Analysis: Sreeleathers Ltd

The current section of “Analysis” series covers Sreeleathers Ltd, one of the leading footwear companies in India based out of Kolkata. Sreeleathers Ltd deals in formal and casual footwear of men, women and kids as well as in leather accessories.

“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.

Sreeleathers Ltd Research Report by Reader

Hello Sir,

Everyone has a transferable commodity – knowledge. Sharing your unique expertise and making introductions for someone creates a lasting legacy. – Marsha Blackburn.

I could not have better words to express after going through your website. Thank you so much for sharing valuable knowledge through your articles and workshop with aspiring investors like us. Your articles not only enhance us with immense knowledge but also inspires to do the hard work.

I attended your Peaceful Investing workshop last month in Pune. It was a great learning and inspiring too especially researching the company in depth and reading annual reports.

This learning made me search for fundamentally sound companies and I came across Sreeleathers Ltd. I have done my analysis and have a few queries. Request you to give your valuable and in-depth analysis on the same.

Attached is the analysis of the company.

Regards,

Kalyani Wadnere

About Sreeleathers Limited:

The company is engaged in the business of dealing in all kinds of footwear and leather accessories. It is also engaged as a retailer and wholesaler of footwear and leather articles. The Company has around 30 retail outlets (including outlets owned by franchise), spread over nine states including West Bengal, Bihar, Jharkhand etc. Sreeleathers Ltd sells its products mostly within India with insignificant export income.

Peer analysis of Sreeleathers Ltd:

Sreeleathers Ltd.’s sales growth (5 years and 10 years) is higher than the sales growth of its peers. Its net profit margin (NPM) is 15%, which is much higher than the NPM of its peers.

Management Analysis of Sreeleathers Ltd:

1) Remuneration of key management personnel of Sreeleathers Ltd:

Promoter’s salary is increased along with an increase in profits whereas other key personnel as if CFO and company secretary salary is very low and last 2 years the increment of their salary has been negative. In addition, the number of employees has been reducing. The employee count has decreased from 62 in 2015 to 34 in 2018.

Remuneration increment details –

Annual Report 2017 page no. 6:

• Satya Brata Dey (Managing Director): 150%
• Bijoy Kumar Roy (Company Secretary): -10.78%
• Sujay Bhattacharya (Chief Financial Officer): -11.67%

Annual Report 2018 page no. 7

• Satyabrata Dey (Managing Director) 60.00%
• Bijoy Kumar Roy (Company Secretary) 9.52%
• Sujay Bhattacharya (Chief Financial Officer) -6.10%

The company is not paying a dividend since 2015. Can we assume that it is not shareholder friendly as well? Please input with your views

Annual report 2018 page no. 7 states:

The Company’s PAT has grown from Rs. 1340.30 lacs to Rs. 2137.18 lacs an increase of 59.45%, against which the average decrease in remuneration is 19.78% this has been achieved by better manpower utilization.

The increase in profit margin is because of cost-cutting (employee). Profit margin increasing at 67% CAGR. Is it sustainable?

2) Related party transactions of Sreeleathers Ltd:

The company purchases goods and sells goods to itself M/S Sreeleathers. Can you clarify on this?

Annual Report 2018 page no. 71 (Related party relations)

a) Purchase of goods by Sreeleathers Ltd:

M/S Sreeleathers 48,270,083.55   38,198,784.00   21,074,502.00

b) Sale of goods by Sreeleathers Ltd:

M/S Sreeleathers 59,833,647.00   21,717,843.00   15,164,742.00

Financial Analysis Checklist of Sreeleathers Ltd:

• Sales growth CAGR >15% for last 7-10 years: 20%
• Profitability NPM >8%: Avg: 11%, Last year 15%
• Tax payout >30%: 34%
• Interest coverage >3: 302.08
• Debt to Equity Ratio < 0.5: Nil
• Current ratio >1.25: 1.75
• Cash Flow CFO>0: CFO: 88; PAT 80
• Cumulative PAT vs. CFO cPAT ~ cCFO: CFO: 88; PAT 80

Business & Industry Analysis Checklist of Sreeleathers Ltd:

• Comparison with industry peers Sales growth > peers: Sales growth is higher @ 21.99 as compared to peers in Screener
• Increase in production capacity and sales volume: Production capacity & sales volume CAGR ~ Sales CAGR No details about production capacity
• Conversion of sales growth into profits: Sales CAGR 20%; Net Profit CAGR 67%
• Conversion of profits into cash cPAT ~ cCFO: cPAT 80 < cCFO 88

Management Analysis Checklist of Sreeleathers Ltd:

• Background check of promoters & directors Web search: No such news
• Management succession plans, Good succession plan should be in place: Succession Plan in line – MD’s daughter appointed as additional. But no remuneration details mentioned
• Salary of promoters vs. net profits, No salary increase with declining profits/losses: Increase in remuneration with increase in profit
• Consistent increase in dividend payments Dividend CAGR > 0: since 2015 no dividend
• Promoter shareholding > 51%: 64.94%
• FII shareholding ~ 0%: NIL

Other Business Parameters of Sreeleathers Ltd:

• Product Diversification: Pure Play
• Government Influence: No govt. interference

Valuation Analysis Checklist of Sreeleathers Ltd:

• P/E ratio > 10: 19.7
• P/E to Growth ratio (PEG ratio) < 1: 0.82
• Earnings Yield (EY) > 10 year G-Sec yield: 7.62%
• P/B ratio < 1: 1.96
• Price to Sales ratio (P/S ratio) < 1.5: 3.31
• Dividend Yield (DY) > 0%: 0.00%

My queries and/or concerns:

• No mention of capacity utilisation or units sold in annual reports.
• The company does not seem to be employee friendly.

Dr Vijay Malik’s Response

Hi Kalyani,

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

Let us analyse the performance of Sreeleathers Ltd over the last 10 years.

Financial and Business Analysis of Sreeleathers Ltd:

While analyzing the financials of Sreeleathers Ltd, an investor would note that in the past, the company has been able to grow its sales at a rate of about 20% year on year. Sales of the company increased from ₹22 cr. in FY2009 to ₹141 cr in FY2018.

While analysing the profitability of the company, an investor would notice that the operating profit margin (OPM) of Sreeleathers Ltd has consistently improved over the years.

The OPM was 2% in FY2009, which increased sharply to 13% in FY2010. The significant change in the OPM in FY2010 is essentially due to a major corporate restructuring in the company and the promoter group.

Further advised reading: How to do Financial Analysis of Companies

Earlier the name of the company used to be Cat Financial Services Limited (CFSL). In FY2009, in an amalgamation scheme, the company merged itself with three other promoter group companies: Deys Holding Pvt. Ltd., Deys Finance Pvt. Ltd and Shree Leathers Pvt. Ltd.

FY2009 annual report, page 4:

The Hon’ble High court of Calcutta has sanctioned the composite scheme of amalgamation between your company CAT FINANCIAL SERVICES LIMITED and the group companies namely DEYS HOLDING PVT LTD (DHPL), DEYS FINANCE PRIVATE LTD (DFPL), SHREE LEATHERS PVT. LTD (SLPL) vide its order dated 15-2-2008 and pursuant to this amalgamation your company has acquired the access of huge pile of properties of its group companies and diversified itself into the business of footwear’s & leather Assocaries and targeting to focus on the same. Also pursuant to the amalgamation your company has benefited by better, efficient and economical management , control and running of the business of the undertakings concerned and gained advantage of economies of scale and also able to pool the resources for growth, development and diversification of the business of the amalgamating companies.

After the amalgamation your company has issued and allotted 2.19,54.812 Equity Shares of Rs. 10/- each to the shareholders of DHPL, DFPL, and SLPL under the scheme and the necessary approval are received for the same.

As part of the amalgamation, CFSL got the business of footwear and leather accessories and the company has maintained it as the core line of business. Therefore, it seems that financials of the company from FY2010 onwards show the performance of the footwear business. CFSL changed its name to Sreeleathers Ltd in FY2011.

If an investor analyses the trend of the operating profit margin of Sreeleathers Ltd from FY2010 onwards, which represents the footwear business, then she notices that the OPM of the company has consistently increased from 13% in FY2010 to 21% in FY2018. Such significant improvement in the profit margin indicates a few aspects of the competitive strength of Sreeleathers Ltd:

1. The company has the ability to pass on the increase in its raw material/purchase costs to its customers.
2. The company has the ability to sell more footwear at higher prices as displayed by rising sales revenue with improving profitability.

The ability to pass on an increase in costs and simultaneously increase sales revenue is a good aspect for any business.

Further advised reading: How to do Business Analysis of a Company?

The net profit margin (NPM) of the company has followed a pattern similar to the OPM. The NPM of Sreeleathers Ltd has improved from 1% in FY2009 to 15% in FY2018.

The tax payout ratio of Sreeleathers Ltd is consistently in line with the standard corporate tax rate applicable to companies in India.

Operating Efficiency Analysis of Sreeleathers Ltd:

1) Net fixed asset turnover (NFAT) of Sreeleathers Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Sreeleathers Ltd over last 10 years (FY2009-18), then she notices that the NFAT of the company witnessed a continuous improvement year after year. The NFAT has increased from 0.20 in FY2009 to 0.89 in FY2018.

The improvement in NFAT is a result of a significant increase in sales from ₹22 cr to ₹141 cr over FY2009-2018 without any major capital expenditure by the company during this period. If an investor notices the capital expenditure done by Sreeleathers Ltd over FY2009-18, then she notices that the company has spent only ₹8 cr in this period.

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

An investor would appreciate that a large increase in sales without any major capital expenditure can be a result of one of the following situations.

1. One situation can be that Sreeleathers Ltd has not seen an increase in the number of footwear sold over FY2009-18 and the entire six-fold increase in sales is a result of the increase in the price of the footwear.
2. Another situation can be that Sreeleathers Ltd had a large amount of unutilized capacity of shoe manufacturing in FY2009-10, which it has been utilizing over the years increase its sales from ₹20 cr to ₹141 cr.
3. Still another situation can be that Sreeleathers Ltd does not spend on manufacturing shoes in-house. Instead, it outsources the shoe manufacturing. As a result, it can easily meet additional demand for its shoes by letting its vendors make more shoes and supply them to Sreeleathers Ltd to sell in its stores.

Advised reading: How to do Business Analysis of Organised Retail Companies

While looking at the pricing of the shoes at the website of Sreeleathers Ltd (click here), an investor would notice that the price of shoes is lower than what we commonly see for various other branded shoes. Therefore, the possibility of the first situation seems low that the six-fold increase in sales for the company over the last 10 years is only the result of a six-time increase in the price of footwear.

This leaves an investor with the second and third situations described above.

While reading the past annual reports of Sreeleathers Ltd, an investor notices that the company has not disclosed its manufacturing capacity in any of the annual reports from FY2009-2018, which are available on its website. Therefore, it is difficult for an investor to ascertain that the increase in sales of the company without any capital expenditure is because of utilization of previously unused capacity available with the company.

An investor would appreciate that any company, which previously had a lot of spare unused manufacturing and has now started utilized it, would need more employees to put the spare capacity to use. In the case of Sreeleathers Ltd, over the last four years, FY2015-2018, the sales of the company have increased from ₹67 cr in FY2015 to ₹141 cr in FY2018. However, an investor would notice that during this period, the number of employees has declined from 62 employees at the end of FY2015 to 34 employees at the end of FY2018.

Further advised reading: How to do Business Analysis of a Company?

Therefore, an investor would understand that the probability of an increase in sales of footwear by making more footwear in the unutilized manufacturing capacity of the company is low. Moreover, when an investor reads the disclosure of the company related to the number of employees, then she notices that the company has permanent employees only in showrooms, godown and administrative office.

FY2018 annual report, page 41:

As on March 31, 2018 the company had 34 permanent employees at its showroom, godown and administrative office.

Therefore, it may indicate that the company has kept showrooms, godown and administrative office under its direct control and the company has outsourced/contracted out the manufacturing activity of footwear to other suppliers.

Moreover, while going through the previous annual reports of Sreeleathers Ltd, an investor notices that in the annual reports for FY2012 and FY2013, the company has disclosed that it sources shoes from small scales shoe manufacturers.

FY2012 annual report, page 5:

Your company continues to procure a part of its total footwear sold in the market from small scale and cottage industries, so that these industries continue to upgrade their machines and manpower. This is a social obligation which your Company fulfills to support the employment given by these small scale and cottage industries.

FY2013 annual report, page 6:

Your company continues to procure a part of its total footwear sold in the market from small scale and cottage industries, so that these industries continue to upgrade their machines and manpower. This is a social obligation which your Company fulfills to support the employment given by these small scale and cottage industries.

Therefore, it might be possible that Sreeleathers Ltd has been sourcing most of its incremental requirement for footwear to meet increasing demand from other vendors including small scale and cottage industries. In case, this is the real situation, then it is possible that Sreeleathers Ltd could increase its sales revenue by six times without incurring any significant capital expenditure to increase manufacturing capacity.

An investor should note that the above discussion on the likelihood of possible scenarios is based on assumptions along with the analysis of publicly available information in the annual reports of Sreeleathers Ltd. For more clarity, an investor may contact the company directly to understand the situation.

2) Inventory turnover ratio of Sreeleathers Ltd:

An investor would note that over the years, the inventory turnover ratios (ITR) of the Sreeleathers Ltd has been ranging from 11-14 during FY2009-18. Such a trend of ITR indicates that the company has kept its inventory management under control and as a result, not allowed money to be unnecessarily stuck in working capital.

Advised reading: Inventory Turnover Ratio: A Complete Guide

3) Analysis of receivables days of Sreeleathers Ltd:

An investor would notice that over the years, receivables days of Sreeleathers Ltd have declined from 9 days in FY2010 to 2 days in FY2018. This reduction in the receivables days for the company has not been a smooth line improvement. Sreeleathers Ltd witnessed its receivables days increase to 20 days in FY2012, which may indicate that the company relied on giving a higher credit period to its customers to increase its sales.

Further advised reading: How to Assess Operating Efficiency of Companies

In the information memorandum filed by Sreeleathers Ltd to Bombay Stock Exchange (BSE) in May 2013, the company provided the names of its largest customers.

Information memorandum, May 2013, page 28:

An investor would appreciate that the major customers of Sreeleathers Ltd are companies, which may be the distributors, retailers/resellers of the shoes. An investor would appreciate that such corporate buyers will ask for a credit period from footwear manufacturers like Sreeleathers Ltd and the company may have to give a higher credit period in order to generate higher sales.

Nevertheless, FY2013 onwards, the receivables days of the company started improving and in FY2018, it declined to 2 days. Such low receivables days indicate that most of the sales for Sreeleathers Ltd take place with an upfront payment. It may indicate a shift in the business model of the company from earlier dealer/distributor/reseller led model to current direct sale to end consumer.

Further Advised Reading: Receivable Days: A Complete Guide

Investors may contact the company to understand more about the shift in its business practices over the last 10 years if any.

An analysis of receivables days along with inventory turnover indicates that Sreeleathers Ltd has been able to keep its working capital requirements stable and under control. It means that Sreeleathers 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, Sreeleathers Ltd has reported a total cumulative net profit after tax (cPAT) of ₹80 cr. whereas during the same period, it reported cumulative cash flow from operations (cCFO) of ₹88 cr indicating that it has converted its profits into cash.

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

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

Margin of Safety in the Business of Sreeleathers Ltd:

1) 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.

An investor would notice that Sreeleathers Ltd has witnessed an SSGR ranging from 4% to 6% over the years. However, the sales growth achieved by the company over the years is 20%, which is higher than its SSGR. Therefore, investors would expect that the company would have to raise debt from additional sources to fund its growth. However, in the case of Sreeleathers Ltd, the company has remained debt-free for almost all of the previous 10 years (FY2009-18).

While reading the SSGR article shared above, the investor would notice that the fundamental concept in SSGR is that a company needs to invest in fixed assets to grow its business and sales. However, in the case of Sreeleathers Ltd, the sales growth of the company over the last 10 years has happened without any major investment in fixed assets (i.e. capital expenditure).

Therefore, it becomes essential for investors to understand the sources from which Sreeleathers Ltd has met its requirement of footwear to generate sales growth. As discussed above, if the business/sales of the company have grown by using the previously unutilized manufacturing capacity, then it becomes important to know the current capacity utilization. This is because the knowledge of current capacity utilization will help the investor to assess the sales revenue that Sreeleathers Ltd can ascertain from currently available manufacturing capacity. In case, the company is nearing the optimal utilization of its manufacturing capacity, then it may have to incur significant capital expenditure in the near future to maintain its growth trend.

However, if the investor gets to know that Sreeleathers Ltd has met the additional requirement of footwear for sales growth by sourcing it from other manufacturers, then she may assume that the company may have the potential to meet its future requirements as well by outsourcing. However, in such a case, it remains to be seen whether Sreeleathers Ltd is able to control the quality of shoe manufactured by its suppliers.

Therefore, it becomes important for an investor to get the key aspect of the business model of Sreeleathers Ltd in terms of in-house manufacturing or outsourcing for generating future growth. This is essential for an investor to estimate the future capital requirements of the company.

2) Free Cash Flow Analysis of Sreeleathers Ltd:

While looking at the cash flow performance of Sreeleathers Ltd, an investor notices that during FY2009-18, the company had a cumulative cash flow from operations of ₹88 cr. However, during this period it did a capital expenditure (capex) of only ₹8 cr. As a result, it had a free cash flow of ₹80 cr. (88 – 8).

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

While analysing the past annual reports of Sreeleathers Ltd, an investor would notice that the company has used this FCF in various manners:

1. A small amount of dividend payments to the shareholders: The company has used the FCF to pay a dividend of about ₹4 cr. (excluding dividend distribution tax) to the shareholders.
2. Cash & equivalents and investment in financial assets: At March 31, 2018, Sreeleathers Ltd has cash & investments of about ₹103 cr.

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 Sreeleathers Ltd:

On analysing Sreeleathers Ltd, an investor comes across certain other aspects of the company:

1) Management Succession of Sreeleathers Ltd:

While analysing the annual reports of Sreeleathers Ltd, an investor notices Mr. Sumanta Dey, who is the son of Mr. Satya Brata Dey (MD of the company), is part of the board of directors of the company. Information Memorandum, BSE, May 2013, page 31:

However, an investor would notice that he is a non-executive director of the company. Therefore, it is not certain whether Mr. Sumanta Dey would be taking up the active management of Sreeleathers Ltd going ahead.

Moreover, as per recent corporate announcement by Sreeleathers Ltd to BSE, Ms. Rochita Dey, who is the daughter of Mr. Satya Brata Dey (MD of the company), has joined the company as an additional director.

Corporate announcement, BSE, December 26, 2018:

Ms.Rochita Dey has been appointed as an Additional Director by the Board of Directors w.e.f. 26.12.2018 and who holds office until the date of the next Annual General Meeting in terms of Section 161 of the Companies Act, 2013.

Ms. Rochita Dey is a young and energetic person and the Board considers that her appointment as Addl. Director on the Board of the Company will be beneficial to the Company. She is the daughter of Mr.Satyabrata Dey, Managing Director of the Company.

Moreover, as per the interview given by Mr. Satya Brata Dey to newspaper Business Line on December 26, 2018, Ms. Rochita Dey is going to play an active part in the management of the company.

“Post listing, our share prices were on the rise but we focussed more on consolidation. This organisation is run like a family and our employees consider this as a family business. So I wanted to keep it small and well knit. But now we are thinking (of expansion) mainly because my next generation – my daughter – is coming into this and she is interested in the business,” Dey told BusinessLine.

Therefore, going ahead it seems that instead of Mr. Sumanta Dey, Ms. Rochita Dey will carry the business ahead.

Nevertheless, the presence of Rochita and Sumanta on the board of the directors indicates that the company has put in place a management succession plan in which the new generation of the promoter family will be groomed in business while the senior members of the promoter family are still playing an active part in the day-to-day activities.

Presence of a well thought out management succession plan is essential in case of promoter run businesses as it provides for smooth transition of leadership over the generations and provides continuity in the business operations of any company.

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

2) Related party transactions of Sreeleathers Ltd:

While reading the past annual reports of the company, an investor would notice that Sreeleathers Ltd has consistently been dealing with multiple related parties in different transactions of sale & purchase of goods, giving & receiving loans etc.

For example, as per FY2018 annual report, page 73, Sreeleathers Ltd has been involved in the purchase of goods as well as the sale of goods with related parties every year.

An investor would appreciate that when publicly listed companies with promoters’ entities/related parties, then there is a probability of promoters taking out economic benefits out of the company in the form of mispricing of purchases and sales of good transactions. If related parties purchase goods from the public listed company at a cheaper price or the related parties sell goods to the public listed company at a higher price, then the related parties benefit at the cost of the public listed company. Moreover, the promoter being the common entity controlling both the public listed company and related parties is the ultimate beneficiary whereas the public/minority shareholders who do not have direct control end up losing their economic interest.

There have been multiple cases in the past where promoters of public listed companies have taken out money from these companies by way of related party transactions.

One of the recent cases where promoters took out money from the public listed company by way of loans is the case of Religare group companies including Fortis Healthcare:

• SEBI finds diversion of ₹2,315 crore from two Religare firms to Singh brothers (Livemint)
• SEBI directs Fortis firms to recover ₹403 cr from Singh brothers, 7 others (Livemint)

Another recent case where the promoters of a listed company are alleged to benefit themselves via business transactions with related parties is the case of Sun Pharma and its dealings with a related party Aditya Medisales:

• Huge Transactions between Aditya Medisales and Private Companies of Sun’s Promoters (Moneylife)
• The Nexus Between Sun Pharma, Aditya Medisales And Dilip Shanghvi (BloombergQuint)

Therefore, it is advised that investors should be cautious whenever they notice business dealings between publicly listed companies and other related party companies, which are owned/controlled by promoters & their relatives. Investors should monitor related party transactions closely as these may turn out to be instances of promoters taking the economic value out of the company.

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

In its information memorandum submitted to BSE in May 2013, Sreeleathers Ltd has highlighted that it has entered into transactions with entities belonging to the promoter group. Sreeleathers Ltd has cautioned the public shareholders that these transactions may have an adverse impact on its business.

Information memorandum, May 2013, page 8:

6) We have entered into certain related party transactions and continue to rely on some of our Promoters, Directors & Promoter Group Entities for certain key support activities. There can be no assurance that such transactions, individually or in the aggregate will not have an adverse effect on our business, financial condition and results of operations.

In fiscal 2012 we entered into related party transactions. These transactions or any future transactions with our related parties could potentially involve conflicts of interest.

Moreover, the company has also highlighted that the promoters of the company have many other companies in the same line of business, which have competing interests. This conflict of interest of promoters may affect the economic interest of the company and its shareholders including public/minority shareholders.

Information memorandum, May 2013, page 8:

Our Promoter Group may have a conflict of interest as some of our Group Entities are in the same line of business.

Some of our Group Entities are in the same line of business as our Company. Hence, our Company may not get the full benefit of our Promoters’ focused attention and managerial skills. This may result in conflict of interest between our Promoter and the business strategies of our Company.

3) Sale of a property by the company to the daughter of the managing director of Sreeleathers Ltd:

As per the corporate announcement by the company to Bombay Stock Exchange (BSE) on August 22, 2018, Sreeleathers Ltd sold a property located at 178 Rashbehari Avenue, Kolkata-700029 to Ms. Rochita Dey who is the daughter of the MD of the company, for ₹15.5 cr.

BSE announcement, August 22, 2018, page 3:

It is advised that investors may do their due diligence about the property and the transaction value to ascertain whether the same is in line with the prevailing market prices in the region. This is because in case the potential benefit to be drawn from the property is more than ₹15.5 cr, then it may be an economic loss to the public/minority shareholders.

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

4) Investments by Sreeleathers Ltd in promoter’s companies:

While analysing past annual reports of the company, an investor would notice that Sreeleathers Ltd has invested in promoter group companies.

FY2010 annual report, page 30:

FY2015 annual report, page 48:

FY2018 annual report, page 60:

Further advised reading: Understanding the Annual Report of a Company

An investor would notice that the above companies, which have received investments include:

• Sumanta Susanta Overseas (P) Ltd, which is a related party as per the latest disclosures.

FY2018 annual report, page 73:

• Shoeline Trading Pvt Ltd is a company through which the promoters own shares in Sreeleathers Ltd.

FY2018 annual report, page 19:

• The case of the third company Sreeleathers Overseas Limited is a curious one:

a) Curious case of Sreeleathers Overseas Limited:

As per the annual reports available on the website of the company (FY2009 to FY2018), an investor notices that Sreeleathers Ltd had an investment in Sreeleathers Overseas Limited since before FY2009. The same is also visible in the screenshots shared above.

Sreeleathers Ltd continued this investment until FY2015 when it sold/wrote off this investment. During these years, the company never disclosed the name of Sreeleathers Overseas Ltd as a related party in the annual report. E.g. FY2013 annual report, page 32:

As per the disclosure above, the auditor relied on the list of the related parties as provided to it by the company.

However, when an investor searches about the Sreeleathers Overseas Ltd, then she finds out that the directors of this company contain Mr Satya Brata Dey, who is MD of Sreeleathers Ltd and Mr Sekhar Dey, who is the brother of Satya Brata Dey. (Source: Zaubacorp)

Information memorandum, May 2013, page 39:

The above analysis indicates that Sreeleathers Ltd had invested in a company, which is controlled by the promoter group; however, it did not disclose it as a related party in the annual report. It seems that the company can do better on its level of disclosure on related parties.

Moreover, investments by any public listed company in related parties amounts to giving resources belonging to the public shareholders to promoters. Therefore, investors should keep a close watch on the investments done by Sreeleathers Ltd in related parties.

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

b) The case of Shoeline Trading Pvt. Limited:

As per the above discussion, an investor would notice that Sreeleathers Ltd has made investments in Shoeline Trading Pvt. Ltd (STPL). The investor would also remember that STPL is one of the companies through which promoters own their shareholding in Sreeleathers Ltd.

Such cases of investment by public listed companies in related parties, which are a part of promoters’ shareholding present a unique situation.

Investors would note that on March 31, 2018, the promoters own 64.55% stake in Sreeleathers Ltd. Therefore, any resource including money/cash owned by Sreeleathers Ltd can be assumed to be 64.55% owned by the promoters. However, when Sreeleathers Ltd invests this money in any promoter owned/related party e.g. STPL, then this money becomes 100% controlled by the promoters.

Taking the argument further, suppose that the related party e.g. STPL uses this money to purchase one share of the public listed company Sreeleathers Ltd, then the promoters’ get to increase their stake in the public listed company by a full share by effectively paying only 64.55% of the value of this share.

This also become a case where effectively the minority/public shareholders finance the promoters’ increase in stake in the public listed company. This is because, in the above example, minority shareholders have given their 35.45% share of the money to STPL to increase promoters’ stake in Sreeleathers Ltd.

Also read: How Promoters use Loopholes to Inflate their Shareholding

To summarize, when promoters make public listed companies invest in related parties and then use this investment to purchase shares of the public listed company, then it is a case of the promoter using the share of minority shareholders to their personal benefit.

If an investor wishes to read another such case, where a public listed company made investments in a related party company, which was used by promoters to own stake in the public listed company, then she may read the case of Dynemic Products Ltd.

Further advised reading: Analysis: Dynemic Products Ltd

Going ahead, investors should keep a close watch on the investments done by Sreeleathers Ltd in related party/promoter-owned companies.

5) A loan is taken by Sreeleathers Ltd that was not needed at all:

While reading past annual reports of the company, an investor would notice that Sreeleathers Ltd borrowed ₹11.5 cr via an unsecured loan in FY2014.

FY2014 annual report, page 37:

While reading the annual reports for FY2014 and FY2015, an investor would note that Sreeleathers Ltd did not use this loan for any capital expenditure. Instead, in FY2014, the company took this loan and invested it in mutual funds. The analysis of cash flow statement esp. the cash flow from investing activities provide the following insights.

FY2015 annual report, page 42:

Looking at the above cash flow from investing activities section, an investor would notice that in FY2014, Sreeleathers Ltd invested only ₹0.37 cr in fixed assets. However, during FY2014, the company invested ₹17.5 cr in mutual funds. In the above statement, an investor would also note that in FY2015, Sreeleathers Ltd invested only ₹0.07 cr in fixed assets.

The above cash flow statement shows that in FY2015, Sreeleathers Ltd sold mutual funds and withdrew ₹2.7 cr. The company apparently used this money to repay the loan taken in the previous year as at the end of FY2015, the loan amount was reduced to ₹2.83 cr.

Further advised reading: Understanding the Annual Report of a Company

Moreover, if an investor analyses the cash & investment situation of Sreeleathers Ltd from FY2013 onwards, then she realizes that the company always had a significant cash balance and was not in a need of funds.

Therefore, it seems that Sreeleathers Ltd took a large loan in FY2014 when it already had cash & investments of ₹17 cr. The company did not use this loan for any capital expenditure/business purpose but invested it in debt mutual funds. The company repaid most of this loan in FY2015.

FY2014 annual report, page 39:

While analysing FY2015 annual report, an investor gets to know that in FY2014, Sreeleathers Ltd accrued (i.e. liable to pay but has not yet paid) an interest of about ₹0.81 cr on the loan amount of ₹10.75 cr, which comes to be an interest rate of about 7.5%.

FY2015 annual report, page 18:

An investor would appreciate that there seem to be no requirement for the company for taking this loan when it already had surplus cash available with itself. Sreeleathers Ltd received the money, paid interest of 7.5% on it, invested it in debt mutual funds that give almost similar returns and then paid back most of the money next year. This seems like providing a temporary home to someone else’s money.

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

Moreover, while analysing the FY2018 annual report, an investor notes that Sreeleathers Ltd has taken another advance/loan of ₹14 cr in FY2018.

FY2018 annual report, page 70:

Investors may observe that this advance of ₹14 cr received by the company is:

• Not an advance from customers as there is a separate entry in the above table for “Advance From Customer”
• Not an advance from sellers/retailers as there is a separate entry in the above table for “Advance from Seller”
• Not a security deposit from agents as there is a separate entry for “Security Deposit from agents” in the FY2018 annual report on page 69 in the Note 16: Other Non-Current Liabilities

Moreover, in FY2018, Sreeleathers Ltd has not used this advance of ₹14 cr in capital expenditure but it has put most of this money in mutual funds. In FY2018, the company spent ₹0.08 cr on the purchase of fixed assets.

FY2018 annual report, page 51:

Investors may contact the company to seek clarifications about the loan of ₹11.5 cr taken in FY2014 and the requirements of the company, which led it to take this loan. Moreover, investors may also seek clarification about the nature of the advance of ₹14 cr taken by the company in FY2018 and the requirements of the same when it already has about ₹103 cr in cash & investments at the end of FY2018.

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

6) Classification of loan as a cash inflow under operating activity by Sreeleathers Ltd:

An investor would appreciate that a cash inflow, which is labelled as a loan should be classified as cash inflow under financing activities (CFF). This should not be classified as an inflow under operating activities (CFO). This is because such misclassification of loan funds inflates the CFO. This leads to an erroneous interpretation of CFO as investors may misinterpret it as a very good business performance during the year whereas the company may not have performed well.

However, while analysing Sreeleathers Ltd, an investor notices that the company has done this misclassification of cash inflow with respect to the unsecured loan discussed above, which was raised by it in FY2014.

In FY2014 cash flow statement, an investor would notice that Sreeleathers Ltd reported a CFO of about ₹19.7 cr. The largest contributor to the CFO was an increase of ₹11.5 cr in other current and non-current liabilities.

FY2014 annual report, page 33:

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

While going through the details of other current and non-current liabilities in the annual report, the investor notices that the increase in these liabilities in FY2014 is due to the unsecured loan of ₹11.5 cr discussed above.

FY2014 annual report, page 37:

An investor would appreciate that Sreeleathers Ltd should have classified this unsecured loan as a cash inflow under financing activities instead of a cash inflow under operating activities. Such misclassification leads to an erroneous interpretation of cash flow from operations.

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

7) Sreeleathers Ltd not sharing the profits of business with minority shareholders:

An investor would notice that Sreeleathers Ltd paid its last dividend in FY2014. Since FY2015, the company has not paid any dividend. While reading the annual reports for this period, an investor notes that every year, the company has mentioned that they want to conserve cash to expand the business.

FY2015 annual report, page 2:

Your Directors regret for not recommending any dividend for the year under review. The directors foresee to make further expansions in business and for this, the profits are ploughed back.

FY2016 annual report, page 3:

Your Directors regret for not recommending any dividend for the year under review. The directors foresee to make further expansions in business and for this, the profits are ploughed back.

FY2017 annual report, page 2:

Your Directors does not recommend any dividend for the year under review. The director’s foresee to make further expansions in business and for this, the profits are ploughed back.

FY2018 annual report, page 3:

Your Directors do not recommend any dividend for the year under review. The directors foresee to make further expansions in business and for this, the profits are ploughed back.

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

As discussed above in the section on business growth of Sreeleathers Ltd., an investor would note that the company primarily relies on outsourcing of manufacturing of footwear; therefore, it does not do a lot of capital expenditure. As a result, an investor notices that since FY2015, the company has had higher profits year after year; it has not done any capital expenditure during this period. However, it has denied dividends to minority shareholders.

The above table highlights that since FY2015, despite increasing profits, the company has not paid any dividends. Moreover, the company has not done any capital expenditure as well. As a result, the company has been accumulating cash with itself. Over the last 4 years (FY2015-18), the cash and investments with the company have increased from ₹35 cr to ₹103 cr.

It seems like a case where the company is keeping cash/business profit without sharing it with minority shareholders.

8) Buyback of shares by Sreeleathers Ltd in which no share was bought back:

In FY2018, the company announced a buyback plan for ₹32.9 cr. It seemed like a step to distribute money to shareholders.

(Read how now a day, buybacks are replacing dividends as a method to pay shareholders: Share Buyback: An Investor’s Guide)

The company announced to stock exchanges on Oct. 10, 2017, that it would conduct a board meeting on Oct. 14, 2017, to consider a buyback of shares.

BSE Announcement Oct. 10, 2017:

We would like to inform you that a meeting of Board of Directors of the Company is scheduled to be held on Saturday. October 14th. 2017 at 3.00 PM to consider, approve and take on record the following:

1. Proposal for Buyback of Equity Shares of the Company, quantum & mode of buyback, constitution of buyback committee. for the purpose of buyback and other incidental matters thereto.

On Oct. 14, 2017, the company informed the stock exchanges that its board of directors have approved a buyback of shares of the company at a maximum price of ₹156/- and a total amount of ₹32.9 cr.

BSE Announcement Oct. 14, 2017:

We wish to inform you that the Board of Directors of the Company at their meeting held today has approved the following:

1) Buyback of its fully paid-up equity shares of the face value of Rs. 10 each (hereinafter referred to as the “Equity Shares”) at a price not exceeding Rs. 156.00 per Equity Share (the “Maximum Buyback Price”) for a maximum amount of Rs. 32,90,00,000 (Rupees Thirty ‘Iwo CroresNinety Lacs Only) (the “Maximum Buyback Size”), which is less than 15% of the paid-tap capital and free reserves of the

However, when an investor notices the share price of Sreeleathers Ltd from about one month prior to the board meeting of the decision on buyback price, then she notices that the share price of the company continuously closed above ₹160/-, which is higher than the maximum buyback price of ₹156/-.

The closing share price of Sreeleathers Ltd on BSE from Sept 15, 2017, to Oct. 15, 2017:

Therefore, it seems that both at the time of planning the board meeting for buyback (Oct. 10, 2017) as well as on the day of the board meeting (Oct. 14, 2017) when maximum buyback price was decided to be ₹156/-, the company knew that its maximum buyback price is below the prevailing price of its shares in the stock market.

Investors would appreciate that generally, companies announce their buyback at a premium to the prevailing share price to incentivize the investors to sell/tender their shares to the company.

In the case of Sreeleathers Ltd., the company did not provide any premium on the prevailing market price. On the contrary, it announced a buyback at a price lower than the prevailing market price.

Eventually, the buyback period was over without a single share being bought back by Sreeleathers Ltd. As per the “Report on Buyback of equity shares of Sreeleathers Ltd. 01-06-2018” available on the website of the company (Click here), the company did not buy any share in the buyback offer.

Investors would note that the date of update in the above screenshot seems to be March 23, 2018. However, unfortunately, in all the reports after March 23, 2018, on this page on Sreeleathers Ltd website, i.e. in all the reports from March 24, 2018, to June 1, 2018, the date of update is March 23, 2018. It can be a human error in which the person relied on the copy & paste method while preparing the reports. Therefore, he/she did not update the date when updating the daily buyback status report.

Nevertheless, the buyback offer indicated that the company does not have any immediate capital expansion plan/alternate avenue to invest its cash. Therefore, it tried to use the buyback of shares as an attempt to return the money to shareholders.

However, when the buyback offer failed to buy any share due to the low price of the buyback, the company did not come up with an alternate method to return money to shareholders like dividend payment etc.

An investor would note that both the above events: lack of dividend despite rising cash reserves and announcement of buyback below the prevailing share price may indicate that the company is reluctant to share its cash/business profits with minority shareholders.

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

9) The contrasting trend in the salaries of MD of Sreeleathers Ltd and its employees:

While analysing the remuneration of employees of the company, an investor notices that recently, year after year, the remuneration of the managing director who is the promoter of the company is increasing in line with increasing profits. However, the remuneration of many other employees is decreasing year on year.

As per FY2018 annual report, the remuneration of MD of the company increased by 60% due to the good performance of the company whereas remuneration of CFO decreased by 6%. The remuneration of employees declined by about 20%.

FY2018 annual report, page 8:

The % increase in the remuneration of each Director, Chief Financial Officer, Chief Executive Officer, Company Secretary or Manager, if any, in the financial year:

Satyabrata Dey (Managing Director) 60.00%

Bijoy Kumar Roy (Company Secretary) 9.52%

Sujay Bhattacharya (Chief Financial Officer) -6.10%

Moreover, when a person analyses the remuneration increases for the previous year (FY2017), then she notices that in FY2017, the remuneration of the MD/promoter of the company had increased by 150%, whereas the remuneration of other two key employees: company secretary and CFO had declined by 10% and 11% respectively.

The % increase in the remuneration of each Director, Chief Financial Officer, Chief Executive Officer, Company Secretary or Manager, if any, in the financial year:

Satya Brata Dey (Managing Director) 150%

Bijoy Kumar Roy (Company Secretary) -10.78%

Sujay Bhattacharya (Chief Financial Officer) -11.67%

Looking at the above data, an investor would sympathize with the situation of the CFO of the company, Mr. Sujay Bhattacharya who is working with the company with declining remuneration for two years in the row while the company is reporting highest ever sales and profits.

Looking at the normal aspirational nature of human being, an investor may assume that:

• Either the workforce (with the CFO as an example) is subpar, who are not able to find better job alternatives, which may reward the hard work put in by employees in the company’s success. This does not seem to be the case as it is difficult for any company to grow its business without efficient hard work by its employees.
• Alternatively, the “additional incentives” other than the remuneration reported in the annual report, which are given by the company to its employees are good enough for them to stay with the company.

Further advised reading: How to identify Promoters extracting Money via High Salaries

10) The curious case of trade payables to Sumanta Susanta Overseas (P) Ltd:

While analysing the related party transactions in the FY2018 annual report, an investor notices that Sreeleathers Ltd has shown certain transactions with Sumanta Susanta Overseas (P) Ltd (SSOPL), which are related to:

• Purchase of goods and
• The trade payables that should be related to these purchases.

Apart from these two sections, the name of Sumanta Susanta Overseas (P) Ltd (SSOPL) does not appear in any other relation in the entire annual report. Therefore, an investor may assume that the only transactions that Sreeleathers Ltd had with SSOPL were the purchases of goods. Therefore, the trade payables to SSOPL should be for these purchases.

When an investor notices the amount of trade payables to SSOPL, then she notices that the trade payables are higher than the amount of purchases done by Sreeleathers Ltd in FY2018.

FY2018 annual report, page 73-74:

An investor would note that in FY2017, there was no trade payable for SSOPL. It indicates that Sreeleathers Ltd has made all the payments due to SSOPL for all the purchases done by it until FY2017. Therefore, the trade payables in FY2018 are only related to the purchases done by Sreeleathers Ltd from SSOPL in FY2018.

As per the above table, in FY2018, Sreeleathers Ltd purchased goods of about ₹0.72 cr from SSOPL. However, it has shown trade payables of ₹0.79 cr.

Investors may seek clarifications from the company about the excess of trade payables over the amount of purchases done by Sreeleathers Ltd from SSOPL. One explanation that may come to investors’ mind is that the excess amount of ₹0.07 cr (0.79 – 0.72) can be the interest being paid by Sreeleathers Ltd to SSOPL for the credit period. However, investors would note that this amount to an interest rate of about 10% on trade payables, which is high considering that Sreeleathers Ltd is a cash surplus company that has its investments in debt mutual funds. The debt mutual funds give returns of about 6-7% per annum. Therefore, there is no point in delaying payments to any supplier and in turn pay 10% interest on the same whereas the company’s cash is earning 6-7% in mutual funds.

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

11) The curious case of negative trade receivables of Sreeleathers Ltd

While analysing the FY2016 annual report, an investor notices that the company has shown that it has negative trade receivables of ₹ (0.52) cr outstanding for less than 6 months.

Further advised reading: Understanding the Annual Report of a Company

An investor would appreciate that trade receivable is the money that a company has to collect from its customers for the goods sold by the company to these customers. In all probability, trade receivable is a positive number. That is why it is called “receivables”.

Negative trade receivables may indicate a few possible scenarios:

• The customer has paid more than the amount of goods supplied by the company and therefore the company has received excess money. However, this is usually called an advance from the customer in the liabilities and is not shown as negative trade receivables.
• The other possibility can be that the customer has found the good supplied by the company as defective/unacceptable quality and therefore, the customer has returned the goods and the customer is now asking for a refund/return of the money paid by it to Sreeleathers Ltd for these goods. However, these cases are usually shown as liabilities under provisions. Moreover, it also raises questions about the quality of the goods supplied by the company.

Investors may contact the company and seek clarifications about these negative trade receivables, the details of the customers with negative trade receivables and the reasons for the same.

12) Legal disputes against Sreeleathers Ltd and its MD, Satya Brata Dey:

While going through the information memorandum submitted by the company to BSE in May 2013, an investor finds that there are many legal disputes pending against Sreeleathers Ltd (or under its previous name Cat Financial Services Ltd) and its promoter Ms. Satya Brata Dey.

Information memorandum, May 2013, page 47:

Out of the above disputes, an investor may especially focus on the following ones:

• Dispute no. 1 filed by the Govt. against the MD, Mr Satya Brata Dey under Wildlife Protection Act. Investors may note that many sections of the Wildlife Protection Act involve criminal charges where a person may be jailed if proven guilty. Therefore, it is essential for investors to get details of this case along with its current status. Any possibility of the key promoter member receiving a jail term is harmful to the company and its business. Therefore, investors may seek clarifications from the company about his case.
• Dispute no. 7 under Trademark Registry. An investor may seek clarification from the company about the nature of this dispute and the trademark over which the rights are being contested by the parties. In case, the dispute is about the key brand name and the company loses its right to the brand name, then it may prove harmful for the business.
• Dispute no. 5, which is a civil dispute that seems to be filed against the company before amalgamation in FY2009 as the name of the party is mentioned as Cat Financial Services Ltd. Investors may seek details of this dispute from the company and whether it involves any monetary compensation demanded by the counterparty. If yes, then what is the amount of compensation sought by the counterparty? This is because if the amount of compensation is high and the case is settled against the company, then it may have a significant impact on the financial health of the company.

Investors would note that the company has disclosed many of these key disputes only in the information memorandum to the BSE in May 2013 and has not mentioned them in the annual reports. Therefore, it is essential to investors to know the current status of these disputes as well as if there are any new disputes filed against the company and its directors post the date of the above-mentioned information memorandum.

Investors may contact the company and seek further details.

13) Errors in the annual reports of Sreeleathers Ltd:

While reading the past annual reports of the company, an investor notices that the company has done some mistakes while referring to the additions & deductions in the gross block in the fixed assets schedule for FY2016 in subsequent annual reports.

In the FY2016 annual report at page 48, an investor would notice that in FY2016, Sreeleathers Ltd made an addition of assets worth ₹74,000/- (mobile phones) and as a result, its gross block increased from ₹1,657,419,084.13 to ₹ 1,657,493,084.13.

However, in the fixed assets schedule of FY2017, when the company referred to the transactions of FY2016 as the previous year, then the company did certain errors:

• The company showed the closing gross block of FY2016 as an amount under deductions and
• The company showed the opening gross block of FY2016 as the closing gross block.

FY2017 annual report, page 46:

The company repeated the same mistake in the FY2018 annual report on page 66:

Further advised reading: Understanding the Annual Report of a Company

Other queries:

• With regard to the query about the sale of goods by the company to M/s Sreeleathers, then investors may note that M/s Sreeleathers and Sreeleathers Ltd are two different entities. M/s Sreeleathers seems like a proprietary or partnership firm as it lacks “Limited” in its name.

Margin of Safety in the market price of Sreeleathers Ltd:

Currently (April 5, 2019), Sreeleathers Ltd is available at a price to earnings (PE) ratio of about 20.7 based on the earnings of the last 12 months ending December 2018.

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

Analysis Summary

Overall, Sreeleathers Ltd seems a company, which has grown over the last decade at a good pace while improving its profit margins. The company is consistently able to pass on the increase in raw material/purchase costs to its customers, which shows its competitive strengths.

Sreeleathers Ltd has been able to grow its business over the last decade without any significant capital expenditure. It seems that the company follows an outsourcing model where it uses other manufacturers to make footwear for it. As a result, the company is able to meet the increasing requirements of footwear for sales growth without investing a lot of money. Instead, the number of employees of the company is coming down, whereas its sales are increasing year on year.

Because of low capital expenditure and increasing sales and profits, the company has been accumulating cash year on year. At March 31, 2018, the company had cash & investments of about ₹103 cr.

However, when an investor studies the company’s past, then she notices that the company does not seem to be willing to share the fruits of business/profits with minority shareholders. The company stopped paying dividends since FY2015 while saying that it plans to invest cash in expansion plans. However, the company has done little capital expenditure since FY2015 and the cash reserves are increasing.

The company came out with a buyback offer for ₹32.9 cr in FY2018. However, the maximum price for the buyback was announced at a lower price than the prevailing share price. As a result, no share was bought in the buyback period. Moreover, despite the failure of buyback offer, the company still did not announce any dividend to shareholders.

Sreeleathers Ltd has been involved in multiple sales, purchase, investment transactions with related parties/promoter entities. The company recently sold a property to the promoter’s daughter. These transactions have the potential of shifting the economic benefits of the resources of the company to the promoters at the cost of minority shareholders. Therefore, investors need to monitor these transactions.

While analysing the annual reports of the company, an investor realizes that Sreeleathers Ltd has not disclosed many key information pieces in the annual reports. For example, the related party status of Sreeleather Overseas Ltd is not disclosed, where the promoters are directors and Sreeleathers Ltd made investments. Similarly, the company has not disclosed many legal disputes against the company and its promoters in the annual reports.

Investors find that in the past Sreeleathers Ltd has availed loans even when it did not need them. The company raised a loan of ₹11.5 cr in FY2014 and put it in debt mutual funds. The company did not do any capital expenditure with the money but repaid most of it the next year. Similarly, in FY2018, the company has raised an advance of ₹14 cr for which no additional details are provided. The company has invested most of this advance in mutual funds.

The company has classified cash inflow on account of the unsecured loan as an inflow under operating activities instead of an inflow under financing activities. As a result, any investor may overestimate the cash flow from operating activities of the company in her analysis.

While analysing the company, an investor notices that during recent years, the company has grown its sales and profits to all-time high. However, only the managing director (promoter) of the company seems to benefit from the growth in terms of a significant increase in remuneration. The remuneration of the managing director/promoter increased by 150% increase in FY2017 and by 60% increase in FY2018. On the other hand, the remuneration of other key employee like the CFO declined both in FY2017 and in FY2018. This different treatment of a different set of employees in terms of remuneration increase deserves the attention of investors.

Investors may contact the company and seek clarification about multiple aspects like the remuneration issue discussed above as well as the current status of the legal disputes. Investors may also seek details about the negative trade receivables disclosed by the company in one of the years as well as the reasons for trade receivables being more than total purchases from one of the related parties for the year.

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

Going ahead, the investor may monitor the related party transactions of the company including sales, purchases and investments in promoter entities. Investors may closely monitor the usage of cash reserves of the company. Investors may track whether the company shows any inclination to share it with the shareholders. This is very important because a situation where a company generates a lot of cash, which it is not able to invest and it is not willing to share with shareholders, is a highly probable case where the cash may be squandered/mis-utilized. Therefore, investors need to keep a close watch on the usage of cash reserves by the company.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on Sreeleathers 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!

Regards,

Dr Vijay Malik

P.S.

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Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

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