This article provides in-depth fundamental analysis of Garware Wall Ropes Ltd, an Indian manufacturer technical textiles specializing in ropes & nets focusing on fisheries, aquaculture, shipping, sports, agriculture, coated fabrics and geo-synthetics.
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.
Garware Wall Ropes Ltd Research Report by Reader
Dear Sir,
I have been investing now for almost 5-6 years and find your blogs and articles/ e-books compilation very informational and useful.
I have a specific query about Garware Wall Ropes Ltd on which I wanted your expert thoughts.
I evaluated the same and it fulfills all the criteria except being a bit high on the valuations side which is not that steep too.
It has a good margin of safety (MoS) in terms of FCF/CFO ~ 67%, SSGR > Sales Growth, DE ratio < 0.5, Promoters check is satisfactory and healthy and consistent NPM.
While browsing through its FY17 annual report I found one strange observation. Garware Wall Ropes Ltd has increased its short term borrowings by 45 Cr. At the same time it increases its bank balance by 32 Cr. Now they invest around 105 Cr around 120% of their FY 17 PAT in NCDs and Mutual funds, which if fine for a long term investment but why do it at the cost of Debt?
Does it means that Garware Wall Ropes Ltd is believing it is better to invest in MF and NCDs rather than in itself?
Also, it has deposited money in banks worth 30 Cr. as increase in its bank balance. Why has Garware Wall Ropes Ltd not utilized the same for borrowings and borrowed at additional costs?
I am attaching my analysis for reference and would be thankful if you can please advise.
Regards,
Sunny Bhardwaj
Financial Analysis Checklist of Garware Wall Ropes Ltd:
- Sales Growth (CAGR > 15% for last 7-10 years): Fail Sales growth at around 10%
- Profitability (NPM >8 %): Pass Around 10%
- Tax Payout (>30%): Pass
- Interest Coverage (>3): EBITA/Interest Expenses Pass
- Debt/Equity Ratio (<.5): Pass
- Current Ratio (>1.25): Pass
- Cash Flow(CFO > 0): Pass
- Free Cash Flow (FCF > 0): Pass
- Cumulative PAT vs CFO: Pass Need to check why CFO is around 50% higher than PAT
- Inventory Turonver Ratio: Pass
- Number of Recievable Days: Pass
- Fixed Asset turnover Ratio: Pass
- D/E trend: Pass
Business & Industry Analysis Checklist of Garware Wall Ropes Ltd:
- Conversion of Sales growth into Profit: Pass
- Value Creation for Share holders (Mcap Incease in 10 yrs > Retained profits in 10 yrs): Pass
Management Analysis Checklist of Garware Wall Ropes Ltd:
- Background check of Promoters: Pass
- Management Succession: plans
- Promoter(s) Salary vs. Net. Profits ( ~2-4% of nett. Profit): Fail Around 13% incl. comissions from Profit. Direct
- renumertion increased by 35%
- Related Party transaction and issuance of warrants: Pass
- Dividend payments not by Debt: Pass
- Consistent increase in dividend payments: Pass
- Promoter shareholding > 60%: Pass More than 50%
- FII shareholding ~0: Pass In lower single digits around 3.5 %
Margin of Safety (MoS) Analysis of Garware Wall Ropes Ltd:
- SSGR > Achieved Sales Growth: Pass
- Free Cash Flow Ratio (FCF/CFO >> 0): Pass
- Listed on both BSE/NSE: Pass
Credit Rating Analysis of Garware Wall Ropes Ltd:
- Continous improvement in Credit Ratings. Minimum rating to be BBB- & above: Pass ICRA A+. Improvement from AA- to A1+
- No significant risk as per credit rating report: Pass Domestic demand sluggishness, High prices of Crudes and Currency fluctuations though balanced by diversifying in different geographies and ntural hedging by import that constitutes 25-30 % of Raw materials
Valuation Analysis Checklist of Garware Wall Ropes Ltd:
- PE Ratio < (1/ (10 yr Govt. bond yield)): Fail Around 22.5
- PEG Ratio < 1: Pass
- Price to Sales Ratio (< 1.5): Fail
Reading: Final Checklist For Buying Stocks
Analysis of FY2017 annual report
- Dependence on Crude
- Forex Conservative hedging: 25~30% of earning hedged as raw material imports
Investments:
The company has bought worth more than 100 Cr. of NCD’s and mutual funds with their Cash. At the same time the company is increasing its short term loans from domestic and international banks to a tune of 45 Cr. It means the company is believing it is better to invest in MF and NCDS rather than in itself. Also it has deposited money in banks worth 30 Cr. as increase in its bank balance. Why has the company not utilized the same for borrowings and borrowed at additional costs. Why have they not gone for a share buyback which could benefit the minority shareholders more?
Finance Costs:
- Finance Cost has though came down in 2017.
Related party transactions:
Management and relatives companies. Most of them trading or investment companies
Basically if you have a look and try to understand in simple financial terms, the company takes a loan of 19.32 Cr and pays back 17.91 Cr. and pays an interest of 3.15 Cr. for FY17. If we calculate the rate of interest here it is 3.15/17.91 ~ 17.6% which means that company has 112 Cr. Cash in Bank still they avail loans form their own/relatives investment companies @ 18% and funnel out shareholders money out of the company to their own/relatives companies.
This is not in interest of the minority shareholders. The company in fact should have used its cash or reserves from 105 Cr. invested in NCD and equities to fund the necessary requirements instead taking of a loan @ 18% from their own companies.
The intention of management is GREEDY and NOT IN INTEREST OF MINORITY SHAREHOLDERS.
Thus we need to avoid this company.
Dr Vijay Malik’s Response
Hi Sunny,
Thanks for sharing the analysis of Garware Wall Ropes Ltd with us! We appreciate the hard work put in by you in the analysis.
Let us first try to analyse the financial performance of Garware Wall Ropes Ltd over last 10 years.
An investor would note that currently Garware Wall Ropes Ltd has one wholly owned subsidiary and one associate company. However, both the entities are yet to start their operations (FY2017 annual report: page 22). Therefore, the standalone financials present the entire current operations of Garware Wall Ropes Ltd.
Garware Environmental Services Private Limited is the wholly owned subsidiary of your Company. This Subsidiary Company is yet to start its commercial operations.
Garware Meditech Private Limited is an associate of your Company and presently not having any business activity.
Further Reading: Understanding the Annual Report of a Company
However, 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 including operations and assets. Garware Wall Ropes Ltd has been publishing only standalone financials until FY2011. However, from FY2012 onwards, it has been publishing consolidated financials as well. Therefore, while analysing Garware Wall Ropes Ltd, we have analysed standalone financials until FY2011 and the consolidated financials of the company thereafter.
Financial Analysis of Garware Wall Ropes Ltd:
Garware Wall Ropes Ltd has been growing its sales since last 10 years (FY2008-17) at a rate of about 8-10% year on year from ₹399 cr. in FY2008 to ₹865 cr. in FY2017.
An investor would notice that the sales growth achieved by Garware Wall Ropes Ltd until FY2014 was associated with fluctuating profitability margins. The operating profit margin (OPM) was fluctuating between 8-12% during this period. The key reason was the inability of the company to pass on the raw material changes to its end consumers.
A reading of the credit rating report prepared by ICRA in November 2013, also highlights the challenges faced by Garware Wall Ropes Ltd to maintain its profitability especially the competition from unorganized sector:
The overall profitability of GWRL’s business is constrained by its high working capital intensity and low pricing flexibility given competition from un-organized segment.
Further Reading: How to do Business Analysis of Companies
However, it seems that since FY2014 onwards, the efforts of the company to establish a brand in the consumer market have paid fruit and the company is able to exercise some pricing power and hold on to the retail consumer prices despite reduction in the inputs costs, which are dependent on crude oil prices. As a result, the OPM of the company has witnessed improvement from 8.9% in FY2014 to 15.3% in FY2017.
An excerpt from the July 2016 credit rating report of ICRA affirms the same:
With high quality product portfolio, the company has been able to maintain its high bargaining power and maintain its product prices in the retail segment despite drop in raw material prices leading to improvement in the overall contribution margin.
Moreover, apart from focusing on creating a brand, Garware Wall Ropes Ltd has been working on adding and increasing the share of value added products in the sales portfolio like aquaculture cages, predator nets, sports nets, agri-tech and coated fabrics. (ICRA, December 2015 credit rating report):
With constant pressure on volumes during last few years, the company has shifted its focus on value added products such as aquaculture and sports net and new business segments like agri-tech and coated fabrics to diversify its revenue stream. Products like aquaculture cages, predator nets and sports nets have much better realization and higher profitability than regular nets and ropes. Further, with increased focus on research & development, the company has designed several innovative products across the segments such as ropes, predator nets and agri-tech among others which command premium and hence fetch better margins.
Further Reading: 7 Important Reasons Why Every Stock Investor Should Read Credit Rating Reports
And as a result, currently, the increased focus on these value added products seems to have yielding results as the increasing share of value added products in the sales portfolio has been leading to sales growth and improved profitability. (ICRA credit rating report, July 2016):
However GWRL’s sales growth has been driven by increasing share of value added products (such as aquaculture net, sports net, braided nets) primarily in export markets, and increasing share of revenues from agri-tech and coated fabrics divisions to some extent. Though, during FY2016, the company witnessed moderate growth in domestic volumes on account of gain in market share supported by development of new products. During FY2016, GWRL registered sales growth of ~5% supported by volume growth while the realizations witnessed a marginal drop in line with drop in prices of key raw materials. The profitability had improved in FY2016 due to increased share of value added products, company retaining benefit of raw material price decline and rupee depreciation.
It seems that the company is consistently trying to bring in new products, which might add higher value to customers. Recently, Garware Wall Ropes Ltd has tied up with an Israel entity, Aero-T to produce aerostats, which are balloons used for surveillance and it plans to supply these to Indian defense forces. The company has entered into the MoU with Aero-T in July 2017 and has done a press release to announce it and submitted it to stock exchanges as well on July 5, 2017:
We enclose herewith the Press Release being issued today by the Company titled as-: ‘Garware – Wall Ropes Ltd. and Israel’s Aero-T ink MOU to explore mutual co-operation for manufacturing advanced Aerostats for Indian Defence’.
Until now, the company has been able to hold on to the retail consumer prices in the times of declining raw material costs (crude oil prices), however, it remains to be seen whether the company would be able to increase prices in future when the commodity cycle turns and the crude oil prices increase again. This is essential because otherwise, the company will witness decline in profitability margins and it will again find itself entangled in the the cyclicty of operating margins.
Moreover, it also remains to be seen whether the company is able to successfully execute the new initiative with Aero-T, absorb the technology and produce quality aerostats acceptable to defense forces.
The net profit margin (NPM) has been following the trend of the operating profit margin (OPM). NPM was initially fluctuating between 4-6% during FY2008-14 and it has been improving in recent years from 3.9% in FY2014 to 9.6% in FY2017.
Further Reading: How to do Financial Analysis of a Company
The tax payout ratio of Garware Wall Ropes Ltd had been below the standard corporate tax rate prevalent in India until FY2014. However, since then, the company has been accounting for taxes at a rate nearly equal to the standard corporate tax rate.
It seems that in the past, Garware Wall Ropes Ltd used to enjoy tax exemptions on some of its units, which were classified as export oriented units (EOUs). However, now the tax exemptions are no longer available to the company. (ICRA credit rating report, November 2013):
GWRL’s exports from its EoU units in the past received benefits of income tax exemption; however expiry of the same impacted net profitability to some extent and the impact is expected to magnify in the current fiscal.
Operating Efficiency Analysis of Garware Wall Ropes Ltd:
While assessing the net fixed asset turnover (NFAT) for Garware Wall Ropes Ltd, an investor would notice that the NFAT of the company has been consistently at a healthy level of more than 3.5 throughout last 10 years. The NFAT has declined during FY2015-17 from 4.91 to 4.30. However, this reduction coincides with the capacity expenditure being done by the company during this period. An investor should keep a watch whether the NFAT of the company improves as it operates its capacity on optimal levels going ahead.
An investor would notice that Garware Wall Ropes Ltd has a NFAT exceeding 4, which is a very good asset turnover for most of the businesses.
Such levels of NFAT are usually seen in companies, which do not need to invest a lot in their plant and machinery or those who rely on outsourcing of the manufacturing process and in turn primarily act as trading companies. The companies, which are not into trading of goods and enjoy such high fixed assets turnover on account of low capital intensiveness of their operations face a lot of competition from unorganized sector unless their market is protected by intangible factors like brands or patents.
It does not come as a surprise to an investor that initially Garware Wall Ropes Ltd faced a lot of pricing pressure on its products from the unorganized sector, as discussed above. However, now the company seems to have realized that the competition from unorganized sector will always be there in this industry due to low capital intensiveness. Therefore, the company has started to focus more on creation of brand in the consumer market and on production of more value adding products, which seems to have resulted in the improving profit margins for the company in recent years.
As discussed earlier, the current improvement in the margins is on account of Garware Wall Ropes Ltd not reducing the prices in line with reduction in the raw material prices (linked to crude oil prices). It remains to be seen whether it would be able to increase prices further, which are already at a premium to other competitors, when crude prices increase in future to protect its margins. (ICRA credit rating rationale, November 2013):
GWRL is the largest domestic manufacturer of high-density polyethylene (HDPE) fishnets, twines and ropes. The company holds a dominant share of the domestic market with its fishnet brands Garfil and Sapphire, mainly on the strength of its brand image, product quality, and wide dealer network, which ensures ready availability of its products. These factors, in turn, have enabled GWRL command price premium over competing products.
Further Reading: 5 Simple Steps to Analyse Operating Performance of Companies
Looking at the inventory turnover ratio (ITR) of Garware Wall Ropes Ltd, an investor would notice that Garware Wall Ropes Ltd has been able to improve its inventory turnover ratio consistently since FY2011. The ITR has increased from 4.3 in FY2011 to 6.5 in FY2017. This reflects improvements in the inventory management by the company over these years.
When an investor analyses the receivables days of Garware Wall Ropes Ltd, then the investor would notice that the receivables days of the company have been improving in the initial period of last 10 years, i.e. from 99 days in FY2010 to 75 days in FY2014. However, since FY2014, the receivables days have been increasing consistently and have reached 89 days in FY2017.
Further Advised Reading: Receivable Days: A Complete Guide
One possible explanation for the increase in receivables days in the recent years might be that Garware Wall Ropes Ltd has to give higher credit period to distributors in light of ongoing stagnation in the domestic market for companies products (as highlighted by ICRA in August 2017 rating rationale):
Stagnant domestic demand in key product segments – The domestic demand in the key product segments of the company has been stagnant. Given the company’s dominant market share in the domestic market, the muted demand has restricted the revenue growth prospects. However, with gradual pick-up in economic activity and end-user entries, the demand outlook is expected to improve to some extent in the medium term.
Other reasons might be that Garware Wall Ropes Ltd might need to give higher credit period to add new customers as well as push premium priced value added products in the markets.
It is advised that the investor may seek clarification from the company about increasing receivables days in recent years and also keep a close watch on the trend of receivables days going ahead.
Further Reading: How to Monitor Stocks in your Portfolio
However, the delay in collection of receivables as reflected by increase in receivables does not seem to be large enough to create troubles on the cash flow/liquidity front for Garware Wall Ropes Ltd. The company has been able to report a cumulative cash flow from operations (cCFO) of ₹616 cr over last 10 years (FY2008-17) against cumulative net profit after tax (cPAT) of ₹348 cr.
An investor would notice that the cCFO is remarkably higher than cPAT for Garware Wall Ropes Ltd due to depreciation and interest expenses, which are significant for last 10 years (FY2008-17). Garware Wall Ropes Ltd has had cumulative depreciation of ₹137 cr and interest expense of ₹116 cr. over FY2008-17, which is added back to cPAT to arrive at cCFO over these years.
Further reading: Understanding calculation of Cash Flow from Operations (CFO)
Moreover, as discussed in the section on net fixed asset turnover (NFAT) above, Garware Wall Ropes Ltd operates a business, which has low capital intensiveness and therefore, does not has a lot of cash requirements to sustain its growth.
Margin of Safety in the Business of Garware Wall Ropes Ltd:
i) Self-Sustainable Growth Rate (SSGR):
The investor would notice that Garware Wall Ropes Ltd has witnessed an SSGR ranging from 1% in FY2011 to 24% in FY2017. The key reasons for such improvement in the SSGR for the company are improvements in the NFAT and the NPM for the company over the years (the SSGR formula used by us takes 3 years rolling average of the input parameters).
Further 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.
As of FY2017, the SSGR of Garware Wall Ropes Ltd is 24%, which is higher than the achieved sales growth of 8-10% achieved by the company over the years. As a result, it can be observed that Garware Wall Ropes Ltd has been able to reduce its debt over the years. Moreover, the investor would also notice that the company has investments of worth ₹228 cr. in FY2017 against a debt of ₹85 cr. and therefore the company has a net debt of zero at FY2017.
The asset light nature of the business of Garware Wall Ropes Ltd, which is reflected in the net fixed asset turnover ratio of more than 4 over the years and thereby comparatively low requirement of cash to fund its growth is also visible when we analyse the free cash flow position of the company over last 10 years.
The relative asset light business model of Garware Wall Ropes Ltd has ensured that the company needed to do a total capital expenditure of ₹202 cr. over last 10 years (FY2008-17) to increase its sales from ₹399 cr. in FY2008 to ₹865 cr. in FY2017.
ii) Free Cash Flow Analysis:
If an investor analyses the total cumulative financial performance of Garware Wall Ropes Ltd over last 10 years (FY2008-17), then she would notice that the company had met the entire capex of ₹202 cr. from its cumulative CFO of ₹616 cr. during the same period. As a result, after meeting entire capex, Garware Wall Ropes Ltd had a free cash flow (FCF) of ₹414 cr.
Free cash flow (FCF) analysis is one of the main pillars of assessing the margin of safety in the business model of any company.
Further Reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing
Garware Wall Ropes Ltd seems to have used the FCF of ₹414 cr. to pay the interest costs (about ₹116 cr.) and reduce debt during last 10 years (about 27 cr), pay dividends to shareholders (about ₹55 cr) and increase the cash & investments balance (about ₹228 cr.) on its books.
An investor would also appreciate that in addition, Garware Wall Ropes Ltd came out with a buy back offer in 2013, where it bought back 4% shares of the company using about ₹10-11 cr. of funds.
It seems that the markets have appreciated that Garware Wall Ropes Ltd has been able to demonstrate strong cash flow position along the growth path and as a result, its market capitalization has increased by about ₹1,700 cr. over last 10 years against the retained earnings of about ₹300 cr. over last 10 years. It amounts to creation of a wealth of about ₹5.8 for each ₹1 of earnings retained by the company.
Also, the strong cash flow position of Garware Wall Ropes Ltd has been recognized by credit rating agency, ICRA as well and as a result, ICRA upgraded the credit rating of the company from A+ to AA- in July 2016.
Let us now address the specific queries:
Simultaneous presence of high cash and debt on the books of the company:
Presence of high cash and high debt on the books of any company is a sign of caution and demands further analysis before any final opinion is made about the company.
The concern being highlighted in case of Garware Wall Ropes Ltd is the presence of debt of ₹85 cr. along with cash & investments of about ₹228 cr at March 31, 2017
Upon analysis of debt of Garware Wall Ropes Ltd, an investor would notice that the entire debt of ₹85 cr. is short term debt, which is primarily working capital debt. Moreover, out of the increase in debt of ₹45 cr. in FY2017, almost all of the increase (₹42 cr.) is in packing credit in foreign currency loan.
We believe that there can be two aspects, which might explain this scenario:
a) The packing credit in foreign currency (PCFC) is a facility available solely to exporters for funding the purchase of raw material to produce the product to be exported. It is available at very cheap terms. As per SBI website, on Oct. 14, 2017, the PCFC is available at LIBOR + 2%. The current LIBOR for 1 to 3 months as per bankrate.com as of Oct. 14, 2017 ranges from 1.25% to 1.50%, which makes the estimated cost of PCFC for Garware Wall Ropes Ltd equal to 3.25% to 3.50%.
As Garware Wall Ropes Ltd, has significant amount of export receivables, therefore, it enjoys a natural hedge in its cash flow and it does not need to incur additional hedging costs on PCFC.
Therefore, this scenario of increase in debt along with increase in cash investments might be construed as a case where Garware Wall Ropes Ltd is funding its export products at 3.25% and investing the CFO proceeds into NCDs etc, which might give it a return of 8-10%.
b) The second situation, which we believe deserves attention is that in some of the communications in the media (we are not able to locate the exact interview), the management has guided about growth via inorganic route (i.e. acquisitions). Carrying on cash on the books might be to create a war-chest for any impending acquisition transaction, if the management has identified any target company.
However, both the above situations are our assumptions without contacting management. Therefore, we believe that the investors should contact the company directly before making any final opinion about the presence of high cash on the books of the company along with carrying debt of ₹85 cr.
Advised reading: How should investors contact Companies/Management for clarifications or additional information?
Getting clarification from the company management in this regard would become further pertinent if this situation of high cash with debt persists going forward without any disclosure by management regarding its plans for the cash accumulated.
Therefore, it is recommended that investors should monitor the cash and debt levels of the company going ahead.
Further Reading: Howto Monitor Stocks in your Portfolio
Additional aspects and annual report analysis of Garware Wall Ropes Ltd:
While studying about Garware Wall Ropes Ltd, an investor comes across certain other aspects, which are important for analysis and subsequent final investment decision by investors:
1) Management succession planning:
An investor would notice that the founder promoter Mr. B. D. Garware, brought in his son Mr. R. B. Garware in the company, who took forward the company after the demise of the founder chairman.
Mr. R. B. Garware brought in his son Mr. V. R. Garware and made him the CMD of the company and himself stayed as director of the company. As a result, after the demise of Mr. R. B. Garware in February 2014, the company could keep on functioning smoothly.
It seems that until now, Garware Wall Ropes Ltd has witnessed good succession planning. However, it remains to be seen how the succession planning goes on in future. It should be one of the key parameters, which should be assessed by the investor, while making investment decision in the company.
Further reading: Steps to Assess Management Quality before Buying Stocks (C)
2) Promoters not participating in the buyback of the shares in 2013:
Garware Wall Ropes Ltd conducted a buyback of shares in 2013. It is pertinent to note that promoters did not participate in the buyback of shares by the company and it led to the increase in shareholding of promoters in the company. (Buyback notification of 2013):
As per Regulation 15(b) of the Buyback Regulations, the Buyback of Equity Shares shall not be made from the Promoters, Persons who are in control of the Company and Promoter Group entities of the Company. The Promoters have undertaken that they will not participate in the Buyback and shall not deal in the equity shares of the Company, including inter-se transfer of shares among the Promoters, during the period from the date of passing the resolution till the closing of the offer except the change of name of registered holders as mentioned in clause 8 above.
The increase in shareholding of promoters by not tendering their shares in the buyback reflects confidence of the promoters in the company’s business on the similar lines like that of market purchase of shares of the company by promoters.
To clarify, this is not to state that when promoters who submit/tender their shares in the buybacks, it is a bad sign. The recent changes in the taxation on dividends, where entities/persons receiving large amount of dividends (>₹10 lac), have to pay additional tax, has made dividends as a non-preferred way of distribution of cash by companies to shareholders. As a result, more and more companies now prefer buybacks over dividends to distribute cash to shareholders. In buybacks, the receipt of money by shareholders from the company is taxed as capital gains, which has now become more tax efficient than dividends.
Therefore, we believe that when promoters submit proportionate number of shares like everyone else, then the buyback transaction effectively becomes equal to dividend distribution.
However, when promoters do not tender/submit their shares in buybacks, then post-buyback, their shareholding in the company increases and we interpret it in the same manner like market purchase of shares by promoters, which shows confidence in the company and its business.
3) High remuneration of promoters:
An analysis of FY2017 annual report brings to fore multiple aspects regarding promoter’s remuneration and its expected future trend:
a) The promoter/CMD Mr. V. R. Garware drew a remuneration of ₹6.23 cr. in FY2017, which is almost equal to the maximum possible remuneration allowed by companies act, 2013 (₹6.40 cr. for Gareware-Wall Ropes Ltd). (Annual report FY2017, page: 36).
b) The investor would also notice that the commission taken by the promoter (₹4.15 cr.) is almost 5% of the PAT (₹85 cr.). A commission of about 5% of PAT is high when we compare it with the commissions taken by many other promoters of different companies. We find that many other promoters normally take a commission equal to 2% of PAT.
c) Another aspect to note in FY2017 annual report is that in the AGM, the company proposed to increase the remuneration of the promoter to 10% of the net profits as per Companies Act 2013, which, going ahead, would allow the company to effectively pay the promoter double the level of remuneration, which was paid to him in FY2017 because in FY2017, the applicable cap/limit on the promoters’ remuneration was 5% of net profits as per Companies Act 2013. (Annual report FY2017, page: 1):
…..the Board of Directors of the Company be and is hereby authorised to determine amount of commission to be paid to Mr. V. R. Garware, Chairman & Managing Director of the Company, every year, based on the performance of the Company for that particular year, such that total remuneration for any financial year shall not exceed ten (10) percent of the net profits of the Company from the financial year, which has started on 1st April, 2017, till remainder of term of his appointment i.e. upto 30th November, 2021.”
d) An investor would also note that the proposed remuneration clause does not has any fixed percentage of commission to be paid to the promoter. Therefore, effectively, if the board wants, then it can decide to give as much commission to the promoter as it wants until the total remuneration is within the new proposed higher limit of 10% of net profits as per Companies Act 2013. Such liberty to pay any level of commission to promoter would not have been there, if the commission percentage to be paid to promoter is fixed in the clause to be approved by shareholders.
Therefore, an investor would appreciate that quite a few of the shareholders who voted at the AGM, opposed the increase in the remuneration. (BSE submission of AGM proceedings, page 5):
Further Reading: Steps to Assess Management Quality before Buying Stocks (A)
4) Company venturing into projects dependent upon govt. subsidies:
Garware Wall Ropes Ltd has been taking initiatives to create a market in the protective farming space where the govt. provides 50% capital subsidy. (ICRA credit rating report December 2015, page: 3):
The company has undertaken a project named “Udaan” as part of which the company appointed representatives have covered villages in various districts of Maharashtra to educate farmers about the advantages of protective farming and its product applications. The government provides 50% capital subsidy for the protective farming projects and the same has provided boost to the segment revenues.
However, there have been many cases where the release of subsidy from Govt departments have witnessed delays and which has led to delay in realization of cash flows and resultant pressure on the working capital of the companies.
Even in the case of Garware Wall Ropes Ltd, the company has accepted in the FY2017 annual report that despite increase in agricultural growth rate due to relatively good monsoon, it did not benefit the company due to delay in subsidies. (Annual report FY2017, director’s report section, page: 18):
In the year under review, the Indian economy continued to grow at an impressive rate. A relatively good monsoon led to increase in the agriculture growth-rate. However, this could not translate into demand for our products due to delays in subsidies and various regulatory issues.
Further Reading: Understanding the Annual Report of a Company
Going ahead, it is advised that an investor keep a track of the contribution of the protective farming segment in the overall revenue profile of the company and the level of receivables days.
5) Sudden increase in trade payables:
In FY2017, the trade payables of Garware Wall Ropes Ltd have witnessed a sudden increase from ₹160 cr. at March 31, 2016 to ₹191 cr. at March 31, 2017.
We believe that this increase in payables should be seen in the same light as the discussion of high cash with debt on the books of Garware Wall Ropes Ltd. This is because increase in trade payable is effectively the suppliers/vendors funding the cash position of the company.
Therefore, an investor should keep a close watch on the cash, debt and trade payables position of the company going ahead to monitor the utilization of the cash accumulated by the company.
Further Reading: How to Monitor Stocks in your Portfolio
6) Significant amount of unexplained short term provisions:
In FY2017, the company has made provisions of about ₹50 cr. under “Other Provisions” in the short term provisions. (Annual report FY2017, page: 99):
The annual report does not provide any details about the exact nature of these provisions. We suggest that investors may contact the company to understand more about these provisions.
7) Significant level of processing and testing charges:
In FY2017, Garware Wall Ropes Ltd has reported processing and testing charges of about ₹76 cr.
Though the processing and testing charges are about the same level as previous year (₹70 cr.), still as it is a very significant part of overall expenses (about 9% of sales), therefore, we believe that an investor should understand further about these charges either from the company directly or from any industry contacts, if she is able to find one.
Further Reading: Understanding the Annual Report of a Company
8) Related party transactions:
Garware Wall Ropes Ltd has been entering into many transactions with the promoters and related entities. Out of these transactions, a lot of transactions pertain to continuous raising of small sized deposits of a few lac rupees from 11 related parties and refunding these deposits during the year and paying interest cost of insignificant amounts of a few thousands to a few lacs. (FY2017 annual report, page 111):
Even though, the amount of deposits and the interest thereon seem insignificant when compared to the overall net worth of Garware Wall Ropes Ltd of about ₹450 cr., however, the nature of these transactions raise a curiosity. It is advised that an investor may seek clarifications from the company about the reasons for entering such small sized transactions with so many related entities, which have the impact of increasing the compliance and reporting burden on the company.
Further reading: Why Management Assessment is the Most Critical Factor in Stock Investing?
Margin of Safety in the market price of Garware Wall Ropes Ltd:
Currently (Oct. 14, 2017), Garware Wall Ropes Ltd is available at a price to earnings (P/E) ratio of about 22 based on trailing 12 months earnings, which does not offer any margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 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, Garware Wall Ropes Ltd seems to be a company, which has been facing tough competition from unorganized sector until a few years back, which has kept it under a lot of pricing pressure. However, since last few years, its efforts for creating a brand in consumer market has borne fruits and it is able to command a premium pricing over competitors as well as is able to hold retail prices despite reduction in the raw material prices. This along with the continued focus of the company on the newer value added product segments has led to the increasing sales growth of the company, which is associated with improving profitability. It remains to be seen whether Garware Wall Ropes Ltd would be increase its retail prices to maintain profitability when commodity cycle turns and raw material prices increase in future.
Garware Wall Ropes Ltd has a comparatively asset light business characterized by relatively high asset turnover. It has led the company to report healthy free cash flows despite increasing receivables days in recent years.
The company has utilized the free cash flow to fund capex, reduce debt, pay dividends, conduct buybacks etc. and it is carrying the balance funds as cash & investments. This strong cash position seems to be recognized as credit strength by the rating agency, which has led to credit rating upgrade from A+ to AA- in 2016.
There are certain queries related to debt of ₹85 cr. on the books of the company despite presence of significant cash & investments of ₹228 cr. An investor should closely monitor the cash and debt position of the company going ahead to track the utilization of the cash.
Until now, Garware Wall Ropes Ltd has demonstrated good management succession planning and the confidence by the promoters in the company’s business, which was reflected by the promoters not participating in the buyback offered by the company in the past. However, the current high remuneration of the promoter along with the enabling clauses approved by recent AGM, where the proposal of even higher remuneration was approved by shareholders deserves attention of investors.
There are certain other aspects, which might require investors to take further clarifications from the company like increase in trade payables, related party transactions etc.
Further Reading: How to Monitor Stocks in your Portfolio
These are our views about Garware Wall Ropes Ltd. However, investors should do their own analysis before taking any investment related decision about Garware Wall Ropes Ltd.
You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”
Hope it helps!
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.
