This article provides a fundamental analysis of Shilpi Cable Technologies Ltd (Shilpi) and Honda SIEL Power Products Ltd (HondaPower).
In order to benefit the maximum from this article, an investor should focus more 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.
Analysis of Shilpi Cable Technologies Ltd
Q: Hello Sir! What is your opinion about Shilpi Cable Technologies Ltd? It looks to be trading on very low valuation and growing as well. Thanks for your help!
Dr Vijay Malik’s Response
Thanks for writing to me!
Financial Analysis of Shilpi Cable Technologies Ltd:
The financial numbers of Shilpi Cable Technologies Ltd (Shilpi) present some strange things. One would need to delve very deep into them before taking them on face value and investing based on them. I will highlight some of the strange things here.
Shilpi Cable Technologies Ltd has been growing its sales at a breakneck speed of 63% per annum since FY2010. Sales have increased from INR 248cr. in FY2010 to INR 1,753 cr. in FY2014. Sales have increased even further to INR 2,974 cr. in the latest 4 quarters. However, the net assets of the company, which are supposed to be used to produce goods for achieving these sales has increased from INR 70cr. in FY2010 to INR 96cr. in FY2014.
It means Shilpi Cable Technologies Ltd has found some magical way that in FY2010 assets of INR 70cr. used to produce goods for sales worth INR 248cr. and suddenly in FY2014, assets of INR 96cr. (50% additional investment) are producing goods for sales worth INR 1,753 cr. (600% additional output). An investor needs to check this rise in operating efficiency.
Profitability margins are being maintained despite this breakneck pace of sales growth. However, tax outgo seems to have fallen. The tax rate paid by the company has fallen from 39% in FY2010 to 10% in FY2014. The company must be enjoying some significant tax breaks or rebates from govt. An investor needs to check this.
Customers of Shilpi Cable Technologies Ltd do not seem to be paying up in time. As cumulative PAT since FY2010 is INR 209cr. where cumulative cash from operations since FY2010 is only INR 111cr. Such development usually leads to an increase in receivables days. On the contrary, the receivables days have reduced for Shilpi from 115 days in FY2011 to 103 days in FY2014. Despite the inability to collect cash from customers in time, the inventory turnover has increased, which should have been decreased in a normal scenario.
Inventory turnover has increased from 7 in FY2011 to 12 in FY2014. An investor needs to analyse this dichotomy in financial numbers in detail before making any investment decision.
Total debt of Shilpi Cable Technologies Ltd has increased from IR 97 cr. in FY2010 to INR 229 cr. in FY2014, an increase of INR 132 cr. However, cumulative cash flow from financing since FY2010 is only INR 53 cr. An investor needs to analyse this comparative financing data of balance sheet and cash flow statement in detail before making any investment decision based on these numbers.
The reported financial numbers of Shilpi Cable Technologies Ltd raise many questions, which demand in-depth analysis. This seems to be the reason that the market is not giving it high valuations.
I would stay away from such a company unless I find answers to all the above questions. However, you should take your investment decision based on your own analysis.
Hope it helps!
Addendum January 3, 2016 (Shilpi Cable Technologies Ltd)
Reader’s Inputs (Sahil Shah)
One of the readers, Sahil Shah, has provided useful inputs on Shilpi Cable Technologies Ltd, which are useful for the investor trying to analyse the company. His inputs are shared below: Hi Dr Vijay Malik, Much appreciate your blogs on value investing. I wanted to provide a few views on Shilpi Cable Technologies Ltd (SCTL) in response to your blog. I am invested in the business, but I am not entirely comfortable with business economics and have pared my holdings substantially.
The magic of Asset Turnover increase:
What Shilpi Cable Technologies Ltd has done is tie-up (with a small equity stake) in third party operators, outsource some of the production to them and brand these as SCTL products. This is gleaned from the annual reports. The gross fixed asset turnover ratio (FATO) has increased 6 fold from 3x to 18x. While large brands like HUL, Symphony, etc. use the outsourcing model and focus only on marketing, this is the first time I have seen a manufacturing company outsource a portion of its manufacturing operations. There is a slight impact on margins (so either the 3rd party has underutilized capacities rendering its output not much higher than cost, or there is something we need to dig deeper into this). The margin impact might have been far larger if the copper prices stood firm rather than collapsing so strongly.
Total WC has actually increased in line with sales:
The total debt has increased meaningfully from ₹100 cr in FY2010 to ₹445 cr in FY2015. Net Working Capital has increased from ₹75 cr to ₹800 cr (much in line with the sales growth).
Tax outgo is low:
This can be explained through a large component of sales happening through Dubai (zero tax outgo) and Singapore (low tax outgo) subsidiaries.
- The Dubai entity accounts for 45% of consolidated revenues and 69% of consolidated PBT.
- The Singapore entity accounts for 11% of consolidated revenues and 2% on consolidated PBT.
Till this money is brought home, the tax outgo would remain very low. However, in our assumptions, we should account for the tax outgo on the cash which would get distributed to the parent from these subsidiaries. It flows into the PAT due to consolidation of accounts, but the cash tax would reflect a much-muted number.
Bits that worry me:
- Shilpi Cable Technologies Ltd has ambitious plans to raise sales to $1 billion (₹6,500 crores) by 2020 through organic and inorganic means.
- Promoters (inclusive of Trust) hold 47%, FIIs own 23%. There seem to be some large holders per the shareholder pattern on BSE – if these are PAC (persons acting in concert), the free float would be reduced substantially. 78% of the promoter shares have been pledged.
- The Company has no enduring brand franchise as of now (mostly a commoditized operation), and is looking to create the same with its brand ‘SAFE’ LED lighting. Enhancing the distributor network and creating further scale could take time and burn cash. However, SCTL is already present on 9 states and has a large distributor and retailer base, giving it enough reach to make a measurable impact.
- The company imports a lot of material, including copper, etc., which are subject to volatile fluctuations. Since the end product is commoditized, passing radical price changes could be difficult thereby pressuring margins. However, copper is at a six-year low, offering respite on margins.
- The standalone operation has an interest coverage ratio of 1.8x, indicating a low margin of safety. However, the consolidated operations have an interest coverage ratio of 3.1x, which is relatively more comfortable.
Analysis of Honda SIEL Power Products Ltd
Q: Hi Vijay, Honda SIEL Power Products Ltd has posted good result in the last quarter. Its debt position is almost nil. Honda Motor is the promoter of the company. The current PE is >40. However, it is < industry PE. How do you see it as a long-term investment candidate?
Dr Vijay Malik’s Response
Thanks for writing to me!
Financial Analysis of SIEL Power Products Ltd:
Honda SIEL Power Products Ltd (HondaPower) has been growing at a moderate pace in past few years. However, growth does not seem to be healthy growth. Company is compromising on profitability margins to achieve growth. Operating margins (OPM) have been fluctuating consistently. OPM reduced from 13% in FY2010 to 7% in FY2013 and improved to 9% in FY2014. Similarly, net profit margins (NPM) have reduced from 10% in past to 3% in FY2014 and have been fluctuating wildly.
In addition to non-maintenance of profitability margins, Honda SIEL Power Products Ltd is also not able to collect money from its customers. Last 10 years (2005-14) cumulative net profit is INR 210cr. whereas cash from operations is only INR 138 cr. Customers of Honda SIEL Power Products Ltd are delaying payments as receivables days have increased from 13 days in FY2011 to 23 days in FY2014. It seems these uncollected sales receipts are adding up consistently and thereby leading to poor working capital utilization. Inventory turnover has been declining consistently: from 7 in FY2012 to 5 in FY2014.
Similarly, Honda SIEL Power Products Ltd is not faring well on other operating efficiency parameters like asset turnover, which has decreased from 6.6 in FY2012 to 4.8 in FY2014.
If I try to look through the reported numbers, it seems that they are chasing aggressive growth targets and selling to everyone they can get hold of; without thinking whether they would be able to collect money in time or not. In the quest for this chase, they have compromised on their profitability as well as operating efficiency. This does not seem to be a sign of good management efficiency.
You have noted right that Honda SIEL Power Products Ltd is a debt-free company. However, they do not seem to have done a lot of capital expenditure in the last decade. They have already utilized a lot of cash, they had on their balance sheet. Cash has come down from INR 71 cr. in 2005 to INR 21 cr. in FY2014, which seems obvious because customers are delaying payment of cash.
I believe that Honda SIEL Power Products Ltd leaves a lot to be desired on the operating & management efficiency front. Such a company might show a few good quarters, but I would not be interested in investing such a company for the long term.
You are right that P/E of Honda SIEL Power Products Ltd is very high. I do not prefer purchasing companies at high P/E irrespective of their P/E being lower than industry P/E. High P/E does not give any margin of safety.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
These are my views regarding Honda SIEL Power Products Ltd. Rest you should take your own call after doing your own due diligence.
Hope it helps!
Readers’ Queries about Shilpi Cable Technologies Limited
Treatment of Interest Expense while calculating Cash Flow from Operating Activities (CFO)
It was a pleasure reading your posts about Shilpi Cable Technologies Limited among others. You have brought out some interesting facts, which hadn’t caught my eye before.
I would like to point out its cash flow from operations on page 156 of the Annual Report for FY2014. Under cash from operations, it has added ₹52cr as financial charges (inflow) and it has deducted a similar amount from cash from finance activity (outflow).
Is it a routine thing or it smells like a boomerang transaction? It has done the same previous year too.
Thank you for your reply in advance.
Thanks for writing to me!
It is a routine and correct entry.
The impact of this entry is to remove the effect of interest (which is financing activity) from cash from operations and classify it under cash from financing, where it actually belongs.
Dr Vijay Malik
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