Analysis: Jamna Auto Industries Ltd

Modified: 19-Jun-21

The current section of the “Analysis” series covers Jamna Auto Industries Ltd, the largest manufacturer of suspension solutions (spring manufacturer) for commercial vehicles in India and the third-largest in the world. The company manufactures products like leaf springs, parabolic springs, air suspensions and lift axles etc.

“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.

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.

Jamna Auto Industries Ltd Research Report by Reader

Hello Sir,

Please find below my analysis for Jamna Auto Industries Ltd. Please provide your input in identifying gaps in my analysis so that I can use that knowledge to get better.

Jamna Auto Industries Ltd:

Jamna Auto Industries Ltd is a leading spring manufacturer located at 8 different locations. The company’s product range includes conventional leaf spring, parabolic leaf spring, stabilizer bar, lift axle, air suspension, trailer suspension, etc. The company manufactures a total of 300 parts for OEM and 2250 parts for the aftermarket.

As we know, auto and auto-ancillaries are cyclical; therefore, Jamna Auto Industries Ltd is trying to focus on the aftermarket segment. It is facing maximum competition from the unorganized segment.

The company’s revenue from the aftermarket segment and export was 24% for FY19-20 against 16% in FY18-19. The revenue from new products developed was 32% for FY19-20.

Jamna Auto Industries Ltd has faced major headwinds due to COVID-19/Lockdown enforced. The company was already struggling in H2 FY18-19 due to a slowdown in the auto industry due to BS6 norms and other challenges faced by the auto industry.

Jamna Auto Industries Ltd has taken many decisions to take down cost/expenses. The company has closed its Lucknow plant (manufacturing capacity not reduced). Also, the company has deferred its current capex plans and will review them upon demand revival.

Jamna Auto Industries Ltd is developing new products (extralite spring) with technical support/help from Tinsley Bridge, UK.

The company was not able to achieve the goals decided under project Lakshya. The ROCE for the year was 16% against the 33% operation goal.

Financial statement analysis of Jamna Auto Industries Ltd:

Cash available has drastically reduced from Rs.18 Cr to Rs.48 Lakh. The company will face a cash crunch problem if this situation continues.

Jamna Auto Industries Ltd.’s current assets have been reduced and there is an increase in non-current assets due to “Capital Work in Progress”.

The company has borrowed Rs.50 Cr capital, which is being charged at a 9% interest rate.

Jamna Auto Industries Ltd has taken a working capital loan of Rs. 54 Cr, being charged at a 7.5% interest rate.

Trade receivables amount stands at Rs. 77 Cr, which was Rs. 231 Cr for last year.

The company is able to reduce Debtor days from 40 days to 27 days.

Jamna Auto Industries Ltd.’s Debt to Equity Ratio is 0.3 due to increased borrowing.

The company was able to reduce total liabilities from Rs. 525 Cr to Rs. 18 Cr.

The operating profit margin (OPM) of Jamna Auto Industries Ltd is fluctuating between 12-16% and the net profit margin (NPM) is ranging between 4-6%. Net profit Margin is very less because almost 60% of total sales is consumed on raw material.

The company is not able to improve OPM and NPM further.

Revenue from the subsidiary company is Rs.66 Cr, which is just 6% of total revenue. The subsidiary company is not making any profit from revenue generated, as the consolidated profit figure is always equal to or less than the standalone profit. However, still, the company’s promoter has given a loan of Rs. 16.5 Cr.

Jamna Auto Industries Ltd has generated total revenue of Rs. 257 Cr whereas last year’s revenue for H1 was at Rs. 670 Cr. The company has made a loss of Rs. 4.59 Cr. It is coming back on track, quarter by quarter. The profit for Q1 FY 20-21 was Rs. 11 Cr, but in Q2, the company was at a loss of Rs. 16 Cr.

Other ratios:

Request you to provide your inputs.

Thanks & Regards,

Akshay Marathe

Dr Vijay Malik’s Response

Dear Akshay,

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

While analysing the past financial performance of the company, an investor notices that in FY2008, Jamna Auto Industries Ltd merged two companies, Jai Parabolic Springs Ltd and MAP Springs Ltd with itself. Thereafter, the company started reporting consolidated financials from FY2008 onwards. In addition, over the years, Jamna Auto Industries Ltd has established a few subsidiary companies and as a result, it has continued to report consolidated financial statements from FY2008 until now.

We believe that while analysing any company, an investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire company including its subsidiaries, joint ventures etc. Consolidated financials of any company, whenever they are present, provide such a picture.

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

Therefore, in the analysis of Jamna Auto Industries Ltd, we have analysed the consolidated financial performance from FY2008 and standalone financial performance before that.

With this background, let us analyse the financial performance of the company.

Jamna Auto Industries Ltd Financials FY2011 21

Financial and Business Analysis of Jamna Auto Industries Ltd:

While analyzing the financials of Jamna Auto Industries Ltd, an investor notices that the sales of the company have grown at a pace of about 2% year on year from ₹903 cr in FY2011 to ₹1,079 cr in FY2021.

While doing a detailed analysis of Jamna Auto Industries Ltd, an investor notices that the company has seen alternating periods of increasing and declining sales. The sales of the company increased to ₹1,120 cr in FY2012. Thereafter, the sales started declining and reached a low of ₹833 cr in FY2014, a decline of more than 25%. Thereafter, the sales started increasing and the company reported sales of ₹2,135 cr in FY2019. However, soon thereafter, the sales again started declining and the company had sales of ₹1,079 cr in FY2021 about 50% lower than the peak.

Such kind of cyclical trend of increasing and then declining sales of Jamna Auto Industries Ltd is not limited to the last 10 years. In the previous decade as well, the company witnessed similar periods. Previously, the sales of Jamna Auto Industries Ltd declined about 33% from ₹98 cr in FY2000 to ₹66 cr in FY2003 (as per FY2005 annual report, page 2).

Jamna Auto Industries Ltd Financials FY2000 To FY2005

The fluctuations in the business performance of Jamna Auto Industries Ltd is not limited to its sales. The profitability of the company has witnessed similar cyclical patterns over the years. During the last 10-years (FY2011-21), the operating profit margin (OPM) of the company first, declined from 12% in FY2011 to a low of 5% in FY2014. The OPM then increased to 16% in FY2016 and thereafter, declined to 10% in FY2020. The company reported an OPM of 12% in FY2021.

The net profit margin (NPM) of the company has also fluctuated between 2% to 8% during the last 10 years (FY2011-21).

If an investor extends her analysis period further, then she notices that Jamna Auto Industries Ltd has even faced multiple years of financial losses. In the table of financial performance of the company from FY2000-FY2005, shared above, an investor would notice that the company reported net losses continuously for 5 years over FY2000-FY2004 (as per FY2005 annual report, page 2).

Thereafter, once again, Jamna Auto Industries Ltd reported a net consolidated loss of ₹12 cr in FY2009. (as per FY2009 annual report, page 62).

From the above discussion, an investor would appreciate that the business of Jamna Auto Industries Ltd faces high uncertainties. The company continuously comes across periods of poor performance after a few years of improving business performance. As a result, it looks like that it is very difficult for any investor to extrapolate the recent performance of the company, whether good or poor, into the future.

In order to understand the reasons behind such fluctuating performance of Jamna Auto Industries Ltd in sales as well as profitability, an investor needs to analyse the business model of Jamna Auto Industries Ltd in detail. Only after understanding the reasons behind the fluctuating performance of the past, an investor would be able to make an educated guess about the future performance of the company.

Advised reading: How to do Business Analysis of a Company

While reading the annual reports of Jamna Auto Industries Ltd from FY2005, its credit rating reports, as well as various corporate announcements, an investor notices the following key characteristics of its business model, which influence its performance significantly:

A) Business of Jamna Auto Industries Ltd is highly dependent on commercial vehicles industry, which is cyclical in nature:

An investor would notice that Jamna Auto Industries Ltd manufactures suspension solutions for commercial vehicles (CV) like leaf springs, parabolic springs, air suspension etc. Major customers of the company are commercial vehicle manufacturers like Tata Motors and Ashok Leyland Ltd.

Credit rating report by ICRA for Jamna Auto Industries Ltd, April 2021, page 2:

ICRA notes its high client concentration with top two customers accounting for a predominant share of sales (67% in FY2020 and 52% in 9M FY2021) – Tata Motors Limited (TML) and Ashok Leyland Limited (ALL).

An investor would appreciate that a high customer concentration of Jamna Auto Industries Ltd with India’s two largest CV manufacturers contributing more than 50% of sales links the business performance of Jamna Auto Industries Ltd with the performance of the commercial vehicle industry.

Whenever the sales volume of the commercial vehicle (CV) industry increase, the sales of CV manufacturers like Tata Motors Ltd and Ashok Leyland Ltd would increase. This, in turn, would increase the demand for the suspension solution manufactured by Jamna Auto Industries Ltd resulting in its higher sales. On the contrary, when the sales volume of the CV industry decline, the sales of CV manufacturers and in turn sales of Jamna Auto Industries Ltd would also decline.

An investor can see this linkage by comparing the trend of sales of commercial vehicles in India with the sales of Jamna Auto Industries Ltd over the years.

The following chart shows the number of commercial vehicles sold in India from FY2012 to FY2021.

Sales Volume Of Commercial Vehicles In India FY2012 FY2021

An investor would notice that during FY2012 to FY2015, the CV industry was in a downtrend as the sales of commercial vehicles in India declined from 809,000 in FY2012 to 615,000 in FY2015.

From the above discussion, an investor would remember that during this period, the sales of Jamna Auto Industries Ltd declined from ₹1,120 cr in FY2012 to ₹833 cr in FY2014 along with a sharp decline in the profit margins.

The company highlighted the strong link between the performance of the CV industry and its own performance to its shareholders in the FY2014 annual report on page 16:

Commercial Vehicles (CVs), the segment in which JAI operates, was the worst affected, witnessing a 20.23% fall in volumes during the year. This had a direct bearing on our performance, resulting in 14.9% fall in revenues to Rs 83,370 lacs in FY14 from Rs 98,010 lacs in FY13.

The above chart shows that during FY2015-FY2019, the CV industry witnessed an uptrend and the sales of commercial vehicles in India increased from 615,000 in FY2015 to 1,007,000 in FY2019. During this period, the sales of Jamna Auto Industries Ltd nearly doubled from ₹1,095 cr in FY2015 to ₹2,135 in FY2019.

An investor would notice that the CV industry has witnessed a sharp decline in the last two years when the sales of commercial vehicles declined from 1,007,000 in FY2019 to 569,000 in FY2021. Therefore, it does not come as a surprise to the investor when she notices that during this period, the sales of Jamna Auto Industries Ltd declined by about 50% from ₹2,135 cr in FY2019 to ₹1,079 cr in FY2021.

Therefore, an investor would appreciate that the fortunes of the company are tightly linked to the performance of the CV industry.

The credit rating agency, ICRA, has also highlighted this aspect of the business of Jamna Auto Industries Ltd in its report for the company in April 2021.

JAI Group’s significant dependence on the M&HCV segment, which exposes it to the inherent cycle nature of the underlying industry.

While reading the FY2006 annual report, an investor gets to know that the sharp decline in the sales during FY2000-FY2003 and the losses reported by the company during FY2000-FY2004 were due to a recession in the CV industry. FY2006 annual report, page 11-12:

During the year 1999 to 2003 the Commercial Vehicle industry was reeling under the recession. These recessionary trends also affected both operational and financial performance of the Company.

After incurring losses during recession period the Company has started earning profit from previous year.

From the above discussion, an investor would appreciate that the CV industry and the performance of Jamna Auto Industries Ltd are highly interlinked and have followed cyclical patterns in the past where periods of good performance are followed by poor performance and vice versa.

In such a situation, it becomes difficult for any investor to extrapolate the recent performance of Jamna Auto Industries Ltd whether good or poor, into the future.

Advised reading:  How to do Business Analysis of Auto Ancillary Companies

B) Input costs for Jamna Auto Industries Ltd are very volatile:

While analysing the business of the company, an investor notices that the key raw material used by Jamna Auto Industries Ltd to make suspension solutions like leaf springs, parabolic springs etc. is steel. An investor would appreciate that the price of commodities like steel face extreme cyclical patterns where it can increase up to 5-6 times in uptrends and decline by about 75%-80% during downtrends.

The management of the company highlighted this aspect of their key raw material, steel, to the shareholders in its FY2018 annual report on page 171:

The Group is affected by the price volatility of certain commodities. Its operating activities require the ongoing purchases of steel which is a volatile product and is major component of end product. The prices in these purchase contracts are linked to the price of raw steel and demand supply matrix.

The problem of volatility in the prices of steel, which is the company’s key raw material, has been one of the key challenges for it for a long time. The company intimated to its shareholders in FY2007 that it has faced many difficulties to hedge the impact of steel prices. However, it was not able to protect its profit margins from the impact of an increase in steel prices. As a result, its operating profit margins were declining.

FY2007 annual report, page 6:

Main raw material cost i.e. steel prices (comprising about 65% to sales and among the most difficult to hedge), increases recently and its continuing trend resulting in declining margins.

Therefore, an investor would note that Jamna Auto Industries Ltd operates in a business environment where the demand for the products of the company is uncertain due to frequent cyclical trends in the CV industry. At the same time, the prices of the raw material of the company are uncertain due to commodity cycles. Therefore, an investor would appreciate that maintaining a stable profit margin is highly challenging for Jamna Auto Industries Ltd.

In such a situation, if Jamna Auto Industries Ltd wishes to protect its profit margins, then it needs to exhibit a very high pricing power to pass on the increase in its input costs to its customers.

Let us see whether Jamna Auto Industries Ltd has a high pricing/negotiation power over its customers.

C) Jamna Auto Industries Ltd does not have pricing power with its customers:

From the above discussion, an investor would remember that the major customers of Jamna Auto Industries Ltd that contribute more than 50% of its sales are Tata Motors Ltd and Ashok Leyland Ltd. An investor may also note that Tata Motors Ltd and Ashok Leyland Ltd are also the biggest commercial vehicle manufacturers in India with a 75% stake in the medium & heavy commercial vehicle (M&HCV) segment.

Credit rating report by ICRA for Jamna Auto Industries Ltd in Nov. 2017:

Tata Motors Limited (TML) and Ashok Leyland Limited (ALL) are JAI major customers which contributed ~64% of its sales revenue in H1FY2018. However, the client concentration risk is mitigated by strong market position with these OEMs (which together account for more than 75% of the domestic M&HCV market)…

Therefore, an investor would notice that the key customers of Jamna Auto Industries Ltd (FY2021 sales of about ₹1,000 cr) are comparatively very big corporates, Tata Motors Ltd (FY2021 sales of about ₹250,000 cr) and Ashok Leyland Ltd (FY2020 sales of about ₹22,000 cr). In addition, these two customers also control about 75% share of the M&HCV market where Jamna Auto Industries Ltd operates.

This combination of large size and large market share of customers gives them very high bargaining power over Jamna Auto Industries Ltd. As a result, an investor would appreciate that Jamna Auto Industries Ltd has very little pricing power in negotiations.

In the article elaborating the business analysis of auto-ancillary companies (click here), an investor would notice that the auto-ancillary companies are under continuous pressure from the original equipment manufacturers (OEMs) to reduce prices.

While analysing the business performance of Jamna Auto Industries Ltd, an investor notices that sharply fluctuating profit margins of the company, which sometimes even result in losses, indicate that the company faces difficulty in passing on its cost pressures to its customers and as a result, it has to take a hit on its profit margins.

In FY2012, when the operating profit margin (OPM) of Jamna Auto Industries Ltd declined sharply from 12% in FY2011 to 9% in FY2012, the company highlighted the tough business conditions it was facing. At one end, the raw material prices were increasing and at the other end, the customers were putting pressure to reduce prices.

FY2012 annual report, page 13:

During the year we had to contend with rising input costs and pricing pressure from customers. Our people responded well with intense cost-cutting and business process improvement efforts.

Therefore, an investor would appreciate that Jamna Auto Industries Ltd does not have a strong negotiating/pricing power over its customers.

An investor would appreciate that when a company with a low pricing power faces an increase in raw material prices, then it has to do cost-cutting to protect some of its profit margins. In addition, the company has also focused on increasing the share of high-margin and value-added products like parabolic springs in its overall sales.

Credit rating report by ICRA for Jamna Auto Industries Ltd in April 2021:

Over the recent years, the Group has witnessed a growth in revenue contribution from the higher value-accretive products such as parabolic springs. The contribution of parabolic springs to JAI’s sales revenue has improved gradually to nearly 28% in FY2021 from 9% in FY2011.

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

A higher contribution from higher-margin parabolic springs has helped the company to improve its business position; however, still, the major portion of the business comes from leaf springs, which are low-value adding commodity products.

Credit rating report by ICRA for Jamna Auto Industries Ltd in August 2018:

JAI derives majority of its revenues from a single product category, leaf springs, which is commoditised in nature.

As the company’s business is highly dependent on a commoditized product where a customer can use the products of any competitor with equal efficiency, therefore, the company faces a low pricing power with its customers.

As discussed above, the nature of its raw material, steel, which has a history of highly volatile prices, further increases the tough business situation of Jamna Auto Industries Ltd.

The low pricing/negotiating power of Jamna Auto Industries Ltd is visible in the sharply fluctuating profit margins, which in the past have even declined to losses.

In addition, due to the low pricing power, even if the raw material prices decline, then Jamna Auto Industries Ltd has to give money back to its customers for the sale made by it during the year. It looks like the company has to even refund the money on the prior sales done by it as it carries a “provision for price differences” in its balance sheet.

As per the company, the “provision for price differences” is the money that it needs to pay to customers for savings made by it due to a decline in prices.

FY2020 annual report, page 90:

The Company’s business requires passing on price differences to the customers for the sales made by the Company. The Company at the year end, has provided for saving made in price differences to be passed on to the Customers.

Jamna Auto Industries Ltd has highlighted to the shareholders in the FY2020 annual report that it has to pass on price differences, discounts, rebates and various incentive schemes to the customers, which an investor would recall are the biggest players in the M&HCV industry.

FY2020 annual report, page 173:

Revenue is measured by the Group at the fair value of consideration received/receivable from its customers and in determining the transaction price for the sale of finished goods, the Group considers the effect of various factors such as price differences and volume based discounts, rebates and other promotion incentive schemes (“trade schemes”) provided to the customers. Adequate Provisions have been made for such price differences, and trade schemes, with a corresponding impact on the revenue.

In light of the above discussion, an investor would appreciate that Jamna Auto Industries Ltd does not have high pricing power over its customers. The very large size of its customers, the cyclical nature of the CV industry as well as the steel industry puts continuous pressure on its profit margins. As a result, Jamna Auto Industries Ltd has witnessed sharply fluctuating profit margins in the past, which on multiple occasions have declined to losses as well.

In the past, the cyclical nature of the CV industry and the low pricing power of Jamna Auto Industries Ltd put so much stress on the profitability and cash-generating ability of the company that Jamna Auto Industries Ltd defaulted to its lenders during 2004-2005. In the near bankruptcy stage, its lenders had to restructure its debt so that the company could survive.

FY2005 annual report, page 15:

Based on our audit procedures and according to the information and explanation given to us, we are of the opinion that the company has defaulted in repayment of dues to financial institutions, banks or debenture holders. However, the restructuring proposal prepared by the State Bank of India under the Corporate Debt Restructuring Cell (CDR) set up by Reserve Bank of India, provide interalia for rephasement of all Term loans and has been agreed and implemented by majority of the lenders

Therefore, an investor would appreciate that Jamna Auto Industries Ltd operates in a very tough business environment of uncertain demand of its products, uncertain prices of its raw materials, and low pricing power over its very large customers. As a result, the business performance of the company keeps on fluctuating from good performance to poor performance.

Sales of the company, after a few years of continuous growth, suddenly decline by up to 50% within a short period of time. After a few years of good profits, suddenly, the company may report losses.

Predicting the business performance of the company is difficult and therefore, an investor needs to continuously keep close monitoring of the business performance of the company.

Advised reading: How to do Business Analysis of a Company

While looking at the tax payout ratio of Jamna Auto Industries Ltd., an investor notices that in recent years (FY2015 onwards), the tax payout ratio of the company has been in line with the standard corporate tax rate prevalent in India. However, before FY2015, Jamna Auto Industries Ltd reported a lower tax payout ratio.

While analysing the previous annual reports, an investor notices that in FY2009, Jamna Auto Industries Ltd had started production in its plant at Pantnagar (Uttarakhand), which had income tax benefits. The plant had 100% income tax benefits for the first 5 years and 30% income tax benefits for the next 5 years.

FY2009 annual report, page 71:

The newly set up unit of Jai Suspension Systems Limited at Pant Nagar is eligible for 100% deduction of the profit of the said undertaking for first 5 years and 30% for the next 5 year from the year of set up of the undertaking as per provisions of Section 80-IC of the Income Tax Act, 1961.

However, Jai Suspension Systems Limited is liable for Minimum Alternate Tax (MAT) as per the Income Tax Act, 1961…

While doing a detailed reading of the annual reports, an investor notices that the income tax department has alleged that Jamna Auto Industries Ltd has mis-utilized the tax exemptions available to it. The income tax department has alleged that the company sold goods to its subsidiary, which owns the Pantnagar plant and thus enjoys the tax holiday, at a lower cost. This practice, in turn, leads to a higher profit for the subsidiary when it sells the finished goods to the end customers. As the subsidiary enjoys the tax holidays, therefore, the income tax department has alleged that Jamna Auto Industries Ltd has avoided taxes by channelling its sales via the subsidiary.

FY2015 annual report, page 77:

The assessing officer has increased the taxable income of the Company by Rs 1,095.73 contending that it has sold material of its subsidiary firm (Jai Suspension System LLP (JSSLLP) at lower margin in order to divert its profits to JSSLLP as JSSLLP was enjoying tax exemption during that year. Tax impact of the same is Rs. 372.46 (Previous year: Rs. Nil). The Company is in process of filing an appeal against this order and based on discussion with the legal counsel is confident of a favourable outcome.

An investor notices that the company has received multiple such orders year after year from the income tax department e.g. in FY2019 (as per page 152 of FY2019 annual report), in FY2020 (as per page 99 of FY2020 annual report).

In FY2020, the company made applications to the govt. for settlement of tax disputes under the Vivad se Vishwas Scheme and Sabka Vishwas Legacy Dispute Resolution Scheme.

FY2020 annual report, page 99-100:

During the year, the Company has made voluntary application to the Central Board of Direct taxes (CBDT) under Vivad se Vishwas Scheme (VsV Scheme) for settlement of cases pertaining to the assessment years 2016-17 and 2017-18.

During the year, the Company has applied under Sabka Vishwas Legacy Dispute Resolution Scheme (SVLDRS) for the resolution of the matter which was pending with CESTAT Lucknow till previous year in respect of Cenvat Credit wrongly availed as capital goods instead of input and service tax credit availed without actual documents.

The investor should do deeper due diligence to assess the outcome of such appeals to know the impact of these orders on the tax payout and cash flow position of the company.

Further advised reading: How to do Financial Analysis of a Company

Operating Efficiency Analysis of Jamna Auto Industries Ltd:

a) Net fixed asset turnover (NFAT) of Jamna Auto Industries Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Jamna Auto Industries Ltd in the past years (FY2011-21), then she notices that the NFAT of the company has been fluctuating between the levels of 6 and 3.

The NFAT declined from 6 in FY2012 to 3.2 in FY2014, which coincided with the downturn of the CV industry during FY2012-2014 during which period, the sales of Jamna Auto Industries Ltd had declined by about 25% from ₹1,120 cr in FY2012 to ₹833 cr in FY2014. The demand for the company’s products declined so much that it had to reduce the number of its employees and even close one of its plants at Lucknow.

FY2014 annual report, page 20:

The company rationalized manpower, shut down the Lucknow plant…

Thereafter, the NFAT started increasing in line with the uptrend of the CV industry and by FY2019, the NFAT increased to 6.3. This was the period when the sales of Jamna Auto Industries Ltd increased to ₹2,135 cr in FY2019.

However, soon thereafter, the CV industry went into another downturn and the NFAT of the company declined to 3.0 as the sales of the company declined by about 50% to ₹1,079 cr in FY2021. As a result, of the declining demand, the company had to again shut down an assembly line at the Lucknow plant. This plant was started in FY2017 after it was closed in FY2014.

FY2020 annual report, page 4:

One assembly unit of Jai Suspension Systems LLP at Lucknow (U.P.) was closed in FY 2019-20.

Therefore, an investor would notice that the NFAT of Jamna Auto Industries Ltd has been fluctuating in line with the cyclical patterns of increase and decrease of CV demand in India. The company ends up making a lot of investment in creating new plants to increase its manufacturing capacity during the CV upcycle. However, during the downcycle, the company has to shut down plants.

In the upcycle, the company faces capacity constraints to service different business segments like aftermarket as the demand from original equipment manufacturers (OEMs) consumes most of the production of its plants.

During the CV industry upcycle, in FY2011, the company intimated to its shareholders that it could not generate significant revenue from the aftermarket segment due to capacity constraints as the OEMs consumed most of the capacity.

FY2011 annual report, page 3:

Spring demand from domestic OEMs continued to be strong. As a result, we faced capacity constraint and could not fully capitalize on the opportunities in After Market segment.

However, soon thereafter, in the downcycle of the CV industry, the company had to reduce its manpower and shut down its Lucknow plant.

Jamna Auto Industries Ltd again faced capacity constraints in the subsequent upcycle of the CV industry in FY2018 when most of its capacity was consumed by OEMs and it could not meet the full demand of the aftermarket and export segment. As a result, it had to limit supplies to the non-OEM segment.

Credit rating report by ICRA for Jamna Auto Industries Ltd in August 2018:

ICRA notes that in FY2018, non-OEM sales was restricted to 15% of total sales revenue as JAI’s capacity was deployed towards increased off-takes by OEMs.

However, all of a sudden within a year, the CV industry hit a downturn and the sales of the company declined by almost half from ₹2,135 cr in FY2019 to ₹1,129 cr in FY2020.

FY2019 annual report, page 18:

commercial vehicle segment witnessed slowdown from the second half of FY 2019

As a result, the company had to put almost all its expansion plans on a hold and as discussed earlier, it had to shut down an assembly line in its plant in Lucknow.

Credit rating report by ICRA for Jamna Auto Industries Ltd in August 2019:

During FY2019, the management had announced a significant capacity expansion plan (~Rs. 650 crore between FY2019-22), a large part of which was discretionary and has been put on hold in line with weakness in demand for end user.

Such a turn of events in the business history of Jamna Auto Industries Ltd would highlight the uncertainties associated with the operating business environment of the company.

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

b) Inventory turnover ratio of Jamna Auto Industries Ltd:

While analysing the efficiency of inventory utilization by Jamna Auto Industries Ltd, an investor notices that for most of the period in the last 10 years, the inventory turnover ratio (ITR) of the company has fluctuated with periods of improving ITR followed by a period of declining ITR.

During the downturn in the CV industry (FY2012-2014), the ITR of Jamna Auto Industries Ltd declined from 9 in FY2012 to 7.2 in FY2014. In the upcycle of the CV industry, the ITR increased to 12.8 in FY2018. However, since then, the ITR has seen a sharp correction to 6.3 in FY2020. In FY2021, the ITR stood at 6.4.

From the above discussions on NFAT and ITR of Jamna Auto Industries Ltd, an investor would notice that for the companies operating in cyclical industries like auto-ancillary companies, such parameters are not highly useful to determine the overall trends of improvement or deterioration in the resource utilization efficiency.

The gains in the efficiency achieved by the company in one phase of the industry cycle are lost when the cycle turns and the measuring parameters like NFAT and ITR get impacted significantly by the phase of the industry cycle. As a result, an investor is not able to assess whether the company is able to bring any real and sustained improvement in its resource utilization efficiency.

Therefore, an investor should be very cautious about interpreting the improvement or deterioration of operating efficiency by parameters of NFAT or ITR.

In the case of Jamna Auto Industries Ltd, an investor comes across many instances where the company was found to keep useless assets, both fixed assets as well as inventory, where it seemed like the company has totally forgotten about these assets.

For example in FY2016, while shifting one of the plants, the company realized that it has fixed assets of about ₹9 cr, which are no longer usable.

FY2016 annual report, page 89:

During the shifting of one plant, the management identified certain assets having book value of Rs. 907.99, which are no longer actively usable and has accordingly provided for accelerated depreciation on the same.

An investor would appreciate that assets lying useless are inefficient utilization of resources by a company. However, the trend of NFAT for Jamna Auto Industries Ltd could not highlight it in FY2016 because the NFAT was continuously rising during FY2015-FY2016 due to the upcycle in the CV industry.

Therefore, an investor would appreciate that the trend of asset utilization ratios like NFAT and ITR are not very helpful to an investor in cyclical industries like auto-ancillary industries. As a result, the investor should be cautious and focus on aspects like auditor’s report, provisioning etc. to find out whether a company is showing signs of inefficiency in the management of its fixed assets or inventory.

Further advised reading: Inventory Turnover Ratio: A Complete Guide

c) Analysis of receivables days of Jamna Auto Industries Ltd:

Over the last 10 years, the receivables days of Jamna Auto Industries Ltd have improved from 42 days in FY2012 to 23 days in FY2021. However, when an investor analyses year on year changes in the receivables days, then she notices that the receivables days of the company had improved to 10 days in FY2017 after which it sharply increased to 62 days in FY2020.

When the investor attempts to analyse the developments related to Jamna Auto Industries Ltd during this period from the publicly available documents, then she finds out that the sharp decline of receivables days to 10 days was due to the use of cash-discounting used by the company with its customers.

The credit rating agency, ICRA, in its report of November 2017, mentioned the practice of cash discounting of receivables by Jamna Auto Industries Ltd with its customers. In its report of November 2017, ICRA highlighted that Jamna Auto Industries Ltd used to follow cash discounting, which it had discontinued for the last 6-months.

ICRA notes that the company’s working capital borrowings from banks and money market has increased over the last six months following discontinuation of cash discounting with customers, which would allow improvement in operating margin keeping the coverage indicators comfortable.

The above note by ICRA seems to indicate that Jamna Auto Industries Ltd used to give additional discounts to customers if they make early payments, which reduced the amount of trade receivables; however, at the same time, it reduced the profitability as the customer would ask for discounts if it has to make early payment.

However, as per ICRA, for the previous 6-months, Jamna Auto Industries Ltd had stopped this practice of cash discounting with customers. Instead, it started utilizing the bank borrowings to meet its cash needs and in turn started receiving the comparatively higher contracted price from the customers. As a result, in November 2017, ICRA expected that the stoppage of cash discounting with customers would increase the operating margins of Jamna Auto Industries Ltd.

Therefore, an investor would appreciate that after the stoppage of the cash-discounting facility from FY2017, the receivables days of the company increased sharply from 10 days in FY2017 to 62 days in FY2020. In absolute terms, the trade receivables increased significantly from ₹34 cr in FY2017 to ₹304 cr in FY2019.

Further advised reading: Receivable Days: A Complete Guide

When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of Jamna Auto Industries Ltd for FY2011-21 then she notices that the company has converted its profits into cash flow from operating activities.

Over FY2011-21, Jamna Auto Industries Ltd reported a total cumulative net profit after tax (cPAT) of ₹710 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹1,270 cr.

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

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

Learning from the article on CFO will indicate to an investor that the cCFO of Jamna Auto Industries Ltd is higher than the cPAT due to the following factors:

  • Depreciation expense of ₹408 cr (a non-cash expense) over FY2011-FY2021, which is deducted while calculating PAT but is added back while calculating CFO.
  • Interest expense of ₹216 cr (a non-operating expense) over FY2011-FY2021, which is deducted while calculating PAT but is added back while calculating CFO.

The Margin of Safety in the Business of Jamna Auto Industries Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Read: 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 can convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

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

An investor may calculate the SSGR using the following formula:

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)

While analysing the SSGR of Jamna Auto Industries Ltd, an investor would notice that the SSGR of the company used to be negative during FY2014-FY2016; however, from FY2017, it turned positive. The negative SSGR during FY2014-FY2016 is primarily due to decreasing NFAT (a result of a sharp decline in sales) and lower profit margins during this period. (Please note that we use a 3-year average for all the inputs for SSGR. So, the impact of change in every input influences SSGR with a lag).

However, after FY2017, the SSGR has turned positive due to improving NFAT (due to rising sales from upcycle in the CV industry) and profitability.

If an investor notices the overall trend and average of SSGR, then she notices that Jamna Auto Industries Ltd has an SSGR of about 4% whereas the company has increased its sales at a rate of about 2% over the last 10-years from ₹903 cr in FY2011 to ₹1,079 cr in FY2021.

As Jamna Auto Industries Ltd is growing at a pace less than its SSGR in the last 10-years (FY2011-FY2021), therefore, it could manage to reduce its debt over this period. The total debt of Jamna Auto Industries Ltd reduced from ₹138 cr in FY2011 to ₹11 cr in FY2021.

As per the press release of the company on May 31, 2021, the company has become debt-free on March 31, 2021.

Debt Position: The Company has become debt free as of 31 March 2021.

An investor arrives at the same conclusion when she analyses the free cash flow (FCF) position of Jamna Auto Industries Ltd.

b) Free Cash Flow (FCF) Analysis of Jamna Auto Industries Ltd:

While looking at the cash flow performance of Jamna Auto Industries Ltd, an investor notices that during FY2011-2021, it generated cash flow from operations of ₹1,270 cr. During the same period, it did a capital expenditure of about ₹657 cr.

Therefore, during this period (FY2011-2021), Jamna Auto Industries Ltd had a free cash flow (FCF) of ₹613 cr (=1,270 – 657).

In addition, during this period, the company had a non-operating income of ₹83 cr and an interest expense of ₹216 cr. As a result, the company had a net free cash flow of ₹480 cr (= 613 + 83 – 216). Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.

While looking at the overall cash-flow position of Jamna Auto Industries Ltd over the last 10 years (FY2011-2021), an investor notices that the company has primarily used its free cash flow in the following manner:

  • Payment of dividends to the shareholders: ₹209 cr excluding dividend distribution tax (DDT). The company might have paid about ₹40 cr (about 20% of the dividend amount) as DDT.
  • Reduction of debt: ₹127 cr as a reduction in total debt from ₹138 cr in FY2011 to ₹11 cr in FY2021.

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

Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are 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

If an investor looks at the overview of the cash-flow position of Jamna Auto Industries Ltd from FY2011 to FY2021, then she might feel that the company has generated a significant amount of cash over the years and seems to be a cash-rich company. However, an investor should always keep in her mind that Jamna Auto Industries Ltd operates in a cyclical industry with a lot of uncertainties around the demand of its products as well as the prices of its raw materials. In addition, the company has low pricing power over its customers.

These combinations create a tough operating business environment for Jamna Auto Industries Ltd. Therefore, at times, the company faced periods of extreme liquidity stretch. On some occasions, the liquidity situation deteriorated so much that Jamna Auto Industries Ltd could not repay its lenders on time.

History of defaults to lenders by Jamna Auto Industries Ltd:

In FY2012, when the downcycle in the CV industry started, Jamna Auto Industries Ltd defaulted to its lenders and could not repay about ₹46 cr for about 67 days. As a result, the auditor of the company highlighted this incident in its report.

FY2012 annual report, page 40:

In our opinion and according to the information and explanations given to us, the Company has not defaulted in repayment of dues to its bankers or to any financial institutions except in respect of dues aggregating ₹4,589.75 lakhs to banks and a financial institution for delays ranging upto 67 days.

In the same year, FY2012, Jamna Auto Industries Ltd exhibited other sign of liquidity stress, when it had to use its short-term funds for long-term purposes.

FY2012 annual report, page 40:

According to the information and explanations given to us and on an overall examination of the Balance Sheet of the Company, we are of the opinion that the funds raised on short-term basis amounting to ₹3,581.17 lakhs have been used for long-term investments.

In the next year, FY2013, the downcycle in the CV industry continued and Jamna Auto Industries Ltd once again defaulted to its lenders, as it could not repay an amount of about ₹92 cr to its lenders for about 35 days.

FY2013 annual report, page 38:

In our opinion and according to the information and explanations given to us, the Company has not defaulted in repayment of dues to its bankers or to any financial institutions, except in respect of dues aggregating ₹ 9,186.58 lakh to banks and a financial institution for delays ranging upto 35 days.

In FY2013 as well, Jamna Auto Industries Ltd used short-term funds for a long-term purpose, which is another indication of liquidity stress in a company.

FY2013 annual report, page 38:

According to the information and explanations given to us and on an overall examination of the Balance Sheet of the Company, we are of the opinion that the funds raised on short-term basis amounting to ₹3,934.95 lakhs have been used for long-term investments.

As a result of the defaults to the lenders in FY2013, the credit rating agency, ICRA downgraded the credit rating for Jamna Auto Industries Ltd to “D”, which indicated default to lenders in repayment.

FY2013 annual report, page 15:

During 2012-13, ICRA had downgraded the rating to ‘D’.

The management of the company agreed that Jamna Auto Industries Ltd faced liquidity issues during the year, which had led to default to lenders where it could not repay the lenders on time.

FY2013 annual report, page 23:

The Statutory Auditors have reported delay in repayment of dues to banks and financial institutions. These delays occurred mainly due to temporary liquidity problem.

As a result of the liquidity stress, Jamna Auto Industries Ltd had to sell one of its investment in the Indian subsidiary of NHK Spring, Japan to raise money.

FY2013 annual report, page 15:

We have infused long term funds to the tune of ₹25.50 crore by way of liquidation of investment in NHK Spring India Pvt. Ltd.

Moreover, in FY2011 also, shareholders had to infuse equity funds of about ₹25 cr in Jamna Auto Industries Ltd when it allotted shares on a preferential basis to the private equity investor Clearwater Capital Partners and the promoters.

FY2011 annual report, page 12:

During the year the company made preferential issue of 2631578 equity shares to Clearwater Capital Partners Singapore Fund III Pvt Ltd and the promoters. The entire preferential issue proceed of ₹25 crore was utilized to prepay high cost term loans.

An investor would remember from the earlier discussion that during the CV downturn of 2000-2003, Jamna Auto Industries Ltd had reached near bankruptcy. It could not repay its lenders and as a result, the lenders had to restructure its loans. At that time, the private equity (PE) firm, Clearwater Capital, infused ₹179 cr in the company and took a 28% stake in the company.

FY2008 annual report, page 22:

The company has undergone financial restructuring recently with infusion of INR 1790 million from Clearwater Capital (Cyprus), which has acquired a 28% stake in the company. The money has been used for working capital and capex, and also to retire high cost debt.

It was only after receiving the money from the PE investor that Jamna Auto Industries Ltd could pay off its lenders and come out of the corporate debt restructuring (CDR).

FY2008 annual report, page 5:

After reaching a one time settlement of debt with IDBI, SBI, HSIDC, UTI, MPSIDC, the company has exited from the provisions of corporate debt restructuring.

From the above discussion, an investor would appreciate that the companies operating in cyclical industries like auto component manufacturers face a very high degree of uncertainty in their business environment in the terms of fluctuating demand, volatile raw material prices and a low pricing power with their large customers.

In such tough business conditions, even though on an overview, it may look that the company is doing satisfactory on an annual basis; however, the company may face periods of such severe liquidity stress that it may not repay its lenders on time and even end up in bankruptcy.

Therefore, while analysing companies in cyclical sectors, an investor should always keep in her mind that it is very difficult to predict the recent performance of companies, whether good or bad, in the future. Such companies may show a sudden sharp decline in their sales and profits after a period of continued growth. An investor should always look at signs of stress in the financial statements of the companies instead of only looking at the overview of annual financial statements.

Advised reading: How to read the annual report of a company

Additional aspects of Jamna Auto Industries Ltd:

On analysing Jamna Auto Industries Ltd and after reading its past annual reports since FY2005, its credit rating reports and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.

1) Management Succession of Jamna Auto Industries Ltd:

The company is a part of the Jauhar family and currently, four members of the family are a part of the company. Three members of the family are a part of the board of directors of the company.

  • Mr Bhupinder Singh Jauhar (aged 87 years) is the chairman of the company.
  • Mr Randeep Singh Jauhar (aged 60 years); son of Mr B.S. Jauhar is the Vice Chairman & Executive Director of the company.
  • Mr Pradeep Singh Jauhar (aged 56 years); son of Mr B.S. Jauhar is the Managing Director & CEO of the company.

Apart from the above, Ms Kirandeep Chadha, daughter of Mr B.S. Jauhar is also a part of the company. She joined the company in FY2006 as Director (International Business).

FY2006 annual report, page 36:

Mrs. Kiran Chadha, a relative of Mr. B. S. Jauhar, Chairman & Managing Director and Mr. R. S. Jauhar, Executive Director of the Company, to hold an office or place of profit in the Company as Director (International Business) of the Company w.e.f. 6th February 2006

Recent annual reports of Jamna Auto Industries Ltd do not mention the current responsibilities or designation of Ms Chadha.

As per the FY2019 annual report, related party transactions section on page 154, Ms. Chadha has taken a remuneration of ₹0.21 cr as compared to the remuneration for her brothers of ₹10.93 cr for Mr P.S. Jauhar and ₹10.80 cr for Mr R.S. Jauhar. The significant difference in remuneration between Ms. Chadha and her brothers indicates that she might not be playing a very active role in the day-to-day management of the company.

Apart from the above four members of the Jauhar family, the annual reports do not mention any details of members of the next generation of promoters who might have joined the company in an executive position.

An investor may contact the company directly to understand the roles and responsibilities of Ms Kirandeep Chadha and whether members of the next generation of promoters have joined the company.

The presence of younger family members at executive positions within the group, while the senior members are still handling responsibilities, is a preferable succession plan. This is because the young members can learn about the fine nuances of the business under the guidance of senior members until the seniors decide to take retirement.

Further advised reading: How to do Management Analysis of Companies?

2) Promoters remuneration of Jamna Auto Industries Ltd:

When an investor analyses the remuneration taken by the promoter-family members of Jamna Auto Industries Ltd, then she notices that on many occasions, the promoters have taken remuneration above the statutory guidelines for which the company had to take special permissions from the govt.

In FY2014, the auditor of the company highlighted that Jamna Auto Industries Ltd had paid remuneration to its promoters, which is more than the statutory limits.

FY2014 annual report, page 73:

we draw your attention to the note no. 44 of accompanying financial statements stating that remuneration of Rs.191.33 lacs being paid to the executive and whole time directors which is in excess of permissible remuneration under the Companies Act, 1956

In the next year, FY2015, the company applied to the central govt. for the approval of payment of a high remuneration to the promoters. However, it had still not received it.

FY2015 annual report, page 86:

During the previous year, the Company had paid Rs. 191.33 towards Directors remuneration. This amount is in excess of permissible remuneration determined under the Companies Act, 1956. Management has filed an application with the Central Government for approval of payment of salary to the Directors in excess of permissible limits. Pending such approval from the government, management has taken a confirmation from the Directors that they shall refund the amounts in the event of such approvals being refused.

Jamna Auto Industries Ltd has a history of paying a high remuneration to its promoter family members. Previously, in FY2008 as well, the company had to take approval from the central govt. for the remuneration of Mr R. S. Jauhar.

FY2008 annual report, page 13:

Application for increase in remuneration of Mr. R. S. Jauhar is pending before the Central Government for approval.

Recently, in FY2019, Jamna Auto Industries Ltd had to take approval for remuneration of promoter-family members because their remuneration was more than the new listing regulations.

The members of the Company have granted their approval for payment of remuneration to Mr. Randeep Singh Jauhar and Mr. Pradeep Singh Jauhar, within the limits as prescribed under the provisions of Companies Act, 2013 which is in excess of the newly prescribed threshold limits of amended Listing Regulations.

As per the FY2020 annual report, page 41, during FY2020, the promoter-executive-directors did not take any commission from the company, which is usually the largest part of their overall remuneration. It seems that the company and the promoters took this decision in light of the coronavirus pandemic.

However, in the past, an investor would notice that the promoter-brothers, Mr R. S. Jauhar and Mr P. S. Jauhar have utilized the commission part of their salary in such a manner that they could get the near maximum possible remuneration from the company as allowed by the law.

In FY2015, the maximum remuneration that a promoter-executive director could take from the company was about ₹2.22 cr and both the promoter-brothers took home a remuneration of ₹2.2 cr each.

FY2015 annual report, page 32:

Jamna Auto Industries Ltd Promoter Remuneration FY2015

In the next year, FY2016, when the maximum possible salary limit increased to about ₹5.1 cr, then both the promoter-brothers took home a salary of about ₹5 cr.

FY2016 annual report, page 31:

Jamna Auto Industries Ltd Promoter Remuneration FY2016

In the past, there have been instances where the promoter family members who are a part of the board of directors took home the salary from the company without attending even a single board meeting of the company during the year.

In FY2009, the chairman of the company, Mr. B.S. Jauhar, took home a remuneration of ₹0.79 cr as per the standalone financials of Jamna Auto Industries Ltd (as per FY2009 annual report, page 56). However, as per the data on the attendance of directors in the meeting of the board during the year on page 11 of the FY2009 annual report, Mr. B. S. Jauhar did not attend any of the 6 meetings of the board of directors that took place during the year. An investor may note that in FY2009, Mr. B. S. Jauhar was a non-executive chairman of the company, which means that his role is only limited to attending the meetings of the board of directors and add value to the discussion of the board.

In the later years, the company started paying remuneration to the chairman, Mr. B. S. Jauhar via its subsidiary, Jai Suspension System LLP. As a result, the standalone financials of Jamna Auto Industries Ltd did not report any remuneration payment to Mr B. S. Jauhar. The annual reports contain payment of remuneration to Mr. B. S. Jauhar only in the consolidated financials indicating that he is now receiving remuneration from the subsidiary entity.

Therefore, the subsequent annual reports did not contain any information about the level of involvement of Mr B. S. Jauhar in the affairs of Jai Suspension System LLP by the means of attending key meetings.

Going ahead, an investor should keep a close watch on the overall remuneration of the promoters family members as a percentage of the profits of the company. While assessing remuneration, an investor should be cautious when she observes an increase in the remuneration of the promoters while the profits of the company are decreasing.

Advised reading: How to identify Promoters extracting Money via High Salaries

3) History of weak internal processes & control at Jamna Auto Industries Ltd:

While analysing the annual reports of the company, an investor notices multiple instances, which indicate that the internal processes and controls at Jamna Auto Industries Ltd leave a lot of room for improvements.

An investor notices that during multiple years, the company did not deposit undisputed statutory dues on time and the auditor highlighted such delays in its report as a part of the annual reports. An investor could see such comments by the auditor of the company in the annual reports for FY2005, FY2006, FY2008, FY2009, FY2012 etc.

In FY2013, the company acknowledged that such delays in the deposit of undisputed statutory dues are due to poor oversight.

FY2013 annual report, page 23-24:

The Statutory Auditors have, in their report, mentioned about delays in deposit of statutory dues in few cases. We may mention here that these delays were due to oversight and purely unintentional. We are implementing corrective actions to ensure such delays do not occur again. In addition, we are also training and sensitizing our employees at working level for compliances/timely deposits.

Apart from delays in the payment of govt. dues, the auditors also found out instances of significant differences in the inventory as per records and the actual inventory on the ground. In FY2014, the auditors highlighted such material discrepancies in their report as a part of the annual report.

FY2014 annual report, page 35:

The Company is maintaining proper records of inventory. Some discrepancies noted on physical verification of inventories which were material

During the year, due to the cleanup of the inventory, Jamna Auto Industries Ltd had to face a loss of about ₹6 cr.

FY2014 annual report, page 72:

The Company, during the year, has carried a detailed exercise to identify stocks that are no longer required for various reasons and has accordingly disposed off such stocks. The loss, which is estimated around Rs. 618 has been included in the consumption of raw materials…

(Please note that in the annual report, the data is presented in the units of ₹ lakhs. As a result, in the above disclosure, the loss of ₹618 lakh is mentioned as ₹618).

In the next year, FY2015 as well, the auditors found significant differences in the inventory as per records and the inventory on the ground.

FY2015 annual report, page 89:

The Holding Company is maintaining proper records of inventory. Discrepancies noted on physical verification of inventories were material

In FY2015, the auditor found significant differences in the fixed assets as well, as per the records and the actual fixed assets on the ground.

FY2015 annual report, page 89:

All fixed assets have not been physically verified by the management of the Holding Company during the year but there is a regular programme of verification which, in our opinion, is reasonable having regard to the size of the Company and the nature of its assets. Discrepancies noted during the year were material and these have been properly dealt with in the books of accounts.

An investor would appreciate that if any company has weak internal controls and processes, then it presents a situation of poor oversight. In such situations, companies are exposed to higher probabilities of frauds.

In FY2013, Jamna Auto Industries Ltd intimated to its shareholders that one of its workers attempted to do fraud on it. The company made provisions for it in FY2013.

FY2013 annual report, page 24:

The Statutory Auditors have, in their report, mentioned about one instance of an attempted fraud on the Company by a job worker. This has happened purely during the course of commercial dealing with the vendor having long term relationship. This risk has been fully provided in FY 2012-13.

In this regard, an investor may read the example of National Peroxides Ltd, a Wadia Group company, which due to weak internal controls and processes faced fraud by its employees allegedly including senior management including the managing director of the company.

Read: Analysis: National Peroxide Ltd

It seems that by FY2015, the management had realized that it needs to strengthen its internal processes and controls. As a result, it decided to appoint an internal auditor from April 1, 2015, to strengthen the control processes.

FY2015 annual report, page 19:

In order to improve and strengthen the control processes, M/s Protiviti Risk & Business Consulting is appointed as internal auditor of the Company from April 1, 2015.

However, the surprises for the investor continued when in FY2016, the company declared that during shifting of a plant, it found fixed assets of about ₹9 cr, which were not usable anymore and it was carrying the same on its books.

FY2016 annual report, page 89:

During the shifting of one plant, the management identified certain assets having book value of Rs. 907.99, which are no longer actively usable and has accordingly provided for accelerated depreciation on the same.

In FY2018, the company intimated to its shareholders that it had lost/misplaced the license issued to it by the Director General of Foreign Trade (DGFT) under the Export Promotion Capital Goods (EPCG) scheme.

FY2018 annual report, page 161:

Matter pending before Director General of Foreign Trade, New Delhi in respect of EPCG licence obtained by the Group, however, the same was lost without being used in 2008. The Group is under an obligation to surrender the licence in case of non utilisation and has received a letter from the office of DGFT for the same.

In the next year, FY2019, the company received a demand from the sales tax department for non-submission of a form named “form F”.

FY2019 annual report, page 152:

Sales tax department has raised demand for non submission of form F.

In FY2020, the company received notices from stock exchanges for late submission of the annual report and non-appointment of the women director. The fine imposed by the stock exchanges for the late submission of the annual report was later waived off by the exchanges. However, the company had to pay a fine for the delay in the appointment of the women director. (as per the FY2020 annual report, page 45)

In the light of such instance where the internal controls and processes of the company have shown a scope of improvement, it is advised that an investor should be cautious while doing an analysis. She should study all the financial statements and auditor’s reports carefully. This is because, in case of significant differences in the value of the assets shown on the annual report and the actual assets present on the ground, the analysis of the company’s financial health done by the company may not be highly accurate.

Advised reading: 7 Signs to tell whether a Company is cooking its Books: “Financial Shenanigans”

4) Incidences of Jamna Auto Industries Ltd not complying with accounting policies:

While analysing the annual reports of the company, an investor notices that the auditors of the company have highlighted incidences where Jamna Auto Industries Ltd did not comply with the accounting norms while preparing the financial statements.

In FY2005, the auditor of the company pointed out that Jamna Auto Industries Ltd did not follow accounting norms while treating miscellaneous expenditure.

FY2005 annual report, page 13:

In our opinion, the Profit and Loss Account and the Balance Sheet and cash flow of the Company comply with the Accounting Standards referred to in Sub-section (3C) of Section 211 of the Companies Act, 1956 to the extent applicable except “Miscellaneous expenditure not written off amounting to Rs. 139.26 lacs refer Note No. 14 of Schedule- 16(11)”

The company explained in the same annual report (FY2005) that it had not deducted these expenses from the P&L because of losses during FY2005.

FY2005 annual report, page 26:

Miscellaneous expenditure amounting to Rs. 139.26 lacs (previous year 139.26 lacs) is not charged to Profit & Loss in view of loss during the year. Due to this Company has under stated loss to that extent. The same is in contravention of Accounting policy no 13 regarding charging of miscellaneous expenditure.

Apart from highlighting that the company did not comply with the accounting policies, the above disclosure also highlights that the company did it to show a lower loss in FY2005. This is equivalent to presenting a better picture to the shareholders than the true financial situation of the company.

Additionally, an investor is confused when she notices that in FY2005, the company had reported a profit of ₹1.86 cr (i.e. ₹186 lac) whereas, in the above disclosure, Jamna Auto Industries Ltd stated that it incurred a loss in FY2005.

Therefore, even if the company had deducted the miscellaneous expenditure of ₹1.39 cr (₹139 lac) from the P&L, it would have still reported a profit. Therefore, it looks like in the FY2005 annual report, the company made a factual error about the profit it made during the year.

Nevertheless, despite highlighting by the auditor, Jamna Auto Industries Ltd continued to break the accounting norms for miscellaneous expenditure in the subsequent years as well.

FY2006 annual report, page 19:

In our opinion, the Profit and Loss Account and the Balance Sheet and cash flow of the Company comply with the Accounting Standards referred to in Sub-section (3C) of Section 211 of the Companies Act, 1956 to the extent applicable except “Miscellaneous expenditure not written off amounting to Rs. 126.03 lacs refer Note No, 16 of Schedule-19 (II)”.

In another instance, in FY2009, Jamna Auto Industries Ltd in its standalone financial statements disclosed that it has earned a non-compete fee of ₹5 cr from its wholly-owned subsidiary, Jai Suspension Systems Ltd.

FY2009 annual report, page 30:

Miscellenous income includes non compete fee of Rs. 500 lacs charged from 100% subsidiary i.e. Jai Suspension Systems Ltd.

Under the conventions of consolidation of financial statements, an investor would expect that when a company prepares its consolidated financial statements, then all the intra-group transactions are cancelled/netted off so that the consolidated financials represent only the transactions of the group with the outside third parties.

In its accounting policies, Jamna Auto Industries Ltd had also stated the same principles.

FY2009 annual report, page 70:

Principal of Consolidation: The Consolidated Balance Sheet, Profit & Loss Account , Cash Flow Statement comprises the Balance Sheets, Profit & Loss Accounts and Cash Flow Statements of Jamna Auto Industries Limited and Jai Suspension Systems Limited and have been combined on a line by line basis by adding together the book value of the items of assets, liabilities, income and expenditure after fully eliminating intra – group transaction resulting in unrealized profit or loss.

Therefore, an investor would expect that in the consolidated financial statements, the non-compete fee of ₹5 cr earned by Jamna Auto Industries Ltd from its wholly-owned subsidiary, Jai Suspension Systems Ltd would be eliminated.

However, the investor is surprised when she notices that in the consolidated financials as well, Jamna Auto Industries Ltd has included the ₹5 cr non-compete fee as income.

FY2009 annual report, page 67:

Miscellaneous income includes non compete fee of Rs. 500 lacs charged from wholly owned subsidiary i.e. Jai Suspension Systems Limited.

Therefore, it looks like while preparing the consolidated financials for FY2009, Jamna Auto Industries Ltd did not adhere to the conventional principles of consolidation, which it had also affirmed in its significant accounting policies.

Advised reading: 7 Signs to tell whether a Company is cooking its Books: “Financial Shenanigans”

In FY2010, in the standalone financials, Jamna Auto Industries Ltd recognized a non-compete fee of ₹10 cr from its wholly-owned subsidiary. However, it did not include it in its consolidated financials.

FY2010 annual report, page 43:

Miscellaneous income includes non compete fees of Rs 1000 lacs charged from 100% subsidiary i.e. Jai Suspension Systems Limited

An investor may contact the company directly in case she needs any clarifications about the treatment of the non-compete fee by the company.

Issues in the calculation of cash flow from operations by Jamna Auto Industries Ltd

An investor would appreciate that while calculating cash flow from operations (CFO), in order to remove the impact of financing activities from the CFO, companies add back the interest expense in CFO and deduct it as an outflow under cash flow from financing activities (CFF).

This is done to segregate all the transactions related to operating activities under CFO and all the transaction related to financing activities under CFF.

However, when an investor analyses the calculation of cash flow from operations in the annual reports of Jamna Auto Industries Ltd, then she notices that until FY2011 Jamna Auto Industries Ltd used to first add the interest expense in the CFO calculation and surprisingly, then instead of deducting the interest expense as an outflow under financing activities, it used to deduct it from CFO itself.

FY2011 annual report, page 81:

Jamna Auto Industries Ltd Financials Cfo Cash Flow From Operating Activities FY2010 FY2011

In the above table, an investor would notice that Jamna Auto Industries Ltd first added the interest expense in the CFO calculation. However, later on, it deducted the interest expense from the CFO itself. Ideally, the company should have deducted interest expense as an outflow under financing activities (CFF).

The impact of the above steps is that the CFO of the company is understated and the CFF is overstated.

In FY2012, Jamna Auto Industries Ltd changed its existing auditors to BSR & Co. Thereafter, the company stopped doing the above steps and changed its CFO calculation to the usual conventions where the interest expense is added in operating activities and deducted as an outflow in financing activities.

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

Changing accounting assumptions to improve the profits of the company:

While analysing the developments around the changes in the accounting norms done by Jamna Auto Industries Ltd over the years, an investor notices that during FY2011, the company changed its method of inventory valuation. The company could show a higher profit due to the change in the method of inventory valuation.

FY2011 annual report, page 77:

The company has changed the method of valuation of inventories as compared to the method as adopted by the company in earlier years. The company has valued the stock by considering weighted average purchase price on the basis of rolling average due to wide fluctuation in purchase price, whereas, earlier Inventory had been valued by considering the weighted average price of goods for the entire period of relevant financial year. As a result of such change, value of inventory has increased by ₹393.78 lacs and accordingly the profit for the period is higher with the similar amount.

In FY2011, Jamna Auto Industries Ltd reported a net profit of about ₹37 cr. An investor would appreciate that the increase in profits by about ₹4 cr due to the change in the method of inventory valuation had a significant impact on the profitability of the company.

It is advised that while analysing any company, an investor should focus on such changes in the accounting assumptions and then adjust the reported financials accordingly so that she is able to assess the true financial position of the company.

Advised reading: How Companies Inflate their Profits

5) Inability of Jamna Auto Industries Ltd to make aftermarket segment a meaning contributor:

While reading about various strategic business initiatives highlighted by Jamna Auto Industries Ltd to its shareholders, an investor notices that for very long, the company has stated its focus on the growing the contribution of aftermarket segment in its revenue.

Jamna Auto Industries Ltd started to highlight its focus on the aftermarket segment in FY2009.

FY2009 annual report, page 5:

The company decided to increase its share in the domestic and export replacement markets. We are happy to inform that we have increased our share in the domestic replacement market.

In FY2012, the company again emphasized that growth in the aftermarket segment is essential for the future growth strategy of the company.

FY2012 annual report, page 14:

An aggressive ramping up of sales in the After-Markets – India/Export and a higher proportion of Parabolic sales is crucial to our growth strategy.

The major aim of increasing the share of the after-market segment for auto component manufacturers is two-fold:

  • The after-market demand is not as cyclical as the demand from OEMs. This is because OEM demand is related to the sale of new vehicles whereas the aftermarket demand is related to the wear and tear of existing vehicles already sold and running on the roads. An investor would appreciate that the vehicles, which are used by drivers, would need the replacement of parts as they undergo wear and tear during vehicle usage.
  • The second factor attracting auto component manufacturers to the aftermarket is comparatively higher margins in the aftermarket segment. This is because the customers in the aftermarket segment do not have a high negotiating power like the OEMs.

Therefore, an investor would appreciate that if a company builds a significant aftermarket presence then it would have a higher profit margin than what OEMs would have permitted and during the industry downturns, the company would have a lower decline in sales as the revenue from the aftermarket segment would not decline as much as the OEMs’ sale of new vehicles.

However, when an investor reads about the decline in the sales of new vehicles in the CV industry and the decline in the sales of Jamna Auto Industries Ltd in the downturn of FY2020, then she notices that the decline of operating profits of the company was much more than the decline in the sales of new commercial vehicles.

It indicated that the company’s strategy of increasing the share of the aftermarket segment in its revenue and thereby using it as a cushion during downturns to protect a decline in its performance is not working as expected.

The credit rating agency, ICRA, in its report of March 2020 for Jamna Auto Industries Ltd highlighted that the business performance of the company declined more than the CV industry during FY2020.

Credit rating report of Jamna Auto Industries Ltd by ICRA, March 2020, page 3:

This impact was visible during 9M FY2020, whereby the M&HCV (trucks) production contracted by 48.1%, while the Group’s operating profits declined by 58.4%. Despite the management’s initiatives to develop a widespread network for the after-market segment, its ability to scale up its after-market supplies to a level that can offset any sharp decline in CV OEM volumes in case of any downturn, is yet to be demonstrated.

Therefore, investors should appreciate that even though the aftermarket segment looks like a solution to many problems faced by auto ancillary companies in the OEM segment. However, establishing a presence in the aftermarket segment is not an easy task. Companies like Jamna Auto Industries Ltd despite being the largest producer of suspension springs in India, could not build the desired scale in the aftermarket segment even in 10-years.

Advised reading:  How to do Business Analysis of Auto Ancillary Companies

6) Related party transactions of Jamna Auto Industries Ltd:

While analysing the transactions of Jamna Auto Industries Ltd with the companies owned by the promoter-family-members, an investor gets to know that the promoters have established many companies, which have their units near the plants of Jamna Auto Industries Ltd. The promoters have entered into agreements with Jamna Auto Industries Ltd where the company gives raw material to the promoter entities, which in turn process it, give the product back to Jamna Auto Industries Ltd, and earn profits.

The notice for the annual general meeting (AGM) put by Jamna Auto Industries Ltd to the shareholders for approval in 2014 has details of many such arrangements between the company and the promoter-owned entities.

i) Jamna Agro Implements Private Limited:

The promoters via their entity, Jamna Agro Implements Private Limited (JAIPL), have entered into an arrangement with Jamna Auto Industries Ltd where the company gives raw material to the unit of JAIPL near the Yamuna Nagar plant. JAIPL converts the raw material into clamps, gives it back to the company, and earns a profit.

FY2014 AGM notice, page 8:

The Company supply raw material to Jamna Agro Implements Private Limited for conversion into clamp for its Yamuna Nagar Unit. After doing the job work Jamna Agro Implements Private Limited supplies clamps at Yamuna Nagar Unit.

ii) MAP Auto Limited:

The promoters via MAP Auto Limited (MAL) have entered into an arrangement with Jamna Auto Industries Ltd where the company gives flat steel to the unit of MAL near the Malanpur plant. MAL cuts the flat steel into smaller parts, gives it back to the company, and earns a profit.

FY2014 AGM notice, page 8:

Malanpur Unit of the Company supply raw material (steel flat) to MAP Auto Limited for cutting into the required sizes and length. MAP Auto Limited does the job work of sharing and cutting and returns the material after cutting it into the requisite size and length.

In addition, the promoters have taken over the services for providing the products of Jamna Auto Industries Ltd to its customer in Alwar and Pune, which includes transportation, warehousing and delivery via their entity MAP Auto Ltd (MAL)

FY2014 AGM notice, page 9:

Presently MAP Auto Limited is providing services to Company for Alwar (Rajasthan) and Pune (Maharashtra). Under the arrangement, MAP Auto Ltd. is responsible for entire transportation, warehousing, JIT delivery at customer plant.

Apart from the above arrangements, the promoters have given a few properties like guesthouses to Jamna Auto Industries Ltd on lease.

An investor may do further due diligence in terms of the charges collected by these promoter entities from Jamna Auto Industries Ltd for providing these services. She may assess whether Jamna Auto Industries Ltd can get these services from other independent third-party entities for a better price and terms.

A deeper analysis of the arrangements between public-listed companies and their promoter-entities is essential because these arrangements have the possibility of shifting the economic benefits from the public/minority shareholders to the promoters. If the company supplies the raw material to the promoter entity at a cheaper price or buys the completed product from the promoter entity at a higher than the market price or pays a higher price for the services provided by the promoter entity than the price what any independent third-party can work, then it is similar to giving undue economic benefits to the promoters.

Therefore, we believe that the investor should analyse the related party transactions of Jamna Auto Industries Ltd with its promoters in detail. She may contact the company directly if she needs any clarifications.

Advised reading: How Promoters benefit themselves using Related Party Transactions

The Margin of Safety in the market price of Jamna Auto Industries Ltd:

Currently (June 19, 2021), Jamna Auto Industries Ltd is available at a price to earnings (PE) ratio of about 47 based on consolidated earnings of FY2021. The PE ratio of the company is about 40 based on the average consolidated earnings for the last 3 years (FY2019-2021). An investor would appreciate that a PE ratio of 40-47 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, which 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.

Analysis Summary

Overall, Jamna Auto Industries Ltd seems a company, which is operating in a very uncertain business environment. The demand for its products is dependent on the commercial vehicle (CV) industry, which is highly cyclical. As a result, the company witnessed periods of poor performance after a stretch of a few years of good growth.

The key raw material of the company is steel, whose prices are very volatile and are difficult to hedge. In addition, Jamna Auto Industries Ltd has a low pricing power with its customers who are very large original equipment manufacturers ((OEMs) of commercial vehicles. As a result, the company frequently faces tough times where at one end raw material prices increase and simultaneously, the customers put a pricing pressure.

Moreover, the largest contributor of the revenue for Jamna Auto Industries Ltd is leaf springs, which is a commoditized product, which contributes to the lower pricing power of the company. As a result, the company faces high pressure on its profit margins.

As a result of these factors, the business performance of the company goes through cyclical phases where the good performance of a few years is suddenly followed by a poor performance.  During the downturn, the sales of the company declined by up to 50% and its profit margins witnessed a sharp decrease. In the past, during a downturn, the company has reported losses as well as liquidity constraints where it failed to repay lenders on time and in turn defaulted to them.

During the downturn of FY2000-2003, the company reached near bankruptcy and its lenders had to restructure its debt. Infusion of funds by a private equity investor who bought 28% in the company helped the company repay its lenders and get out of restructuring.

Therefore, the key essence of the business of Jamna Auto Industries Ltd is that it is very difficult to project its recent financial performance, whether good or bad, into the future. There have been instances where during the uptrend of the CV industry, Jamna Auto Industries Ltd faced capacity constraints and it could not fulfil all the business opportunities. However, when it started to build new capacity, then the industry hit the downturn and it had to abandon the expansion plans and even had to close down existing manufacturing plants and lay off employees.

The sudden sharp fluctuation in the business prospects of Jamna Auto Industries Ltd presents a situation where an investor has to do a much deeper analysis of the business position of the company. This is because the overview of the year-on-year annual financial performance of the company may not show the liquidity stress that the company had faced in short stretches.

There had been times in the past where the financial position of the company at the start of the year as well as at the end of the year was stable; however, during the year, the company faced periods of severe liquidity stress and it defaulted to its lenders. On one such occasion, the credit rating agency, ICRA, downgraded its credit rating to D.

Despite the continued focused efforts of Jamna Auto Industries Ltd for more than 10 years, the company is yet to make any meaningful revenue contribution from the aftermarket segment. As a result, even in recent times, when the CV industry hit the downturn, the impact on the business performance of Jamna Auto Industries Ltd was more than the decline in the industry sales.

The large fluctuations in the sales and profitability of Jamna Auto Industries Ltd make it very difficult to do any trend-based analysis of the operating efficiency parameters of the company. As a result, an investor is not able to assess whether the efficiency of asset-utilization of the company is improving or deteriorating. Therefore, an investor notices many instances where there were discrepancies between the record of assets like inventory and fixed assets on the books and the actual inventory and assets on the ground.

The promoters of the company did not take any commission as a part of their remuneration in FY2020 due to the adverse impacts of the coronavirus pandemic. However, in the past, there have been many occasions when the promoters took home salaries above legal limits and Jamna Auto Industries Ltd had to take special approvals for it. At times, the promoters have taken the near maximum possible remuneration from the company. At times, it is seen that the promoter-chairman of the company took remuneration from the company without attending any board meeting in the whole year.

The promoters of the company have formed many entities, which have entered into agreements with Jamna Auto Industries Ltd where the company gives raw material to these entities and in turn, these entities process it, give it back to Jamna Auto Industries Ltd, and earn profits. Promoters have other business dealings with Jamna Auto Industries Ltd like providing services like transportation of goods, warehousing and delivery to the customer. In addition, the company has taken various properties on lease from the promoters. An investor needs to analyse these related party transactions in detail as these have the possibility of shifting the economic benefits from the public shareholders to the promoters.

There have been various instances in the past, which indicate that the internal processes and controls of Jamna Auto Industries Ltd have a lot of room for improvement. There have been instances of significant differences in the assets recorded on the books and the actual assets on the ground. There have been instances of poor oversight due to which the company did not deposit undisputed statutory dues and various required forms and reports like annual reports on time. The company did appoint an internal auditor for strengthening its processes; however, despite it, every now and then, instance reflecting weak internal controls and processes keep on appearing in the company.

At times, Jamna Auto Industries Ltd has not complied with the accounting norms while dealing with certain expenses and the auditors of the company have highlighted it to the investors. At times, the company changed its accounting assumptions like the valuation method of inventory, which has led to a higher profit for the company. Once the company showed a non-compete fee received from its wholly-owned subsidiary in its consolidated financials as well, which ideally, it should have removed, as it was an intra-group transaction.

Going ahead, an investor should keep a close watch on the factors affecting the CV industry, if she wishes to make any prediction of the future performance of Jamna Auto Industries Ltd. This is because otherwise, it is highly uncertain to project the recent performance of the company, whether good or bad, into the future.

An investor should not restrict her analysis only to the overview of the annual financial results. Instead, she must read all the disclosures by the company including annual reports in detail. It is only through line-by-line reading of these disclosures that she can get to know of issues like short period defaults to the lenders due to transient liquidity stress or issues related to verification of inventory and fixed assets or use of any accounting assumptions to inflate profits etc.

The investor should keep a track of the related party transactions of the company with its promoters including the remuneration drawn by the promoters. She should be cautious if the size of the related party transactions increases significantly or the promoters draw a higher remuneration even when the business performance of the company declines.

Further advised reading:How to Monitor Stocks in your Portfolio

These are our views on Jamna Auto Industries Ltd. However, investors should do their own analysis before making any investment-related decisions about the company.

You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

I hope it helps!

Regards,

Dr Vijay Malik

P.S.

Disclaimer

Registration status with SEBI:

I am registered with SEBI as 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.

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8 thoughts on “Analysis: Jamna Auto Industries Ltd

  1. Thank you for this kind of detailed analysis. I have been following your blogs for the past few years. I admit the fact that even after companies have some issues in the past, they always successfully increase their earnings, revenue and cash flow as well. Even after involvement in malpractices by the management, companies gradually stabilize their financial positions and become more competitive. I have missed many multi-baggers because of this.

    For example, in the case of Jamna Auto Industries Ltd (JAI), promoters were involved in many wrongdoings. But I have a few observations. Even after all the negative aspects, the company has become the market leader in spring manufacturing with almost 70+% market share, debt-free and cash positive with 30+ RoCE. JAI’s client portfolio is mainly dependent on TATA Motors and Ashok Leyland. Just imagine, without any competitive advantage, they have successfully retained their clientele, expanded their business and gained a market share of 74% even in this fragmented industry. I think without doing something extraordinary beyond orthodox business, it is not possible to maintain this kind of growth and resilience.

    Another example could be Divi’s Laboratories Limited where repeatedly the management made poor capital allocation decisions but was able to maintain growth in all parameters with an extraordinary margin.

    Another such multi-bagger company would be Shri Jagdamba Polymers Ltd where the promoters have similar business in a privately owned firm. But the listed entity has increased its profit, revenue year after year and the stock becomes a multi-bagger.

    Don’t you think it is necessary to do something “extraordinary” (sometimes not ethical) when the company is small and the business is in a very competitive and difficult industry? It often happens that when the company becomes bigger and gains a large market share, its management does not continue the same actions. In his book, Peter Lynch also mentioned, you can find a great company at first glance to the annual report and financial statement. Overanalyzing can complicate matters. Should we consider past mismanagements (minor ones) overlooking the growth for investing in a stock? Would love to hear from you.

    • Dear S. Raxit,
      Thanks for sharing your views. Investing is a highly personalized approach and what appears as an attractive investment proposition to one may not look so attractive to another. That’s the nature of the market and is very essential because it makes trading possible when with the same information, one investor buys a stock and another investor sells the stock.
      At end of the day, an investor is putting in her hard-earned money at stake when she invests it in any company. If she believes that any management who has had a history of dubious actions in the past, can make good returns for her and she is determined to invest her money in the company, then she may do so. At the end of the day, it is her money.
      Regards,
      Dr Vijay Malik

  2. I was waiting for your views on the company. Now, I have got it. In-depth analysis is good. Please do not consider negative comments. First, fraud companies should upload. We learn new things from this only. Please add data as soon as you find it. Gradually increase the company analysis in-depth. Do not take this much time to upload. I promise to you from my side, definitely, upload one company detailed analysis on your website.

  3. Dr Malik Sir,
    Your analysis of M/s Jamna Auto Industries Ltd is very exhaustive. As you have rightly pointed out “in auto ancillary industry, which is cyclical in nature, one should focus on auditor”s report, provisioning etc.” The promotors are continuously siphoning of funds, still, are able to get one-time settlement (OTS) from lenders. The quality of management is reflected in governance issues. Such articles throw much light on how companies drain lenders and shareholders.

  4. Thank you for this detailed analysis. This is immensely insightful. But even after all these, JAI has increased its revenue more than 50 times in the last 20 years even after staying in such a difficult industry. Just thought that sometimes overanalyzing might ruin the investment rationale.

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