake in Aturia International Pte. Limited (Singapore), which in turn holds a 100% stake in 9 other subsidiaries. As a result, in the FY2019 annual report, an investor reads that WPIL Ltd has a 61.53% stake in 10 subsidiaries. Almost all the subsidiaries except Sterling Pumps Pty Ltd of Australia are owned by the Singapore subsidiary.

FY2019 annual report, page 120:

Further advised reading: Understanding the Annual Report of a Company

Looking at the importance of Singapore subsidiary, an investor wishes to know about the counterparty who owns the balance 38.47% stake in Aturia International Pte. Limited (Singapore).

The investor gets to know about the other counterparty while reading the FY2017 annual report.

In the FY2017 annual report, on page 121, WPIL Ltd intimated its shareholders that its stake in the Singapore subsidiary has decreased from 76.84% to 61.53% as the minority shareholders have put in $2,000,000 (₹12.97 cr) in the company.

The name of WPIL International Pte. Limited was changed to ‘Aturia International Pte. Ltd.’ with effect from 24th February, 2017 During the year the Minority Shareholder of Aturia International Pte. Ltd. contributed USD 20,00,000 (equivalent to Rs. 12,97,00,000/-) towards its Share Capital consequent to which our Company’s share in Aturia International Pte. Ltd. has been changed to 61.53%.

In the same annual report on page 18, WPIL Ltd intimated that the promoters of the company have put in more capital in the Singapore subsidiary.

Fresh capital was injected into Aturia International by the promoters to meet the equity requirements of its subsidiaries especially Mathers U.K.

These two disclosures seem to indicate that the promoters of WPIL Ltd are the minority shareholders in the Singapore subsidiary. Investors may contact the company directly to confirm the identity of the minority shareholders in the Singapore subsidiary.

Advised reading: How should investors contact Companies/Management for clarifications or additional information?

While analysing companies in the past, we have found that whenever promoters of a company enter into partnerships with the company, then such a situation is usually disadvantageous for the public/minority shareholders. In these cases, if the subsidiary turns profitable, then the promoters get to enjoy a higher upside whereas, during the troubled times, it falls upon the company to save the subsidiary.

An investor may read the case of Balaji Amines Ltd to understand how such a partnership of the promoters with the company turned out.

Read: Analysis: Balaji Amines Ltd

In the case of Balaji Amines Ltd (BAL), the promoters entered into a partnership with the company to form a subsidiary, Balaji Greentech Products Ltd (BGPL) in which BAL held 66% stake and the promoters held 34% stake. The promoters owned 54.46% of BAL on March 31, 2017.

By way of this partnership, the promoters effectively controlled 69.94% (66%*0.5446 + 34%) economic interest of BGPL whereas the minority shareholders in BGPL had only 30.06% (66%*0.4554 OR 100%-69.94%).

Instead, if the investment in BGPL would have been done entirely by Balaji Amines Ltd, then the stake of promoters and minority shareholders in BGPL would have been 54.45% and 45.54% respectively, which is the same proportion held by them in the listed entity Balaji Amines Ltd.

In both the above scenarios, i.e. whether the investment in BGPL was done by Balaji Amines Ltd entirely or in collaboration with promoters, there was not going to be an effective change in the way in which the operations of BGPL were going to be managed. In both cases, the promoter family was going to take all the operational decisions for BGPL. The only difference in part investment by promoters was that they got a higher share in the economic benefit by putting in the same level of effort to manage the venture.

As mentioned above, in such cases, when the venture is successful, then the promoters keep enjoying the higher economic benefits, whereas in cases, when the venture does not do well, then the listed entity has to bail out the venture.

In the case of BGPL, the listed entity (Balaji Amines Ltd) had to invest multiple times in BGPL by way of capital advances and cumulative redeemable preference shares apart from the original equity investment to support the operations and debt payments of BGPL. However, eventually, the business of BGPL failed.

When it finally decided to close the operations of BGPL due to continued losses, the first option, which was thought, was to sell the company/its assets to any third party. However, when no buyer could be found for BGPL, then it was decided to merge BGPL with Balaji Amines Ltd. This effectively meant that Balaji Amines Ltd bought BGPL when no other buyer was found.

An investor would appreciate that this situation indicated that on the merger, the minority shareholders of Balaji Amines Ltd had to bear the 45.54% of the losses of BGPL and not the 30.06% of their indirect shareholding of BGPL via the 66% stake held by Balaji Amines Ltd in BGPL. Whereas the promoters might end up owning 54.46% of the burden of BGPL and not 69.94%, which was their effective direct and indirect holding of BGPL.

Read more: Analysis: Balaji Amines Ltd

Therefore, we believe that whenever promoters of a company enter into partnerships with the company, then such situations are usually not favorable for the public shareholders. The promoter gets to enjoy higher gains if things turnout right. Whereas mostly, it is the company that has to bail out the venture if the things go wrong.

Moreover, in the case of WPIL Ltd., an investor notices that in FY2016-17, the company has given loans of ₹6 cr to promoter entity.

FY2017 annual report, page 16:

One of the possibilities may be that the promoters might have used this loan from WPIL Ltd to invest in the Singapore subsidiary to increase their stake.

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

Looking at all these possibilities, it is advised that an investor may directly contact the company to know about the minority shareholders of the Singapore subsidiary.

a) When WPIL invests money in Singapore subsidiary, the stake provided is costlier. When Minority Shareholders invest money in Singapore subsidiary, the stake provided is cheaper.

While reading the past annual reports of WPIL Ltd, an investor notices that in FY2016, WPIL Ltd had invested ₹28.42 cr in the Singapore subsidiary and as a result, its stake in the subsidiary increased from 51% to 76.84%.

FY2016 annual report, page 111:

The Company during the year has contributed Rs. 28,42,40,000/- towards the Capital of its Subsidiary WPIL International Pte Limited in Singapore, consequent to which its shareholding in the Company has increased from 51% to 76.84%.

While assessing the valuation of the Singapore subsidiary at which WPIL Ltd invested its money, an investor notices that the value is ₹110 cr. An investor may infer this value from the fact that ₹28.42 cr represents a 25.84% stake (= 76.84 – 51.00) of the Singapore subsidiary (₹110 cr = 28.42 cr/0.2584).

While assessing the valuation at which the Minority Shareholders (?Promoters) put their money the next year i.e. in FY2017, the investor notices that the valuation of Singapore subsidiary offered to the minority shareholders is ₹84.72 cr. An investor may infer this value from the fact that in FY2017, the minority shareholders invested ₹12.97 cr and their stake in the company increased from 23.16% to 38.47% (i.e. the stake of WPIL Ltd in the Singapore subsidiary decreased from 76.84% to 61.53%. See the discussion above).

In this case, ₹12.97 cr represents the value of 15.31% stake (i.e. 76.84 – 61.53 OR 38.47 – 23.16). Therefore, the overall value of the Singapore subsidiary in FY2017 was assigned to be ₹84.72 cr (= 12.97 cr/0.1531)

An investor would note that this difference in valuation represents a 23% decline in the value of Singapore subsidiary over a period of about one year from FY2016 to FY2017. Whereas during this period, the Singapore subsidiary had completed the acquisition of the Italian operations, which turned out to be highly profitable for the company.

FY2016 annual report, page 111:

The Singapore Subsidiary had during the year ended 31st March 2016 completed the acquisition of an European Group (namely Gruppo Aturia S.p.A along with its subsidiaries in France and Switzerland).

Credit rating report of WPIL Ltd, Nov. 2018 from CARE Ltd:

The company reported PAT (consol.) of Rs.35.67crore in FY18 vis-à-vis loss of Rs.1.89 crore in FY17 mainly backed by improvement in the financial performance of one of its step down subsidiary namely Gruppo Aturia SPA.

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

4) Thailand Joint Venture seems a partnership between the company and the promoters:

While reading the business details of WPIL Ltd, an investor notices that the company has a joint venture in Thailand named WPIL (Thailand) Company Ltd, via its Singapore subsidiary.

FY2019 annual report, page 116:

Relationship :

• Associate – Clyde Pump India Private Limited (Clyde)
• Joint Venture – – WPIL (Thailand) Company Ltd. (WPIL-Thy.) (JV of Aturia Internatinal Pte Ltd.)

While reading the FY2017 annual report, the investor notices that under the list of related party transactions, WPIL (Thailand) Company Ltd is shown as an entity where the key management personnel has significant influence.

FY2017 annual report, page 89:

Companies over which key management personnel or relatives are able to exercise control / significant influence:

• Bengal Steel Industries Limited (Bengal Steel)
• Hindusthan Udyog Limited (HUL)
• Macneil Electricals Limited (MEL)
• Neptune Exports Limited (Neptune)
• Orient International Ltd. (Orient)
• Hindusthan Parsons Ltd. (HPL)
• WPIL (Thailand) Company Ltd. (WPIL-Thy.)

These two disclosures indicate that WPIL (Thailand) Company Ltd is a joint venture of the Singapore subsidiary and the promoters/key management personnel.

If this the case, then the concerns shared in the above discussion become applicable to this case as well. This is because we believe that whenever promoters of a company enter into partnerships with the company, then such situations are usually not favorable for the public shareholders. The promoter gets to enjoy higher gains if things turnout right. Whereas mostly, it is the company that has to bail out the venture if the things go wrong.

It is always advised that investors should be very cautious while analysing companies that enter into many transactions with promoters/related parties. This is because the related party transactions are the areas which open up opportunities of shifting economic benefits from the public shareholders to the promoters. There have been many instances in the corporate world where money has been siphoned off from public companies using related party transactions.

An investor may pay attention to the risk highlighted by WPIL Ltd in relation to the related party transactions in its QIP prospectus of FY2015 on page 57:

While we believe that all of our related party transactions are in compliance with applicable law, we cannot assure you that we could not have achieved more favorable terms had such transactions been entered into with unrelated parties. Further, the transactions we have entered into and any future transactions with our related parties have involved or could potentially involve conflicts of interest which may be detrimental to the Company. We cannot assure you that such transactions, individually or in the aggregate, will not have an adverse effect on our business, results of operations and financial condition, including because of potential conflicts of interest or otherwise.

Investors should note that related party transactions are very sensitive areas in the analysis of the companies. Investors should be very cautious while assessing these transactions.

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

5) Delays in payment of undisputed statutory dues to the Govt.

While reading the FY2018 and FY2019 annual reports, an investor notices that as per the auditor, WPIL Ltd has not deposited its undisputed statutory dues to the Govt. on time.

FY2018 annual report, page 72:

…and other statutory dues have generally been regularly deposited with the appropriate authorities though there has been a slight delay in a few cases.

FY2019 annual report, page 77:

…and other statutory dues have generally been regularly deposited with the appropriate authorities though there has been a slight delay in a few cases.

Similarly, an investor notices that the company has not spent the required money on corporate social responsibility (CSR) every year since FY2015.

FY2019 annual report, page 64:

Total amount to be spent for the financial year 2018-19: Rs. 59,35,176/-

Amount unspent, if any: Rs. 30,04,692/-

Reason for unspent for CSR Activities: During the financial year under review the Company accelerated its CSR interventions in line with CSR policy compared to the previous year. However, prescribed CSR amount could not be spent due to financial tightness experienced by the Company following honouring huge financial commitments against inconsistent recovery for irregular payment by customers.

An investor would note that the company has stated that it could not spend the required money on CSR as it faced financial tightness in the year. However, when an investor notices its financial performance in FY2019, then she finds that it had a net profit of ₹126 cr and cash flow from operations (CFO) of ₹141 cr during FY2019.

The net profit and the CFO of the company during FY2019 seem sufficient enough that it could meet all its statutory dues payments on time as well as it could spend ₹0.30 cr more on CSR. However, the company did not meet these payments on time and the auditor the company had to highlight these issues in the annual report to all the shareholders.

An investor may appreciate that these dues may be an indication of a lack of strong operational processes at the company.

Many times, the lack of strong processes in the companies leads to significant issues being undetected for a long period. Investors may remember the case of National Peroxide Ltd where the lack of strong processes provided the opportunity to the senior management to siphon off the money by a continuing financial fraud for almost 10 years.

Read: Analysis: National Peroxide Ltd

Going ahead, an investor should keep a close watch on the payment status of undisputed statutory dues etc. by the company.

6) Lack of sufficient details in the annual reports:

An investor would note that the statutory auditor of any company would ensure that the company discloses the minimum information required by the law in its annual report. Therefore, many times investors will find that the companies disclose some information in their annual reports, which meets the regulatory purpose; however, the investor is not able to derive appropriate conclusions from the limited information available in the annual report.

In the case of WPIL Ltd., there are many such instances where an investor feels that the company should have provided more information in the annual report.

In such cases, if the investor needs, then she may contact the company directly for further clarification.

Let us see a few of such instances for WPIL Ltd.

a) A loan from related parties, which is not disclosed in the related party transactions table:

In the FY2013 annual report, WPIL Ltd disclosed that it has taken a loan of ₹20 cr from corporate bodies. It also mentioned that further details about this loan are given in note 26(j), which is the section containing related party transactions.

FY2013 annual report, page 40:

However, when the investor search the note 26(j) for the counterparty who has given this loan to WPIL Ltd, then she notices that there is no detail of the loans of ₹20 cr in the related party transactions details.

FY2013 annual report, page 51:

b) A loan is given by the company, which is seen in cash flow but not in the balance sheet:

In the FY2013 annual report, while analysing the consolidated cash flow statement, an investor notices that the company has given out a loan of ₹31.73 cr to someone. As this is disclosed as an outflow under consolidated cash flow from investing statement, therefore, in all probability it is not a loan/investment to the subsidiaries etc. and it should be to some third party. Investors would note that the loans/investments in the subsidiaries are present in the standalone financials and are canceled out while preparing the consolidated financials.

FY2013 annual report, page 83:

However, when the investor analyses the consolidated balance sheet of WPIL Ltd along with the detailed notes, then she is not able to find the details of this loan. An investor would appreciate that this loan of ₹31.73 cr should ideally be a part of either short-term loans & advances or long-term loans & advances in the balance sheet.

FY2013 annual report, page 59:

Moreover, even after reading the detailed notes of the financial statement, an investor is not clear about where this cash outflow of ₹31.73 cr is represented in the balance sheet of WPIL Ltd.

Further advised reading: Understanding the Annual Report of a Company

c) FY2013: Income of ₹24 cr (35% of profit before tax) for which no details are present:

In the FY2013 annual report, an investor notices that in the consolidated profit and loss statement, the company has disclosed ₹23.9 cr income as “Sundry Income” under other income. An investor would appreciate that an income of ₹24 cr is very significant when compared to the profit before tax of ₹68 cr in FY2013. This sundry income formed about 35% of the PBT for FY2013; however, an investor is not able to get an idea from where this money came.

FY2013 annual report, page 71:

d) FY2016: Income of ₹5.7 cr (more than 100% of profit before tax) for which no details are present:

Similarly, in FY2016, an investor notices that WPIL Ltd reported sundry income of ₹5.73 cr as other income in consolidated financials. This income of ₹5.73 cr is more than the entire consolidated profit before tax of ₹5.31 cr reported by WPIL Ltd in FY2016. However, an investor is not able to get an idea about this income from the annual report.

FY2016 annual report, page 106:

7) A financial loss in Government Securities (Post Office National Savings Certificate):

While reading the past annual reports of WPIL Ltd since FY2010, an investor notices that every year, the company has disclosed an investment of ₹23,000 in government securities (7-year post office national savings certificate), which it has fully provided for.

FY2019 annual report, page 157:

An investor would appreciate that the investments in govt. securities including post office savings instruments are considered default-free. However, it is not clear from the annual report, why the company has fully provided for its investments in one of the safest financial investments in India.

An investor may contact the company directly for any clarifications in this regard.

Advised reading: How should investors contact Companies/Management for clarifications or additional information?

Margin of Safety in the market price of WPIL Ltd:

Currently (January 14, 2020), WPIL Ltd is available at a price to earnings (PE) ratio of about 8.3 based on the last four quarters consolidated earnings from Oct. 2018 to Sept 2019. The PE ratio of 8.3 provides some 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.

• 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
• How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
• Hidden Risk of Investing in High P/E Stocks

Analysis Summary

Overall, WPIL Ltd seems like a company, which has been able to grow its sales at a growth rate of 18%-20% per annum over the last 10 years (FY2010-19). However, the sales growth journey of the company has not been smooth. WPIL Ltd has witnessed periods of high growth intermixed with periods of negative growth. Similarly, the company has seen its profit margins fluctuate significantly over the years.

The key reasons for such fluctuating business performance of the company are the dependence of the company’s business on the general economic environment and the intense competition from organized as well as unorganized and Indian as well as foreign competitors. Because of the high level of competition, WPIL faces difficulties to pass on the increase in raw material costs to its customers. Most of the contracts entered by the company with its customers are fixed-price contracts and as a result, whenever the raw material prices increase, then WPIL Ltd has to take a hit on its profit margins.

The company has attempted to safeguard itself from fluctuations in the business environment by expanding in overseas markets. However, when an investor looks at the performance of the company since FY2012 when it established its first foreign subsidiary, then she notices that the nature of its cyclical business performance has remained the same with periods of good business performance followed by subdued performance.

The customers of the company are govt. departments, public sector units, state utilities, and large corporations from power, and oil & gas sector. These customers have a very high negotiating power over their suppliers. This coupled with intense competition in the water pump industry has led to a situation where WPIL is not able to collect its due from the customers on time. Some of the receivables are due from the customers for more than one year from the expected date of payment. As a result, WPIL Ltd had to write-off receivables every year. The company has recognized that the creditworthiness of its customers and its ability to recover the receivables is one of the major risks in its business.

Nevertheless, WPIL Ltd has been able to report a CFO higher than net profits as it has managed to get a high credit period from its suppliers. Still, the inherent business cash generation ability of the company does not seem able to support the growth rate of 20%. As a result, the company has to fund its expansion initiatives by raising additional debt as well as additional equity (QIP) during FY2010-2019. In FY2020 as well, the company has made an acquisition, which is primarily funded by debt.

An investor notices that WPIL Ltd has been involved in many transactions with its promoters. The promoters have sold manufacturing units to the company. The promoters have entered into joint venture agreements with the company in Thailand. In addition, it seems that the most important subsidiary of the company in Singapore, which controls almost all of its foreign business, is also a venture of the promoters with the company. We believe that such transactions have the potential of shifting economic benefits from the company to the promoters and therefore, investors should be cautious while doing an assessment of such transactions.

An investor notes that WPIL Ltd has delayed payment of undisputed statutory dues as well as deferred spending required money on CSR despite making significant money from its business. Such delays might be a result of a weak operating process at the company. An investor should keep a close watch on such development as weak processes may hide bigger problems in the company for a prolonged time.

While reading the annual reports, an investor notices that WPIL Ltd has disclosed only minimal information in the reports where the investor is not able to get sufficient details for analysis. In one case, loans to related parties are shown in the balance sheet but seem to be missed out in the dedicated related party transactions section. In another case, a loan given by the company is visible in the cash flow statement but not seem to be present in the assets in the balance sheet. In many years, the company has shown significant income as “Sundry Income” without providing any further details even in cases where this income contributed almost 100% of the profits of the company. In one case, the company has reported a loss of money in its investments in govt. securities, which are assumed by investors as default-free.

We believe that investors may contact the company directly for any clarifications and do deep analysis at their end before arriving at any investment decision related to WPIL Ltd.

Going ahead, investors should keep a close watch on the profit margins of the company to monitor whether the company is able to maintain its profitability in light of intense competition. An investor should keep a track of the receivables position of the company, and its transaction with the promoters & their group companies. Investors should monitor the disclosures of the company in order to understand the level of operating processes present at the company.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on WPIL 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.

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Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.