The current section of “Analysis” series covers Navkar Corporation Ltd, an Indian container freight station (CFS) player with operations at Jawaharlal Nehru Port Trust (JNPT) and Vapi.
“Analysis” series is an attempt to share with all the readers, our inputs to the company analysis submitted by readers on the “Ask Your Queries” section of our website.
In order to benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.
I have analysed a logistics company based on the knowledge that I have gained from your articles.
Please offer your views and insights on the analysis prepared by me.
About Navkar Corporation Ltd (Source: Annual Report):
Navkar Corporation Ltd is promoted by Nemi Chand Mehta and his family members. It operates a container freight station (CFS) at Jawaharlal Lal Nehru Port Trust (JNPT). It also has 3 CFS, two at Ajivali and another at Somathane in Panvel, which are custom notified and, spread over 91 acres. The company has set up in 2014 and operates an inland container depot (ICD) spread over 60 acres at Valsad Logistics Park.
Navkar Corporation Ltd also has a private freight terminal (PFT) at JNPT Port, which allows the company to load and unload cargo from container trains operating between Somathane CFS and JNPT and to transport domestic cargo to and from inland destinations. The company has started ICD operations at Vapi with an installed capacity of five lakh TEU per annum. Navkar Corporation Ltd has received final approval from railways for operating PFT at Vapi. This is a favourable development for Navkar Corporation Ltd as the distance between JNPT and Vapi is about 175 km, the PFT is expected to improve volumes as well as profitability for the company.
However, recent govt. initiative to do imports under direct port delivery (DPD) model is likely to be a challenge for Navkar Corporation Ltd. Imports through DPD are expected to reach up to 80%, which would render the CFS business model less profitable. However, Navkar Corporation Ltd is working a strategy to increase product mix with export volumes at 55% and imports at 45%.
Financial Analysis of Navkar Corporation Ltd
Sales growth (FY 2018):
Navkar Corporation Ltd has registered a sales growth of 12.26% over the previous year.
- EBIDTA: Operating EBIDTA increased by 12.55%
- Debt to EBITDA: Total debt /EBITDA = 2.36
- (Total debt Rs395 cr : EBIDTA =167 Cr)
Navkar Corporation Ltd has improved working capital funds very well by reducing the current liabilities as well as the level of Current assets.
The Current ratio which was 0.84 (FY 2017) has improved to 1.23 (FY 2018)
Further advised reading: How to do Financial Analysis of Companies
Operating Efficiency Analysis of Navkar Corporation Ltd
Inventory turnover ratio (ITR):
Cost of services/Average inventory: FY2018: 28.93 and FY2017: 33.81
This is an important working capital performance ratio. The ratio average collection period of receivables. FY2018: 47 days, FY2017: 52 days. Thus Navkar Corporation Ltd has improved the collection period compared to last year. It is a good sign.
Net Fixed Assets Turnover (NFAT):
NFAT of Navkar Corporation Ltd is just 0.27 (due to a high level of fixed assets).
Interest Coverage Ratio:
It has improved to 3.1 (FY 2018) from 2.6 (FY2017)
(The port-based logistics companies’ balance sheets are capital intensive)
Return on capital employed (ROCE):
ROCE is a good yardstick to measure the operational efficiency of the capital employed. ROCE is calculated by deducting current liabilities from the total assets (net of cash and cash equivalents) and compare with EBIT
ROCE of Navkar Corporation Ltd has declined marginally from 7.160 % to 6.65% due to a decrease in current liabilities during the FY 2018.
Funds Flow Analysis of Navkar Corporation Ltd (FY 2017-18)
- Fixed assets increased by Rs 676.31 Cr due to conversion Capital WIP Rs 511.63 Cr
- Reserves increased by Rs 232.50 Cr
- Fresh equity for Rs 7.91 Cr is issued
- Business has generated long term surplus of Rs 83.72 cr to meet the short term fund requirements, which is good and helped improve current ratio
Further advised reading: Fund Flow Analysis: The Ultimate Guide
Valuation Analysis of Navkar Corporation Ltd (Based on FY2018):
- PE Ratio 14.9
- Price to Book Ratio is 1
As Navkar Corporation Ltd is continuously ploughing back the retained profits as internal accruals to fund capital expenditure (CAPEX), the company has not declared any dividend for the past several years.
Business Analysis of Navkar Corporation Ltd
Comparison with Industry peers:
Navkar Corporation Ltd is competing with one big player Container Corporation of India, which has a market capitalization of ₹31,792 cr and a PE ratio of 30.11. All other logistics companies are small and do not pose much competition.
Increase in production capacity and sales volume:
The Installed capacity of Navkar Corporation Ltd at the three CFS is about five lakh TEU per annum. Presently, Navkar Corporation Ltd is utilizing only 65% of the capacity. There is a scope to increase the volume and profitability, as port-related logistics is a niche area with investment barriers as well as the availability of space near the major ports. Navkar Corporation Ltd also has a PFT terminal connecting JNPT and VAPI and also an ILD at Valsad industrial belts.
Conversion of sales growth into profits:
Navkar Corporation Ltd is able to post volume growth as well as profitability growth. Because of which it is able to meet most of the capex from internal accruals. The company is hopeful of posting 15% sales growth in FY2019 despite challenges in EXIM trade and Govt. policy on imports.
Conversion of profits into cash:
- cCFO > cPAT
- 672 >606
Cumulative cash from operations (cCFO) is more or less equal to the cumulative net profit after tax (cPAT), which shows that Navkar Corporation Ltd is able to realize the PAT in cash.
Creation of value for shareholders from the profits retained:
Navkar Corporation Ltd has not declared dividends and has been retaining the profits to fund capex. The market capitalization at 2018 is ₹1,629 Cr. Therefore, the value created is ₹2.70 cr.
Given that the earnings per share (EPS) at FY2018 is ₹6.92 and Navkar Corporation Ltd expects the EPS to reach 10 in the next year, therefore, we believe that there would be rerating of the share and market capitalization would increase.
Management Analysis of Navkar Corporation Ltd
Background of the promoters and directors:
The promoters of Navkar Corporation Ltd are long-standing and hold 69 % of the total shares. There are no adverse comments on the style of functioning of the management. There are no instances of diversion of funds outside the business and questionable related party transactions.
Succession plans of Navkar Corporation Ltd:
Mr Shantilal J Mehta is currently Chairman and Managing Director. His son Nemichand J Mehta is a whole time director. Therefore, the son would eventually hold the reins from Mr Shantilal Mehta, if he opts to retire. The succession is expected to be smooth.
Salary of the promoters vs net profits:
The promoters of Navkar Corporation Ltd have taken only ₹80 lakh as remuneration even though the net profit is ₹100.91 crores. The promoters are also contributing to strengthening the internal accrual to fund capex by taking only modest remuneration. Promoters are conservative.
Projection execution skills:
Navkar Corporation Ltd has successfully constructed PFT from JNPT to VAPI covering a distance of 175 Km, which would help the company in volume growth as well as profitability.
Consistent Dividend Payments:
With a view to conserve the resources for current as well as future business and expansion plans, Navkar Corporation Ltd has not recommended any dividend for the FY 2018. Dividend payout (AR 2018 PAGE 9).
Shareholding pattern (percentage of shares held by promoters, page 41 of AR 2018): 69.03%
FII shareholding of Navkar Corporation Ltd (< 1%)
As observed from the above table, the FII shareholding in Navkar Corporation Ltd is very less and insignificant, which is a good sign.
Other matters related to Navkar Corporation Ltd
Capitalization of interest:
Navkar Corporation Ltd is capitalizing the interest as the capex is to be completed and expenses are to be booked. As the capex is almost over, Navkar Corporation Ltd may not capitalize interest expenses any longer from the next fiscal.
Product diversification of Navkar Corporation Ltd:
Navkar Corporation Ltd is focusing on inland transport from ICD to ports, which is very profitable. It has added new vehicles. It is also using space available in CFS as warehouses as importers have to evacuate containers facility to nearest CFS under DPD scheme introduced by the Govt. recently.
Remuneration to directors and key managerial personnel:
(Refer AR 2018 page 30)
- Mr Shantilal Mehta ( MD) Rs 80lakhs,
- Nemichand Mehta (WTD) Rs80 lakhs
- Capt. Dinesh Gautama (CEO) Rs78 lakhs
Related Party Transactions of Navkar Corporation Ltd:
No significant related party transactions. All transactions are done in the normal course of business.
Business Outlook of Navkar Corporation Ltd
(AR 2018 page 45):
The future of container growth in India is bullish in the wake of various policy initiatives such as make in India, GST, Digital India, new foreign trade policy and port linked Infrastructure projects. As per Indian container market trend over the last few years, the installed capacities and handled volumes have been growing proportionately, shows a positive sign and achieving a capacity utilization levels of almost 65 %.
Risks and concerns:
Navkar Corporation Ltd.’s business is primarily dependent on Indian EXIM trade, which in turn is dependent on global economic conditions. However, the Co is optimistic that given the projected growth in India economy, and expected recovery in global trade, rising spending in the infrastructure and manufacturing space, the imports will continue to rise steadily
Credit rating of Navkar Corporation Ltd
The Navkar Group rating continuous to be supported by a strong business risk profile. The Financial risk profile has improved due to the infusion of capital of ₹144.70 cr.
Navkar Corporation Ltd has weakness in CFS business, the susceptibility of revenue and profitability to cargo movement and low utilization in ICD at Valsad. The rating CRISIL A+ is confirmed by CRISIL.
The rating agency stated non-cooperation of the company to submit information for rating revision.
Govt policy impact on the business model of Navkar Corporation Ltd
(AR 2018 page 45)
- Govt.’s initiative of direct port delivery (DPD) to reduce dwell time and transaction cost for shippers is an area of threat the CFS operators may face in future.
- The share of DPD in total containers transported by road rocketed to 39% in March 2018 as compared to 4% to 6 % in fiscal 2017.
- While the Govt. pushes for DPD, the use of CFS as a transport and storage solution would remain worthwhile.
Investor meet transcript: Q1 FY2019
- Navkar Corporation Ltd is reducing exposure to DPD volumes, essentially because of lower profitability. It is concentrating on domestic cargo parcel services from Mumbai towards Vapi.
- Navkar Corporation Ltd is also exploring the cargo movement from Pune base and better results expected from 3rd and 4th quarter FY 19
- The product mix after the introduction of DPD compulsory up to 80% would be export 55% and import 45% as against 55% import and 45% export earlier. The profitability would be better as cargo comes from the train as compared to road earlier
- However, the DPD is not a problem per se, as the importers have to necessarily warehouse the imported material, which has to be removed from a port within 48 hours from the arrival of cargo. Therefore, the CFS facilities are being converted into warehousing facilities, which is also profitable.
- With these problems, Navkar Corporation Ltd is expecting that DPD volumes may touch only 50 % of total imports at the port.
Portwise export-import volumes in the current quarter are as follows (TEU)
- Total capacity: 4,75,000 TEU
- So every quarter 20% of the installed capacity i.e. 1,20,000 TEU
- Actual capacity utilization worked out to 73000 TEU volumes (export 38,366 TEU, import 34,736 TEU)
- EBIDTA would be around 40%
As Navkar Corporation Ltd is operating at 65% of installed capacity (4.70 lakh TEU), capitalizing the interest on capex and EBITDA for DPD is low, therefore, even assuming that the company would improve the capacity utilization to 80%, the key question is how Navkar Corporation Ltd is going to improve the NFAT in future.
Navkar Corporation Ltd is retaining all the profits (without any dividend payout all these years), but market capitalization is very low. How the shareholders are going to witness value expansion in the future?
Navkar Corporation Ltd is enjoying moat as it has CFS and PFT in important ports and port infrastructure is very asset heavy and long gestation to generate a comparable return on investment.
Please offer your views as regards the performance and outlook of Navkar Corporation Ltd.
Dr Vijay Malik’s Response
Thanks for sharing the analysis of Navkar Corporation Ltd Limited with us! We appreciate the time & effort put in by you in the analysis.
Let us analyse the performance of Navkar Corporation Ltd over the last 10 years.
While analyzing the past financial performance data of the company, an investor would notice that until FY2011, Navkar Corporation Ltd used to disclose only standalone financials. However, since FY2012, the company has been preparing both standalone as well as consolidated financials. Moreover, from FY2018, Navkar Corporation Ltd merged its subsidiary, Navkar Terminals Ltd with itself and as a result, in FY2018, it reported only standalone financials.
We believe that while analysing any company, the investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire group. Therefore, while analysing Navkar Corporation Ltd, we have analysed standalone financials until FY2011 and consolidated financials from FY2012 onwards until FY2017. For FY2018, we have analysed the standalone financials as the company merged its subsidiary with itself.
Further advised reading: Standalone vs Consolidated Financials: A Complete Guide
Financial Analysis of Navkar Corporation Ltd:
While analyzing the financials of Navkar Corporation Ltd, an investor would note that in the past, the company has been able to grow its sales at a decent rate of 15% year on year. Sales of the company increased from ₹137 cr. in FY2010 to ₹428 cr in FY2018. The financial data present at Screener shows sales for FY2009 as ₹0.6 cr. This is because, as per the DRHP filed by the company for its IPO in 2015 (Source: SEBI), the first CFS terminal at Somathane was built in 2009 and FY2010 is the first year of operations of the terminal.
DRHP 2015, page 150:
2009: Establishment of the CFS at Somathane
2010: Amalgamation of Preeti Logistics Limited with our Company pursuant to a Scheme of Amalgamation pursuant to which our Company started operations at Ajivali CFS I and Ajivali CFS II and our installed handling capacity increased from 220,000 TEUs per annum to 310,000 TEUs per annum
When an investor analyses the profitability margins of the company over the years, then she notices that the operating profit margin (OPM) of Navkar Corporation Ltd has been continuously increasing over the years. The OPM of the company increased from 27% in FY2010 to 39% in FY2018. On the similar lines, the net profit margin (NPM) of the company has increased from 16% in FY2010 to 24% in FY2018.
Such improvement in the profit margins of the company highlights the very good business condition of the company. It indicates that the company has been able to get very favourable terms from its customers and is able to pass on the cost increases to the client as and when they happened.
However, when the investor analyses the state of business operations of the company in the current financial year, then she notices that all of a sudden Navkar Corporation Ltd has witnessed a drastic decline in its profitability margins. In the Q2-FY2019, the company reported a decline of the OPM to 24% and the decline of the NPM to 3%.
This sharp decline in the profit margin comes as a surprise to the investors during the analysis and it deserves further exploration. As a result, the investor may turn to analyzing the management communication to shareholders in the form of the conference call (concall) on October 31, 2018, in which the management discussed the results of Q2-FY2019 quarter with the stakeholders.
In the Oct. 2018 concall, the management highlighted many difficult aspects of the business that Navkar Corporation Ltd is facing now a day.
1) Reduction in the negotiating powers of the company with its customers:
On page 2 of the Oct. 2018 concall transcript, Navkar Corporation Ltd has mentioned that the company faced significant cost pressure due to increase in fuel prices. However, it could not increase the prices that it charges to its customers and had to take a hit on its profits.
One major reason is a diesel prices which was hiked in last one and half month drastically there is a change of around 20%-25% in diesel prices which we are not able to pass through our customer and the major reason behind that is what because our Vapi model which is really new model and Bombay there is already dip on the business side. So, if we are coming up with the new model of a new tariff it is very uncertainty that the clients are not going to accept that kind of a new hike of the rates.
2) Clients are refusing price hikes despite multiple attempts by the company and in addition, clients are delaying payments as well:
On page 5 of the October 2018 conference call, Navkar Corporation Ltd has mentioned that in addition to the refusal to increase the prices, the customers are nowadays taking more days to clear their payments. In addition, customers are asking for more free storage days for their goods on its premises.
Situation is what you know there is impact on business itself right now in that case what happens if I will go again and again to the clients to revision of prices, they will not at all allow me and one more thing I just wanted to add over here now the payment circle is also impacted due to certain things. Earlier my payment circle at Vapi was around 30 days to 45 days which is now 60 days to 75 days. If you will see my receivables which is also hiked by last quarter. So, at all if we see overall impact of the industry as well as the preposition of the EXIM cargo movement. In that case what happens if I will go and revise prices to the party again and again, they will definitely take advantage of the price hike over there at the side of number of days for this making the payment. Earlier we are giving 7 days free in the export side they are asking about 14 to 21 days now. If we are hiking the price, they would take the other advantage so this is the situation right now.
3) Competition in the CFS industry is showing its impact on the business of Navkar Corporation Ltd as customers now have many options:
On page 5 of the October 2018 conference call, the management of Navkar Corporation Ltd accepted that the company wants to have profit margins of 35-40%. However, it cannot achieve these margins currently because they fear that the price hike will lead to a loss of customers as they now have options to move to other avenues.
Anish Maheshwari: Ultimately, we have to receive somewhere around 35% to 40% EBITDA anyhow. Right now, we are not at all in the position to take that kind of a call because if I will stretch the party that party will move out of here because they have an option.
On the similar lines, in FY2016 annual report as well (page 46), Navkar Corporation Ltd has highlighted to the shareholders that there is stiff competition among the CFS operators. As a result, the shipping lines, custom house agents (CHAs) and freight forwarders who are the key customers of CFS operators have started to ask for increased incentives for using services of any CFS operator. In such a scenario, the CFS operators have found it difficult to pass on the increase in costs to their customers.
Shipping lines/ CHAs and Forwarders continue to exert pressure for payment of increased incentives for moving their boxes to a particular CFS coupled with demand for more storage free days. In view of the stiff competition, CFSs are not able to pass on the increase in costs to the trade and this affects earning per TEU for most of the CFS operators.
Further advised reading: Understanding the Annual Report of a Company
4) Customers are currently asking for very high discounts:
On page 14 of the October 2018 conference call, the management of Navkar Corporation Ltd mentioned that now a day customers are asking for such high levels of discounts that it is not possible to do business at those levels.
Anish Maheshwari: 28,000 if 25% will be minus that price will be Rs. 21,000 after giving them the decent discount if I will use the railway tracks, but parties asking me 19,000, 20,000 how could I give.
5) Direct port delivery (DPD) initiative of the govt. is having a major impact on the CFS business:
While analyzing the annual report of Navkar Corporation Ltd for FY2018, an investor notices that the company has highlighted that it is facing challenges from the direct port delivery (DPD) initiative of the govt.
Under DPD initiative, an importer can do a quick customs clearance of her shipment and take delivery directly at the port without the need for the containers going to CFS. As a result, it is anticipated that CFS would face a reduction in business.
In FY2018 annual report, page 9, the company assures the investors that despite DPD, it has reported satisfactory performance.
The CFS industry in India is facing challenges by increasing share of direct port delivery (DPD) of import containers. But your Company registered a satisfactory performance during the financial year 2017-18 countering such challenges.
However, within six months, in the Q2-FY2019 quarter, the company acknowledged that DPD is affecting its business in a significant manner.
October 2018 concall, page 3:
Tejas Goradia: My question is on DPD how bigger threat is DPD to the CFS business as the share of DPD has been growing at a fast pace and the government themselves have been promoting it aggressively, so could you please share your view on the same?
Anish Maheshwari: Practically there is such a huge impact to the CFS industry and if you see the shipping side also there is consultation going on due to the DPD also because till last quarter if you see the last month DPD August was around 41.92% vice versa September was 43.67%. If you will tell me around 75%, 80% cargo till now moving now moving by CFS only which belongs to the DPD, but practically there is a very thin margin it you will move the DPD container from (Inaudible) 7:35. So, that is why DPD is definitely impacted our business for the entire industry itself.
The management of Navkar Corporation Ltd acknowledges that the impact from DPD is very significant and that they are hoping that DPD might be stopped altogether.
October 2018 concall, page 3:
Tejas Goradia: So, going forward are you all doing something about it?
Anish Maheshwari: No, we are just focusing on the new era of business like we have already started domestic market first thing. Secondly, we are further hoping that there are certain news in the market DPD getting stop from sometime after or just like that, but practically we had already impacted around 44% DPD is already there.
The company has acknowledged that it is currently facing severe impact on its profits as on the one end it is losing business and on the other end, the cost prices are going up.
October 2018 concall, page 3:
…earlier what happens DPD versus CFS cargo which we handle there are margins little bit already impacted, but there was something margin which is left for us, but from last quarter onwards the prices are getting down and the diesel prices itself is getting up. So, which was impacted both the side to us so that is why we are not doing that business….
6) Negative phase for the CFS industry:
During the October 2018 conference call, the management of Navkar Corporation Ltd acknowledges that currently, the CFS industry is facing huge challenges as there are many negative factors affecting the industry.
October 2018 concall, page 7:
Prateek Kumar: So, this again you are not able to charge to Vapi customer let say?
Anish Maheshwari: Basically, I will just the package to the party right now. Right now, what is my motive today, I will have to retain my customer in this negative phase of this industry.
October 2018 concall, page 14:
Anish Maheshwari: …If tomorrow is there is no positive after two quarters also then after we will have to rethink either we will have to do that business with that party or will have to take that cargo which will be giving me less margins that we will have to reanalyze because the problem is what you know Giriraj in today’s situation everything is negative for this industry.
7) Profit margins may stay lower in future:
When the management of the company was asked whether the lower profit margins reported by Navkar Corporation Ltd in Q2-FY2019 will improve in future or the profit margins will stay at the lower levels, then the company said that the profit margins may stay in the lower range going ahead.
October 2018 concall, page 10:
Nitin R.V: And more thing sir basically what you are trying to tell me these margins are going to be the same for the forthcoming quarter these margins would be sign right this is going to be new normal so to speak?
Anish Maheshwari: Not exactly, but in the range of it. They maybe slight positive.
Therefore, while analyzing the profit margins of Navkar Corporation Ltd, an investor comes to know that the CFS industry was facing a very favourable business environment until recent times. As a result, it was able to get significant business at very profitable prices, which has led to significant improvement in its profit margins over the year.
However, recently the company has started facing a very difficult business environment characterized by government’s push on direct port delivery (DPD), intense competition among CFS players, rising input costs etc. As a result, on the one hand, the company is getting lesser business and on the other hand, it is not able to pass on increases in the inputs costs to its customers. Therefore, the company witnessed significant impact on its profit margins and its net profit margin (NPM) declined to 3% in Q2-FY2019 from 24% in FY2018. Moreover, the company anticipates that the profit margins may stay at these lower levels in the future.
Over the years, the tax payout ratio of Navkar Corporation Ltd has been in the range of 10-15%. This is because the company enjoys income tax exemptions for its CFS and ICD operations. The company has disclosed these tax exemptions in the placement document for the qualified institutional placement (QIP) done in 2017 (Source: Company website).
QIP placement document, October 2017, page 48:
We have claimed a 10 year tax exemption under Section 80-IA(4)(i) of the Income tax Act in respect of our two CFSs and will claim the 10 year tax exemption in the block of 15 years for our Tumb ICD operations. These tax benefits have resulted or may result in significantly lower tax liabilities for our CFS and ICD operations, respectively. However, we may be unable to avail these tax benefits under Section 80-IA(4)(i) of the Income tax Act in the future as these tax benefits may only be claimed for any 10 consecutive years out of 15 years, commencing from the year in which we developed and began to operate our CFSs or ICD. Benefits under the Income Tax Act are available to our Somathane CFS expire in fiscal 2019.
An investor would notice that the income tax exemptions for the Somathane CFS are expected to end in 2019. As a result, investors may witness the tax payout ratio of the company increasing in the future.
Further advised reading: How to do Financial Analysis of Companies
Operating Efficiency Analysis of Navkar Corporation Ltd:
i) Net fixed asset turnover (NFAT) of Navkar Corporation Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of Navkar Corporation Ltd, then she notices that the NFAT of the company has witnessed a continuous decline over the years from 0.78 in FY2010 to 0.27 in FY2018. The overall declining trend in the NFAT indicates that the company has to continuously investment additional money in its business; however, the new investments have not yielded an increase in the business in a similar extent.
An investor would notice that the net fixed assets of Navkar Corporation Ltd have increased from ₹140 cr in FY2009 to ₹1,921 cr in FY2018, which is a growth rate of about 34% year on year. However, during this period the sales have increased by a growth rate of about 15% year on year.
Equally important is the fact that the fixed asset turnover ratio is very low, less than one, which indicates that Navkar Corporation Ltd needs to spend more than ₹1 in plant and machinery to produce ₹1 of additional sales. This low asset turnover has serious implications as a huge amount of incremental investment is needed to show future growth.
To illustrate, let us assume that in first year Navkar Corporation Ltd, targets to achieve ₹100 cr. of additional sales, then it would need to invest ₹370 cr. in fixed assets (100/0.27 = 370, as net fixed asset turnover is currently 0.27). If we assume the NPM of 24% (FY2018), then this ₹100 cr. of additional sales would provide additional net profits of ₹24cr. However, if we assume NPM of 3% (Q2-FY2019), then the ₹100 cr of additional sales would provide net profits of ₹3 cr only.
If Navkar Corporation Ltd retains entire profits and invests in its operations, then this incremental investment of ₹24 cr. of entire net profits would generate only ₹6.5 cr. of incremental sales in the second year (assuming fixed asset turnover ratio of 0.27). If Navkar Corporation Ltd wishes to grow sales by another ₹100 cr. in the second year as well, then it would have to generate ₹93.5 of sales by investing additional ₹346 cr. (INR 370 cr. the total requirement for increasing sales by ₹100 cr. – ₹24 cr. of net profits invested). This ₹346 cr. needs to come from either fresh equity infusion or debt.
Investors also need to understand that this calculation of ₹346 cr of additional investment to keep generating ₹100 cr of additional sales year on year is with the assumption of NPM of 24%, which the company achieved in FY2018. However, if the NPM stays at the level of 3% (Q2-FY2019, which as highlighted by the management in the Oct. 2018 concall may be the new normal), then the contribution of funds from net profits will be even lower at about ₹3 cr. In this case, the incremental funds needed from either fresh equity or debt would increase to ₹367 cr. (₹370 cr. – ₹3 cr). On the contrary, if the NFAT improves from current levels of 0.27 to any higher level (say 0.50 in line with the historical performance during FY2012-14, then the additional investment requirement from fresh equity or debt will decline to ₹197 cr. (₹200 cr. – ₹ 3 cr., ₹200 cr. = ₹100 cr./0.50).
Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors
The above calculations show that the business of Navkar Corporation Ltd is very capital intensive as reflected by NFAT of less than one. In such a case, whatever be the combination of NPM & NFAT (24% NPM, 0.27 NFAT or 3% NPM, 0.50 NFAT), Navkar Corporation Ltd would have to keep investing a significant amount of funds from additional equity or debt in order to keep growing. This is because the funds generated by profits in all likelihood will prove insufficient to meet the capital expenditure requirements of the company to fund future growth.
Thus, we may see that with very low fixed asset turnover of 0.27, Navkar Corporation Ltd would have to keep on relying on additional sources of funds to maintain its growth. This has happened in the past as well. Navkar Corporation Ltd has been relying on multiple additional sources of funds to meet its capital expenditure requirements:
- Debt of Navkar Corporation Ltd from financial institutions has increased from ₹101 cr. in FY2009 to ₹395 cr. in FY2018.
- In addition, Navkar Corporation Ltd has raised two rounds of additional equity during the recent past:
- In 2015, the company raised ₹510 cr via initial public offer (IPO).
- Again, in 2017, the company had to raise about ₹145 cr via qualified institutional placement (QIP).
- Over and above these sources of debt from financial institutions and equity dilution, Navkar Corporation Ltd has raised loans from promoters and related parties. As per FY2018 annual report, page 83, the amount of such loans (including preferred shares) was about ₹75 cr.
Further advised reading: Understanding the Annual Report of a Company
Such instances of continuous fundraising by any company on regular intervals indicate that the business model of the company is very capital intensive. In many such cases, the profits generated by the companies are not sufficient to meet their growth requirements and the companies either end up under huge debt burden or dilute the equity capital so much that the returns to existing shareholders keep getting lower and lower as new equity investors are continuously added to the company.
We believe that investors should be cautious while analysing such companies. This is because such companies have the potential of increasing the risk of bankruptcy and reduced profitability under tough business conditions.
Investors should read the analysis of following companies to understand the impact low fixed asset turnover can have on the debt levels of companies. You may read their analysis here:
- Analysis: Metalyst Forgings Ltd (erstwhile Ahmednagar Forgings Ltd)
- Analysis: Castex Technologies Ltd (erstwhile Amtek India Ltd)
- Analysis: Chaman Lal Setia Exports Ltd
- Analysis: Wonderla Holidays Ltd
- Analysis: Nandan Denim Ltd
ii) Inventory turnover ratio of Navkar Corporation Ltd:
An investor would note that over the years, the inventory turnover ratios (ITR) of the Navkar Corporation Ltd has been ranging from 120-100-65. Such high levels of inventory turnover indicate that the company needs to keep only very low amounts of inventory with itself. In turn, investors may appreciate that the amount of inventory is not the most determining factor for sales of the company.
Therefore, the inventory turnover ratio may not be the most relevant parameter for the analysis of Navkar Corporation Ltd.
Advised reading: Inventory Turnover Ratio: A Complete Guide
iii) Analysis of receivables days of Navkar Corporation Ltd:
Over the years, initially, Navkar Corporation Ltd witnessed its receivables days deteriorate from 37 days in FY2010 to 85 days in FY2015. However, in recent years, the company seems to have improved its cash collection practices and as a result, the receivables days of the company have declined to 41 days in FY2018.
Further Advised Reading: Receivable Days: A Complete Guide
Moreover, when an investor analyses the receivables days along with inventory turnover, then she notices that the company has been able to keep its working capital requirements under control. It means that Navkar Corporation Ltd has been able to convert its profits into the cash flow from operations without the money being stuck in working capital. An investor observes the same while comparing the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of the company for FY2009-18.
An investor would notice that over FY2009-18, Navkar Corporation Ltd Limited has reported a total cumulative net profit after tax (cPAT) of ₹590 cr. whereas during the same period, it reported cumulative cash flow from operations (cCFO) of ₹790 cr indicating that it has converted its profits into cash.
Further advised reading: Understanding Cash Flow from Operations (CFO)
Margin of Safety in the Business of Navkar Corporation Ltd:
i) Self-Sustainable Growth Rate (SSGR):
Further advised reading: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company
Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it is able to convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.
Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.
While analysing the SSGR of Navkar Corporation Ltd, an investor would notice that the company has had an SSGR of 6-8% over the years. However, the company has been growing at a rate of 15% over the years. As a result, investors would appreciate that Navkar Corporation Ltd will have to continuously raise money from additional sources like debt or equity to meet its investment requirements.
Therefore, it does not come as a surprise to the investor when she notices that over the last 10 years (FY2009-18), Navkar Corporation Ltd had to raise additional funds by multiple sources:
- Debt from financial institutions (₹294 cr.): Total debt has increased from ₹101 cr. in FY2009 to ₹395 cr. in FY2018 (294 = 395 – 101)
- Equity (₹655 cr.):
- Raised ₹510 cr. in 2015 by the initial public offer (IPO)
- Raised ₹145 cr. in 2017 by QIP.
- In addition, the company has loans of about ₹75 cr from promoters and related parties in the form of debt and redeemable preference shares.
The decision of the management of Navkar Corporation Ltd to go for aggressive expansion plans over and above the sustainable levels from its business cash generation has led to a continuous increase in debt and equity dilution for minority investors.
ii) Free Cash Flow Analysis of Navkar Corporation Ltd:
While looking at the cash flow performance of Navkar Corporation Ltd, an investor notices that during FY2009-18, the company had a cumulative cash flow from operations of ₹790 cr. However, during this period it did a capital expenditure (capex) of ₹1,881 cr. As a result, it had a negative free cash flow of ₹1,091 cr. (1,881 – 790).
Further advised reading: Free Cash Flow: A Complete Guide to Understanding FCF
As per the discussion above, an investor would appreciate that Navkar Corporation Ltd met this cash flow gap of ₹1,091 cr. in its capital expenditure needs from the additional debt of ₹294 cr., equity dilution (additional equity) of ₹655 cr and with loans from promoters & related parties.
Therefore, an investor would note that due to the decision of the company management to grow aggressively beyond the internal business strength, Navkar Corporation Ltd had to dilute its equity and raise additional debt.
In light of the above discussion, it does not come as a surprise to the investor that Navkar Corporation Ltd has not been able to declare any dividend for its shareholders until date.
Free cash flow (FCF) is one of the main pillars of assessing the margin of safety in the business model of any company.
Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing
Additional aspects of Navkar Corporation Ltd:
On analysing Navkar Corporation Ltd, an investor comes across certain other aspects of the company:
1) Management Succession of Navkar Corporation Ltd:
While analysing the FY2018 annual report of Navkar Corporation Ltd, an investor notices that currently, two brothers Shantilal J Mehta and Nemichand J Mehta are managing the company. Both of the brothers are currently approaching old age.
In the previous annual reports, an investor notices the name of Jayesh Nemichand Mehta as whole time director of the company up to August 31, 2016. Jayesh Nemichand Mehta who seems to be the son of Nemichand J Mehta and is currently about 32 years old but is no longer a director of the company.
FY2016 annual report, page 18:
It is advised that investors may seek clarification from the company about the reasons for this change in succession planning for the company. Investors may ask the company details about its current succession plan and its implementation.
Further advised reading: Steps to Assess Management Quality before Buying Stocks
2) Raising equity at a high cost:
In the discussion above, an investor would remember that Navkar Corporation Ltd has been attempting to grow at a rate, which is higher than what its inherent business profits can sustain. As a result, Navkar Corporation Ltd has to rely on additional debt and equity dilution to meet its funding requirements.
Moreover, while looking at the expenses incurred by the company to raise equity, an investor would appreciate that it has paid a significant amount of money to the bankers for raising equity.
In 2015, Navkar Corporation Ltd paid about ₹32 cr in expenses to raise ₹510 cr, which amounts to a cost of about 6.3% (32/510).
FY2018 annual report, page 11:
In 2017, Navkar Corporation Ltd paid about ₹5.41 cr in expenses to raise about ₹144 cr in qualified institutional placement (QIP), which is a cost of about 3.8% (5.41/144).
FY2018 annual report, page 63:
An investor would appreciate that a cost of 3.8% to 6.3% for raising equity is high and indicates an urgent need on part of the company to meet its fund’s requirements.
Therefore, it is advised that an investor should keep in mind the high capital requirements of the business of Navkar Corporation Ltd while analysing the company and projecting its future.
Further advised reading: How to do Financial Analysis of Companies
3) Timing of capital expansion turning out to be unfavourable:
An investor would notice that Navkar Corporation Ltd has spent a significant amount of money on its expansion projects in Panvel and Vapi in the last few years. The company has raised debt and equity via IPO and QIP to meet this capital expenditure. However, now when the capital expenditure is complete and the company is in the position to use it to gain additional business, the CFS industry is facing tough times.
As discussed above, the management acknowledges that the CFS industry is currently in its negative phase due to direct port delivery (DPD) initiative of the government under improving the ease of doing business in India. The Govt. has given a lot of stress on DPD in the EXIM policy and it aims to improve the share to DPD at ports to about 70% of the total cargo (Source: BusinessLine):
“DPD allows importers/consignees to take delivery of the containers directly from the port terminals and haul them to factories without taking them first to a CFS and from there to factories. An importer is thus assured clearance of cargo in less than 48 hours under DPD as against an average of seven days if routed through a CFS.
In late 2016, the government directed JNPT and Customs to raise the proportion of DPD first from 3 per cent to 40 per cent and later to 70 per cent.”
In light of the determination of the Govt. to keep on working on initiatives to improve the business environment in India by smoothening the processes in the export-import sector by steps like DPD, it seems unlikely that the things will go back to earlier days when CFS was a near mandatory step in the export-import process. Such a change in the business landscape may indicate that the CFS operators will have to change their value proposition to the customer instead of simple temporary parking/warehousing to other value additions. This change in business model may entail additional capex requirements over and above the significant capex already incurred by CFS operators including Navkar Corporation Ltd.
In light of the same, investors should be cautious about estimating the future capital requirements of the company.
Further advised reading: How to do Business Analysis of a Company?
4) Guarantees given to lenders for loans taken by promoter group entities:
As per the placement document of Navkar Corporation Ltd for QIP in 2017, the company has disclosed that it is a co-borrower in a few loan facilities taken by promoter group companies. As per the co-borrower lending structure, in case any of the borrowers are not able to repay the loan amount taken by it, then the lender can ask the other co-borrower to repay the loans given by it. Such an arrangement may turn out to be a guarantee for the loan availed by promoter group entities.
2017 QIP placement document, page 54:
Further, certain of our Promoters and members of our Promoter Group are co-borrowers under certain of our credit facilities, which entitle such co-borrowers to draw-down from such facilities. While disbursements have not been made to such persons as on the date of this Placement Document, we cannot assure you that our Company will receive all disbursements from such credit facilities or that such co-borrowers will not exercise their right to receive such disbursements in the future.
When an investor analyses the past disclosures of Navkar Corporation Ltd, then she notices that the company has entered as a co-borrower as well as given guarantees to the loans taken by promoter group entities in the past as well. As per the 2015 DRHP, the company had given guarantees as well as its properties as security to the lenders for promoter group entities. The company has stated that if the promoters & their entities are not able to repay these loans, then the banks may recover the money from Navkar Corporation Ltd.
2015 DRHP, page 38-39:
Our Company is a co-borrower in relation to certain credit facilities of our Subsidiary, NTL, and an automobile loan availed by our Promoter, Mr. Shantilal Jayavantraj Mehta, and we have also provided corporate guarantees and certain property owned by our Company as security for certain indebtedness of some of our Group Entities. We have mortgaged certain of our properties in relation to certain indebtedness of the Selling Shareholder. For details of the outstanding borrowings of our Company including facilities in relation to which we are a co-borrower or guarantor, see “Financial Statements – Annexure 9 – Restated Consolidated Statement of Borrowings” and “Financial Indebtedness” on pages 326 and 432, respectively. In the event our Promoter or Group Entities referred to above default on their obligations under such facilities and the guarantees and other obligations undertaken by us are invoked, we may be required to fulfill such obligations by the lenders, which would adversely affect our business and financial results.
While reading the secretarial audit report section of the FY2015 annual report as well, the investor comes across that Navkar Corporation Ltd has given a guarantee to one of the promoter group entity: Sidhhartha Corporation Private Limited.
FY2015 annual report, page 16:
The Corporate Guarantee given to Sidhhartha Corporation Private Limited on 18th March, 2011, has been renewed during the F.Y. ended on 31 st March, 2015.
It is advised that investors should keep a close watch on such lending arrangements in which the company has become co-borrower or given a guarantee to the promoters and their entities. This is because, in the event of default by promoters, the lenders would recover the money from the company.
Further advised reading: How Promoters benefit themselves using Related Party Transactions
5) Donations to a trust owned by the promoters:
As per the FY2018 annual report, page 102, Navkar Corporation Ltd has been making donations to Navkar Charitable Trust year on year. In FY2018, the company donated ₹3.5 cr wherein FY2017; the company had donated ₹2.1 cr.
As per the disclosures made by the company in the DRHP in 2015, page 20, the promoters are the trustees of Navkar Charitable Trust.
Further, our Company has made donations to Navkar Charitable Trust, a Group Entity, which aggregated to ₹ 38.40 million, ₹ 42.06 million and ₹ 26.95 million, for the financial years 2013, 2014 and 2015, respectively. Our Promoters are trustees of Navkar Charitable Trust. Our Company may make further donations to the Navkar Charitable Trust, which may adversely affect our financial results.
Navkar Corporation Ltd had cautioned the investors in the DRHP that the donations might even adversely affect the company. Investors should monitor the donations, which are made to the trust by the company.
Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?
6) Promoter own competing companies with the same business objectives as Navkar Corporation Ltd:
As per the DRHP (page 26) for the IPO of Navkar Corporation Ltd in 2015 (Source: SEBI), the company has acknowledged that the promoters of the company have ownership in companies, which have business objectives to compete in the same business as Navkar Corporation Ltd. Moreover, as per the company, it has entered into a non-compete agreement with the promoters but the company also highlights that this non-compete agreement may not be valid as per Indian law.
Conflicts of interest may arise out of common business objects shared by our Company and some of our Group Entities.
Harvard Global Logistics Tanzania Limited, one of our Group Entities, is engaged in business activities, similar to that of our Company. However, it has not carried on any business activity during the financial years 2014 and 2015. Further, Sidhhartha Corporation Private Limited (“SCPL”), Harvard Global Logistics Limited and Bhagvati Commission Agents Private Limited, our Group Entities, are authorized to carry out business, similar to that of our Company. As a result, conflicts of interests may arise in allocating business opportunities amongst our Company and our Group Entities in circumstances where our respective interests diverge. In cases of conflict, our Promoters may favor other companies in which our Promoters have interests. While we have entered into a non-compete agreement March 20, 2015 with our Promoters, such non-compete agreement could be deemed to be non-enforceable under Indian law. We cannot assure you that our Promoters or our Group Entities or members of the Promoter Group will not compete with our existing business or any future business that we may undertake or that their interests will not conflict with ours. Any such present and future conflicts could have a material adverse effect on our reputation, business, results of operations and financial condition.
Further advised reading: How Promoters benefit themselves using Related Party Transactions
7) Multiple transactions of purchasing land from promoters:
While analysing the past documents of Navkar Corporation Ltd, an investor comes across multiple disclosures related to dealings related to land transactions of the company with its promoter Nemichand Mehta.
i) Navkar Corporation Ltd purchased a land parcel from its promoter Nemichand Mehta in 2012, where the ownership of the property is under dispute and now the company has to fight the legal battle:
As per 2015 DRHP, page 461, Navkar Corporation Ltd had bought a land parcel from its promoter Nemichand Mehta in 2012. However, it seems that later on, certain disputes came out related to the ownership of the land parcel and as a result, Navkar Corporation Ltd had to file a civil suit in 2015 to protect its interest and possession of this land parcel.
Our Company filed a suit (special civil suit no. 93/2015) before the Court of Civil Judge (S.D.), Panvel dated March 13, 2015 for cancellation of sale deed and power of attorney and for a declaration of permanent injunction against Fama Constructions Private Limited, Ms. Bela Godha, Late Aba Kamble through his heirs, Mr. Chima through his heirs, Late Rago Janu Kamble through his heirs, Mr. Mahendra Motilal Banthia and Mr. Nemichand Jayavantraj Mehta, our Promoter, seeking an injunction to prevent the defendants other than Mr. Nemichand Jayavantraj Mehta from disturbing our possession and occupation of the property located in Somathane bearing survey no. 94/0 on account of the fact that our Company entered into a valid registered sale deed dated June 25, 2012 with respect to such property with Mr. Nemichand Jayavantraj Mehta, who had validly purchased it from Ms. Bela Godha under a registered sale deed dated August 4, 2009, in his personal capacity and seeking a declaration that the sale deed dated June 20, 2007 entered into amongst certain defendants, to sell such property to Fama Constructions Private Limited was not valid. Our Company has not received any further communication in this regard.
Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?
ii) Navkar Corporation Ltd again buys land from Nemichand Mehta and his proprietary firm for ₹8.8 cr:
As per FY2016 annual report, page 122, Navkar Corporation Ltd purchased land from Nemichand Mehta and his proprietary firm M/s. Arihant Industries for ₹8.8 cr.
An Investor should assess whether the amount paid by Navkar Corporation Ltd for the land is in line with the market prices. This is because in case the company had purchased the land at a price higher than the market price, then it may tantamount to shifting economic benefits from the company to the promoters.
iii) Certain land parcel shown by Navkar Corporation Ltd in its fixed assets are still in the name of its directors:
While analysing the FY2018 annual report, page 76, an investor gets to know that there are some land parcels, which Navkar Corporation Ltd is using and showing in its fixed assets; however, these land parcels are still in the name of the directors of the company.
Gross carrying amount of Land and Land Development includes certain land and land development having gross block value of ₹ 1,017.05 lakhs (March 31, 2017: ₹ 1,661.59 lakhs) situated at different locations, which are in the name of the Directors of the Company and are yet to be transferred in the name of the Company.
It seems that in case of these land parcels Navkar Corporation Ltd has purchased the land parcels from the promoters/directors. However, the directors are yet to transfer the ownership of these land parcels in the name of Navkar Corporation Ltd.
Investors may contact the company to know the details of these land parcels along with other clarifications like whether the company has paid entire consideration for these land parcels and whether there are any ownership related disputes related to these land parcels.
From the above instances, it appears that the promoters of Navkar Corporation Ltd have first purchased the land in their own name and later on sold the land parcels to the company. An investor would appreciate that in such cases of multiple legs of land transactions, there is always a possibility of intermediaries taking out their share of economic value before the ownership is transferred from the third party original landowner to the final consumer of the land (in this case Navkar Corporation Ltd). As a result, there may be a possibility that the final cost of the land to the company might have been higher than the cost at which the company might have acquired the land directly from the original landowner.
Investors may look deeper at such land transactions and then form their opinion about the same.
Further advised reading: How Promoters benefit themselves using Related Party Transactions
8) Order of SEBI against the promoters of Navkar Corporation Ltd for part in another of their companies: Jayavant Industries Limited:
In May 2017, SEBI passed an order and imposed a penalty on the many individuals who are promoters of a company named Jayavant Industries Limited for not following SEBI SAST Regulations, 2011. (Source: SEBI)
Investors should note that many of the individual indicted in the order are the promoters of Navkar Corporation Ltd.
In the said order (page 12), SEBI imposed a monetary penalty on the promoters:
After taking into consideration the nature and gravity of charges established, the facts and circumstances of the case, the mitigating factors and the number of years during which the default has occurred, I, in exercise of the powers conferred upon me under Section 15I (2) of the SEBI Act read with Rule 5 of the Adjudication Rules, hereby impose a penalty of ₹ 1,00,000/- (Rupees One Lakh only) under Section 15A(b) of SEBI Act, 1992 on the Noticees i.e. Nemichand J Mehta, Shantilal Mehta, Shantilal J Mehta (HUF), Kunthukumar Mehta, Shailaja Mehta, Nemichand Mehta (HUF), Sairabai Mehta, Jayesh Nemichand Mehta, Rajsekhar Sajjanraj Kothari,…..
9) Noncompliance of Navkar Corporation Ltd with ROC and Companies Act regulations:
While reading the placement document for the QIP in 2017, page 53, an investor comes to know that Navkar Corporation Ltd has not complied with the regulations of Registrar of Companies (ROC) and Companies Act 2013.
Navkar Corporation Ltd admitted that it did not take the central govt. approval, which is needed before entering into certain transactions with its promoters. The company also disclosed that it did not do certain filings to ROC for the creation of charges. The company also admitted that as per the regulations, it should have appointed a company secretary from April 1, 2014; however, it appointed the company secretary from September 12, 2014.
2017 QIP placement document, page 53:
We have not made certain filings with the RoC in the past and we have not complied with certain provisions of the Companies Act and we may be subject to regulatory action for such non-compliances.
We have not made certain form filings in relation to the creation of charges, i.e. Form 8 or Form CHG-1, with the RoC in the past, however, we have not received any notice from the RoC until date. We cannot assure you that our Company will not be subject to any penalty imposed by the competent authority in this respect.
Moreover, our Company has also entered into certain transactions with companies in which our Directors or their relatives were interested, for purposes of the sale, purchase or supply of goods, from the date of incorporation of our Company until March 31, 2011, which transactions required us to obtain prior approval from the Central Government under Section 297 of the Companies Act, 1956, on account of these entities being related parties. However, our Company did not obtain such prior approval of the Central Government, and thus applied for a compounding of the offence under the Companies Act, 1956, on August 17, 2011. Pursuant to an order dated December 8, 2011, from the Regional Director, Western Board, Ministry of Corporate Affairs, Government of India, Mumbai, such offence was compounded on payment of ₹ 0.03 million by each of our Company and our Promoter, Mr. Nemichand Jayavantraj Mehta. Further, while our Company obtained prior approval from the Central Government for entering into certain transactions for the period from July 1, 2011 to March 31, 2014 in accordance with Section 297 of the Companies Act 1956, the actual value of these transactions exceeded the limits prescribed in the approval.
Further, under the provisions of Section 383A of the Companies Act 1956, we were required to appoint a whole-time Company Secretary since our Company’s incorporation. Under the provisions of Section 203 of the Companies Act 2013, we were required to have appointed a company secretary from April 1, 2014. Previously, we had engaged a company secretary between January 18, 2010 and April 15, 2010. Subsequently, we appointed Ms. Ekta Chuglani as a whole-time Company Secretary with effect from September 12, 2014.
Similarly, the company did not have any internal auditor during 2015 from January 22, 2015, to March 30, 2015.
FY2015 annual report, page 15:
– There was no Internal Auditor during the period 22.01.2015 to 30.03.2015.
Further advised reading: Understanding the Annual Report of a Company
10) Noncooperation of Navkar Corporation Ltd with existing credit rating agency CRISIL:
While analysing the credit rating reports of Navkar Corporation Ltd, an investor comes to know that the company has not been cooperating with the credit rating agency CRISIL since January 2017.
CRISIL is, however, awaiting adequate information from Navkar Corporation Ltd (NCL) which will enable us to carry out the rating review. CRISIL will continue provide updates on relevant developments from time to time on this credit.
As per the update from CRISIL dated April 30, 2018, Navkar Corporation Ltd is still not cooperating with CRISIL to provide it requisite information.
Further advised reading: Credit Rating Reports: A Complete Guide for Stock Investors
In most of the cases where companies, which have taken debt but stop cooperating with their credit rating agencies, we have found that these companies switch their credit rating agency. As a result, investors find that some new credit rating agency starts the rating of the company. However, in the case of Navkar Corporation Ltd, we are not able to find any new report from any other credit rating agency.
Investors may approach the company to know the reason for it not cooperating with CRISIL. An investor may also ask the company about any new credit rating agency, which is rating the company now. If yes, then investors may seek the credit rating reports prepared by the new credit rating agency.
In case, the company has not started the credit rating from any new credit rating agency, then investors may ask the company about the reasons it has stopped getting itself/its debt credit rated. An investor may also ask the company whether it is currently in noncompliance with RBI regulations mandating credit rating for companies, which have taken debt from financial institutions more than a certain amount.
11) Suboptimal capital allocation by Navkar Corporation Ltd:
As per the discussion above in the article, an investor would appreciate that Navkar Corporation Ltd has attempted to grow more than the growth rate, which its internal business strength could sustain. As a result, the company had to raise funds by diluting its equity capital and by raising additional debt.
In addition, when an investor analyses the returns generated by these assets, then she notices that currently, Navkar Corporation Ltd is able to generate a profit before tax (PBT) of ₹128 cr. from its net fixed assets (NFA) of ₹1,921 cr. in FY2018. This amounts to a pre-tax return of 6.6% on the money invested in net fixed assets, which is very low when compared to a risk-free pre-tax return of 7.50% provided by Government of India Securities 10-Years (2028) (Source: RBI Website on Jan 12, 2019).
The next best risk-free alternative of deploying money, a fixed deposit with State Bank of India (SBI) offers an interest rate of 6.85% on deposits exceeding ₹10 cr. (Source: SBI website on Jan 12, 2019)
An investor would note that a pretax (PBT) return of 6.6% earned by Navkar Corporation Ltd on its assets is very low when compared to other hassle-free and risk-free avenues like govt. securities or fixed deposits with banks. Moreover, the investor would appreciate that the PBT return of 6.6% is assuming the business performance of Navkar Corporation Ltd during FY2018 when it enjoyed good profit margins.
The investor would remember that in Q2-FY2019, the profit margins of the company declined significantly and the management anticipates that going ahead profit margins might stay at lower levels. Therefore, if the investor lower her future profit margin assumptions as per the result of Q2-FY2019, then the PBT return of Navkar Corporation Ltd falls further below the minimum benchmark of the risk-free return offered by Govt. of India securities or the fixed deposits of SBI.
Alternatively, an investor may consider that unless an investment in the business is able to generate returns higher than the risk-free returns provided by Govt. Securities or fixed deposits, there is no point in taking the business risk of investing money in creating large plants & machinery and taking the added stress of selling the produce in the market. In such situations, an investor may simply sell all its plant & machinery and invest the money in govt. securities or fixed deposits and earn a higher return.
Further advised reading: How to Identify if Management is Misallocating Capital
You may read about some of the other companies, which have such low returns on their assets that the company might be better off selling all its assets and investing the money in bank fixed deposits:
- Analysis: Globus Spirits Ltd
- Analysis: Meghmani Organics Ltd
- Analysis: Castex Technologies Ltd / Amtek India Ltd
- Analysis: KNR Constructions Ltd: Some road assets are earning toll income, which is much less than the interest income that the company would have earned by putting the cost of building the road in a fixed deposit.
Margin of Safety in the market price of Navkar Corporation Ltd:
Currently (January 12, 2019), Navkar Corporation Ltd is available at a price to earnings (PE) ratio of about 9.5 based on earnings of FY2018. The PE ratio of 9.5 offers some margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- Further advised reading: 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- Read: How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Further advised reading: Hidden Risk of Investing in High P/E Stocks
Overall, Navkar Corporation Ltd seems like a company, which is operating in a very capital-intensive business where it needs to do large capital expenditure to generate additional sales. The company finds that its capital expenditure (capex) requirements have always exceeded its profit-generating ability. As a result, the company has regularly relied on additional sources of funds like equity dilution (IPO and QIP) and debt from financial institutions as well as promoters.
Until recently, Navkar Corporation Ltd enjoyed high-profit margins. However, now a day, the initiatives of Govt. of India like direct port delivery (DPD) aimed at reducing time delays in clearance of port cargo, are creating a tough business environment for the company. This is because DPD initiative has reduced the role of CFS operators in cargo handling. In addition, the intense competition among CFS players has ensured that Navkar Corporation Ltd is losing out its negotiating power over its customers.
Now a day, Navkar Corporation Ltd is not able to pass on the increase in costs to its customers. On the contrary, the customers are pressing it to increase incentives like increased free days of cargo handling in its warehouses and delay in clearing the payments.
The company acknowledges that currently, the CFS industry is going through a negative phase. However, this tough phase for the industry has hit Navkar Corporation Ltd especially hard. This is because Navkar Corporation Ltd had been doing a large capital expenditure (capex) over the last few years. The expanded capacity has recently become operational and instead of getting to enjoy the fruits of new capacity in terms of profitable additional business, Navkar Corporation Ltd is facing a tough time to maintain its profitability while the capacity utilization of new capacity remains low.
An investor would appreciate that Navkar Corporation Ltd used comparatively lower amounts of debt for the new capex as it funded part of it by way of equity raised in IPO. However, still, the double impact of industry headwinds along with debt on the books has led the company to go for another round of equity dilution (QIP) in FY2018 in quick succession. Moreover, the financial data indicates that Navkar Corporation Ltd had to pay high costs to raise equity, which might indicate the urgent need of capital by the company.
Investors would appreciate that the business model of Navkar Corporation Ltd is very capital intensive and it needs a large amount of capital investments to generate additional sales. Therefore, while analysing the future growth of the company, investors should do an in-depth assessment of its future capital requirements and their probable sources.
While an investor analyses the promoter group of Navkar Corporation Ltd, then she notices that there are certain aspects, which need additional information from the company. An investor should ask the company about the succession planning of promoters. She should also ask the company about various land parcels, which have been supposedly purchased by it from the promoters but are to be transferred in the name of the company. She should also seek clarity about any legal dispute related to these land parcels.
An investor should be aware of the challenges in circumstances where promoter first buy assets/land in their own name and then sell them to the company. There have been multiple instances wherein such transactions; the ultimate cost to the company has been higher in comparison to the condition if the company would have bought the asset directly from the original owner. Therefore, it is advised that the investor should do enhanced due diligence of such transactions in the case of Navkar Corporation Ltd as well.
Investors get to know that Navkar Corporation Ltd has provided guarantees to the promoter group entities by way of co-borrowing arrangements with lenders. Navkar Corporation Ltd has also provided donations to a promoter owned trust year on year. In light of such transactions, investors increase their level of analysis for the company.
An investor also notices that there have been multiple instances in the past where the company has not complied with the stipulated regulations like taking central govt. approval before dealings with promoters/related parties, not filing required documents with ROC, delay in appointing the company secretary, no internal auditor for a certain period etc. Moreover, SEBI has penalized a few promoters of the company in the instance of another of their company, where they did not comply with the regulations. In light of such instances, an investor needs to be extra cautious while doing her analysis.
An investor notices that the Navkar Corporation Ltd has stopped cooperating with its credit rating agency, CRISIL, in January 2017 and has not provided the information asked by the agency. However, investors are not able to find a report by any other credit rating agency for the company. An investor may ask the company about the reason for noncooperation with CRISIL. She should also ask whether any other credit rating agency has rated it. If not, then whether Navkar Corporation Ltd is in compliance with the RBI guidelines for credit rating requirements of borrowers.
Going ahead, an investor should closely track the profit margins of the company along with capital requirements. She should monitor related party transactions of the company with promoters, their group entities, trust as well as developments related to highlighted land transactions. She should update herself about any credit rating report of the company and analyse audit reports of the company for any noncompliance with regulations in future.
Further advised reading: How to Monitor Stocks in your Portfolio
These are our views on Navkar Corporation Ltd. However, investors should do their own analysis before taking any investment related decision about the company.
You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”
Hope it helps!
Dr Vijay Malik
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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.