Analysis: Tembo Global Industries Ltd

The current section of the “Analysis” series covers Tembo Global Industries Ltd previously known as Saketh Exim Ltd, active in manufacturing pipe hangers & support systems and trading textiles. Recently, the company has entered into the engineering, procurement and construction (EPC) business and is also trying to venture into the fields of arms manufacturing and solar power.

Please note that to get maximum benefit from this article; an investor should focus on the analysis process instead of looking for good or bad aspects of the company. She should learn the interpretation of diverse 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.

Tembo Global Industries Ltd: Detailed Fundamental Analysis

Tembo Global Industries Ltd has investments in various subsidiaries. As a result, Tembo Global Industries Ltd reports both standalone as well as consolidated financials.

Currently, the company has the following subsidiaries and associate companies:

• Wholly owned subsidiaries (WOS): Tembo Global LLC, Tembo USA Inc, PES Joint Venture and Tembo Global Solar Power Pvt Ltd and
• an associate Company Tembo Project Limited.

The company did not have any subsidiaries until FY2019. Therefore, it reported only standalone financials until FY2019. Thereafter, it formed subsidiaries and started reporting both standalone as well as consolidated financials.

We believe that while analysing any company, an investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire company including its subsidiaries, joint ventures etc. Consolidated financials of a company present such a picture. Therefore, if a company reports both standalone as well as consolidated financials, then the investor should prefer the analysis of the consolidated financials of the company.

As a result, while analysing the past financial performance of Tembo Global Industries Ltd, we have analysed its standalone financials until FY2019 and consolidated financials from FY2020 onwards.

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

With this background, let us analyse the financial performance of Tembo Global Industries Ltd.

Financial and Business Analysis of Tembo Global Industries Ltd:

In the last 10 years (FY2015-FY2024), the sales of Tembo Global Industries Ltd have increased by 31% year on year, from ₹37 cr in FY2015 to ₹432 cr in FY2024. Moreover, in the 12 months ended September 30, 2024 (i.e. Oct. 2023-Sept 2024), the company reported a further growth of its sales to ₹529 cr.

However, over the years, the operating profit margin (OPM) of Tembo Global Industries Ltd has seen fluctuations between 4% to 9%. The OPM was 4% in FY2015, improved to 9% in FY2019 and then declined to 4% in FY2024. Thereafter, the OPM increased to 6% in the 12 months ended September 30, 2024 (i.e. Oct. 2023-Sept 2024).

The net profit margin (NPM) of Tembo Global Industries Ltd has shown similar fluctuations from 1.1% to 3.4% during the last 10 years (FY2015-FY2024). In the 12 months ended September 30, 2024 (i.e. Oct. 2023-Sept 2024), the company reported an NPM of 5.1%.

To understand the reasons for the business growth of Tembo Global Industries Ltd along with fluctuations in its profit margins, an investor needs to read the publicly available documents of the company like its annual reports, red herring prospectus (RHP) for its initial public offer (IPO) in FY2019, letter of offer for its rights issue in FY2023, credit rating reports by CRISIL and CARE and its corporate announcements submitted to stock exchanges.

In addition, an investor should also read the following article on conducting business analysis of companies active in the textile, steel and trading industries:

• How to do Business Analysis of Textile Companies
• How to do Business Analysis of Steel Companies
• How to do Business Analysis of Trading Companies

The above-mentioned documents show that the following key factors have influenced the business of Tembo Global Industries Ltd, which are critical to understanding for any investor.

1) Intense competition in each of the business divisions of Tembo Global Industries Ltd:

Currently, the company operates in two business divisions: pipe hangers & support systems and trading of textiles. In both these divisions, the company faces intense competition.

In both segments, the company faces competition from both domestic and international players. In addition, the business activities in these divisions are not very high value-adding; therefore, there is a large presence of unorganized players, which further increases the competition.

Letter of offer for the rights issue, August 2022, page 90:

There is increasing competition in the pipe support hanger & related metal industry as well as textile Industry. We face competition from both domestic and foreign players. This is an unorganised sector that is fragmented with numerous small and medium-sized enterprises and entities that create these items at various levels.

FY2024 annual report, page 99:

The company faces stiff competition from both domestic and international players in all its business segments

Due to very high competition, the customers of Tembo Global Industries Ltd have an option of buying goods/services from multiple suppliers without any significant impact on their business operations. This, in turn, hurts the pricing/negotiating power of Tembo Global Industries Ltd.

Also read: How to do Business Analysis of a Company

2) Very low negotiating/pricing power of Tembo Global Industries Ltd:

Most of the products and services of the company do not have a very high value-addition and a large number of smaller players are able to provide the same goods. As a result, all these players primarily compete on price to gain market share.

Consequently, companies like Tembo Global Industries Ltd are price takers who have to sell their goods as per competitors’ pricing, which leads to low-profit margins.

RHP for IPO, July 2018, page 23:

The industry, in which we are operating, is increasingly competitive and our results of operations and financial condition are sensitive to, and may be materially adversely affected by, competitive pricing

Due to low pricing power, Tembo Global Industries Ltd is not able to pass on the increase in its input costs to its customers and has to take a hit on its profit margins. As a result, the company’s profitability is highly exposed to volatility in the raw material prices.

Credit rating report by CARE, May 2023, page 2:

The raw material i.e. steel is the major cost driver and the prices of the same are volatile…Company also deals in trading of yarn and prices of which also remain volatile and with limited ability to pass on…increase in material costs would affect the company’s profitability.

As a result of low pricing power, the net profit margin (NPM) of the company is low in the range of 1-3% and has seen fluctuations due to volatility in input costs, which Tembo Global Industries Ltd has faced difficulties in passing on to its customers.

Credit rating report by CARE, May 2023, page 2:

PBILDT margin…declined to 5% in FY22 vis-à-vis 8.05% in FY21 on account of…increase in prices of raw material i.e. steel with limited ability to pass on to customers.

Also read: How to analyse New Companies in Unknown Industries?

3) Growth in the business of Tembo Global Industries Ltd:

Over the years, sales of the company have grown at an annualized rate of 31% over FY2015-FY2024. This growth is impressive. However, when an investor analyses the performance of the company across its different segments, then she notices that most of this growth has come from the trading of fabric and textiles.

As per the below table containing the segmental performance of Tembo Global Industries Ltd over FY2014-FY2024, major growth in the business of the company came from FY2019 to FY2024 when the sales of the company increased from ₹62 cr in FY2019 to ₹439 cr in FY2024.

However, the major contribution to this growth is the textile-trading segment whose sales increased from ₹19 cr in FY2019 to ₹334 cr in FY2024 taking its share in the overall sales from 31% in FY2019 to 76% in FY2024.

An investor would appreciate that trading items like fabric and textiles are low-value-adding activities, in which a company has to buy products from its suppliers and sell them to its customers. Therefore, textile trading is a low-profit margin segment. As a result, the FY2019-2024 period saw the overall operating profit margin of the company decline from 9% in FY2019 to 4% in FY2024.

Also, an investor would note that growing a trading business is comparatively simpler than growing any manufacturing business. This requires making capital investments in plant and machinery and finding long-term customers to recover the investment. However, growth in the trading business is very volatile, and it may witness a quick reversal in case customers switch to other traders to procure goods.

Moreover, currently, the company is constructing a plant to manufacture electric resistance welded (ERW) pipes and struts for about ₹95 cr. The company expects to complete the plant by April 2025.

Credit rating report by CARE, July 2024, page 3:

greenfield project of manufacturing of electric resistance welded (ERW) pipes, struts…in Palghar, Maharashtra…to add installed capacity of 90,000 metric tons of pipes and struts per annum. Total cost of the project is estimated at Rs. 94.87 crore…has started project execution in FY24 and incurred 40% of the cost i.e. Rs. 37.49 crore till June 22, 2024…expected to be operational from April 01, 2025.

Also read: Credit Rating Reports: A Complete Guide for Stock Investors

In addition, the company has also disclosed plans to go for yarn manufacturing after FY2027.

Investors’ presentation, Oct. 2024, page 16:

Planning to set-up In-house Manufacturing of Yarn Post FY27, thereby Tapping Domestic and Exports Demand

An investor needs to keep a close watch on these initiatives of Tembo Global Industries Ltd to see if it is able to successfully execute them.

4) Multiple announcements of new business ventures by Tembo Global Industries Ltd:

Moreover, in recent times, the company has announced its entry into numerous business ventures. For example, in FY2024, the company expressed its plans to enter into Electronic Weighing Scales and Systems.

FY2024 annual report, page 39:

I look forward to your continued support in the coming years to take this Company to the next level of growth and a Leader in Electronic Weighing Scales and Systems in India

In the current year, the company has entered into the Engineering, Procurement and Construction (EPC) business to supply and underlay pipes.

Credit rating report by CARE, July 2024, page 4:

During, FY25, company has forayed into Engineering, Procurement and Construction (EPC) business wherein it undertakes supply and underlaying of pipe activities in across India.

In addition, recently, the company has entered into solar power by making a wholly-owned subsidiary company, Tembo Global Solar Power Private Limited. The company has also announced the signing of a power purchase agreement (PPA) for 124 MW to sell power to the Maharashtra Govt. The project is for about ₹595 cr.

Corporate announcement to National Stock Exchange (NSE), Oct. 15, 2024:

it has secured its first Power Purchase Agreement (PPA) for a 124 MW solar power project with the Maharashtra state government…a total project cost of approximately ₹595 crores. The project is slated for execution within the next 18 months, with the PPA extending for 25 years

In addition, in September 2024, Tembo Global Industries Ltd also announced its entry into the defense sector for manufacturing arms & ammunition for a European company under 100% purchase commitment of the production.

Corporate announcement to National Stock Exchange (NSE), September 11, 2024:

strategic partnership with a leading European company to establish a state-of-the-art arms and ammunition manufacturing facility in India…European company will provide crucial technical expertise and operational support…European partner commits to purchasing 100% of the production output

In light of back-to-back announcements of multiple such initiatives in very diverse fields, an investor needs to be cautious and do close monitoring to assess whether the company is able to successfully execute these ventures.

For initiatives like entering into arms & ammunition manufacturing, an investor should do deeper due diligence as the company has not disclosed the name of the European partner who is willing to place the bet with a commitment to buy 100% of production on Tembo Global Industries Ltd, which has never engaged in defense/arms manufacturing.

An investor needs to be cautious and do her due diligence before she projects the future performance of the company based on such proposed new business ventures.

In the case of Tembo Global Industries Ltd, on February 12, 2024, the company was quick to announce that it has received an order of ₹9.45 cr from Kalpataru Projects International Ltd.

The company hereby announces the achievement of order from Kalpataru projects International Ltd amounting to Rs. 9.45 crores…-civil contracting at Uran in Gas bottling plant expansion project of Bharat petroleum corporation Ltd.

However, just after a couple of days, on February 15, 2024, the company announced that the order had been withdrawn.

Due to unforeseen circumstances, the order for the civil contract by Kalpataru has been delayed, consequently putting our plans on hold. As a result, we regret to inform you that we need to withdraw the order intimation previously communicated.

Moreover, when on the same day (February 15, 2024), the stock exchange (NSE) sought clarifications from the company about this order, then Tembo Global Industries Ltd took almost three months to reply to NSE on May 03. 2024. In its reply, the company stated that it withdrew from the Kalpataru order after meticulously going through the terms and conditions.

Thank you for your correspondence dated February 15, 2024, concerning the withdrawal of the civil contract order with Kalpataru…our initial order for the civil contract with Kalpataru was dated February 12, 2024. Regrettably, following a meticulous review of the terms and conditions. Consequently, in the interest of ensuring a mutually beneficial agreement, we opted to withdraw the order on February 15, 2024…Moving forward, we remain committed to upholding the highest standards of professionalism and timely delivery in all our business dealings.

Such incidents indicate the hurry on the part of the company to make corporate announcements of new orders etc. without properly going through the terms & conditions whereas taking a long time to reply to stock exchanges with clarifications.

On another occasion, in FY2024, the company announced a memorandum of understanding (MoU) with Masah Specialized Construction for making a manufacturing unit in Saudi Arabia, projecting a large business opportunity.

FY2024 annual report, page 53:

Association…with Masah Specialized Construction…joint venture is signed on 26th January, 2023…to partner in new manufacturing factory unit along MASAH in Saudi Arabia…for all types of construction buildings by MASAH in the Kingdom of Saudi Arabia.

However, the initiative did not proceed further and got stuck at the stage of MoU only.

FY2024 annual report, page 89:

The association is still in the initial stage and have not grown after the signing of Memorandum of Understanding;

Also read: How to study Annual Report of a Company

When companies make very frequent and quick announcements about new orders or memorandum of understanding (MoU), an investor should be very cautious because, in the past, there have been instances where companies influenced their share price by making positive corporate announcements, which later on, SEBI found to be false.

For example, take the case of Urja Global Ltd, which made fake announcements of supplying a fake mineral “Zacobite” to a Japanese company, Nippon Shinyaku Co Ltd. The announcement led to a sharp increase in the company’s share price. However, later on, SEBI found that all of it was fake. The Japanese company denied signing any contract with Urja Global. SEBI barred Urja Global Ltd and its executives from the market for 2 years (Sources: SEBI, CNBC TV18)

The top brass of Urja Global — now barred by SEBI from the markets — thought nothing of thinking up the non-existent Zacobite, which it was purportedly going to supply to Nippon Shinyaku Co Ltd. Simply put, Zacobite does not exist. Not on the Periodic Table, not even on a Google search. That’s right. The company decided to sell a product that does not exist.

Therefore, it is advised that investors should be very cautious while analysing corporate announcements made by companies and always cross-check the developments mentioned in these announcements from independent sources like customers, media and govt. authorities’ websites.

Over the years, the tax payout ratio of Tembo Global Industries Ltd has been in line with the standard corporate tax rate in India.

Also read: How to do Financial Analysis of a Company

Operating Efficiency Analysis of Tembo Global Industries Ltd:

a) Net fixed asset turnover (NFAT) of Tembo Global Industries Ltd:

Over the years, the NFAT of the company has seen large fluctuations from 20.6 in FY2016 to 8.3 in FY2021 to 19.4 in FY2024.

The company currently has two business segments: manufacturing of pipe hangers & support systems and trading of textiles. The manufacturing business has a lower NFAT than the trading business because the trading business of textiles does not require a large amount of fixed assets.

Therefore, the NFAT of the company has followed the trend of its product mix. As per the segmental performance table shared above, the share of textile trading in the overall revenue of the company used to be about 81% in FY2014, which started declining as the share of the manufacturing business picked up. The share of the textile business declined to 31% in FY2019, which coincides with the decline in the NFAT.

In recent years, most of the growth in the revenue of Tembo Global Industries Ltd has come from textile trading, which has reached 76% of the business in FY2024. As a result, the NFAT has again increased to 19.4 in FY2024.

Now, the company is in the process of establishing a plant to manufacture ERW pipes. As the new plant starts, it might increase the share of manufactured goods in the revenue, which may lead to a decline in the NFAT going forward.

An investor should monitor the NFAT of Tembo Global Industries Ltd to understand whether it is able to utilize its plant and machinery efficiently.

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

b) Inventory turnover ratio (ITR) of Tembo Global Industries Ltd:

Over the years, the ITR of Tembo Global Industries Ltd has declined from 33.7 in FY2016 to 10.8 in FY2024. The inventory turnover had declined to its lowest, 6.3, in FY2021 as the share of manufacturing business increased. However, with the recent increase in the share of the trading business, the ITR of the company seems to have witnessed an improvement.

Going ahead, an investor should monitor the inventory position of Tembo Global Industries Ltd to assess whether it is able to manage its inventory efficiently.

Further advised reading: Inventory Turnover Ratio: A Complete Guide

c) Analysis of receivables days of Tembo Global Industries Ltd:

Over the years, the receivables days of Tembo Global Industries Ltd have declined from 79 days in FY2016 to 23 days in FY2024. Even though, the receivables days of the company have improved significantly; however, initially, receivables days increased significantly to about 113 days in FY2019, which improved thereafter.

The business of the company is working capital intensive because due to highly competitive business; to gain business, it has to offer longer credit periods to its customers.

RHP for IPO, July 2018, page 73:

Our Company operates in a highly competitive environment…acquiring and retaining large customers requires us to provide them sufficient credit period, which sometimes may be a little higher than general industry standards.

As a result, significant money of the company stays stuck in trade receivables.

Credit rating report by CARE, May 2023, page 2:

The operation of TGIL remained working capital intensive mainly on account of funds being blocked in receivables

Moreover, due to the weak negotiating power of the company both with its customers as well as suppliers, Tembo Global Industries Ltd ends up getting a lower credit period from its suppliers whereas it has to give a longer credit period to its customers. This, in turn, makes its operations highly working capital intensive.

RHP for IPO, July 2018, page 73:

To avail timely raw materials and high quality goods from our suppliers we do not keep a large credit period as compare to trade receivable.

In fact, the working capital requirements of the company are very high as compared to its cash flow generation; so, time and again, it had to dilute its equity to fund its working capital.

For example, in 2018, when the company came out with its IPO, it was almost entirely to fund its working capital. Out of the net proceeds of ₹7.33 cr to be received by the company, ₹7.30 cr was for funding its working capital.

RHP for IPO, July 2018, page 71:

As the company grew its business, its working capital needs grew at a faster pace than what it could generate as cash flows. As a result, in August 2022, the company came out with a rights issue, which was primarily for infusing working capital into the business and for repaying debt.

Letter of offer for rights issue, August 20222, page 52:

As per the recent most results declared by the company, during H1-FY2025, the company had a negative cash flow from operations of about ₹150 cr because about ₹110 cr of its funds got stuck in the increase in trade receivables.

Q2-FY2025 results, page 9:

Going ahead, an investor should watch the trend of receivables days of Tembo Global Industries Ltd to assess whether it is able to collect its receivables on time and whether it is able to keep its working capital requirements under control.

Further recommended reading: Receivable Days: A Complete Guide

When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of Tembo Global Industries Ltd for FY2015-FY2024, then she notices that over the years (FY2015-FY2024), the company is not able to convert its profit into cash flow from operations.

Over FY2015-24, Tembo Global Industries Ltd reported a total net profit after tax (cPAT) of ₹33 cr. During the same period, it reported a cumulative negative cash flow from operations (cCFO) of (₹7) cr.

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

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

Learning from the article on CFO and the fund flow analysis over the last 10 years will show to an investor that the company could not convert its profits into CFO as over FY2015-FY2024, incremental inventory requirements consumed ₹43 cr and increased receivables requirements consumed ₹20 cr of its funds.

Going ahead, an investor should keep a close watch on the working capital position of Tembo Global Industries Ltd.

The Margin of Safety in the Business of Tembo Global Industries Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

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

An investor may calculate the SSGR using the following formula:

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

• SSGR = Self Sustainable Growth Rate in %
• Dep = Depreciation rate as a % of net fixed assets
• NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
• NPM = Net profit margin as % of sales
• DPR = Dividend paid as % of net profit after tax

(For systematic algebraic calculation of SSGR formula: Click Here)

An investor would notice that over the years, Tembo Global Industries Ltd had reported an SSGR of about 13-20% whereas over last 10 years (FY2015-FY2024), it has grown its sales at a rate of 31% year on year. As a result, the company has grown its sales at a rate higher than what its business profits can sustain.

Therefore, in the last 10 years (FY2015-FY2024), Tembo Global Industries Ltd has had to raise a significant amount of additional funds by incremental debt and equity dilution.

The company has raised about ₹43 cr via additional debt as the total debt of the company increased from ₹7 cr in FY2015 to ₹50 cr in FY2024.

In addition, the company had to raise more than ₹150 cr by way of multiple rounds of equity dilution.

• In August 2018, the company raised about ₹7.75 cr via IPO.
• In August 2022, the company raised about ₹10.5 cr via a rights issue.
• In FY2024, the company raised about ₹55 cr by way of issuance of warrants @ ₹ 230/- each to promoters (584,400 warrants) and non-promoters (1,800,000 warrants) (FY2024 annual report, page 52).
• In FY2025, the company has proposed to raise ₹80 cr by issuing preferential equity @₹285/- per share to non-promoters (2,000,000 shares) and issuing 810,000 warrants to promoters.

The investor gets the same conclusion when she analyses the free cash flow position of Tembo Global Industries Ltd.

b) Free Cash Flow (FCF) Analysis of Tembo Global Industries Ltd:

While looking at the cash flow performance of Tembo Global Industries Ltd, an investor notices that during FY2015-FY2024, it generated a negative cash flow from operations of (₹7) cr. During the same period, it made a capital expenditure of about ₹41cr.

Therefore, during this period (FY2015-FY2024), Tembo Global Industries Ltd had a negative free cash flow (FCF) of (₹48) cr (= – 7 – 41).

In addition, during this period, the company had a non-operating income of ₹11 cr and an interest expense of ₹23 cr. As a result, the company had a total negative free cash flow of (₹60) cr (= -48 + 11 – 23). Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.

As discussed above, Tembo Global Industries Ltd used incremental debt and equity dilution to meet this cash shortfall. Over FY2015-FY2024, the company raised money by ₹43 as additional debt and about ₹150 cr as additional equity.

Due to aggressive growth beyond what its inherent business model can sustain, Tembo Global Industries Ltd has to continuously rely on outside capital to fund its business expansion. As a result, its debt keeps on increasing at a very fast pace. Thereafter, in order to control its leverage, the company has to dilute equity to raise money to repay debt. Its IPO and rights issue were primarily to repay its debt.

Credit rating report by CARE, May 2023, page 2:

company has done rights issue…total amounting to Rs. 10.50 crore in 9MFY23. The proceeds were majorly used to pay its term debt obligation

In such a situation, when the company’s business is highly capital intensive and its profits are not able to meet its capital expenditure requirements leading to a reliance on debt and equity dilution; an investor notices a tricky situation that the company has paid about ₹3 cr as dividends to its shareholders. Whenever a company with a negative free cash flow relying on additional debt and equity, pays dividends, then it might mean that these dividends in the hands of shareholders are simply a pass on from the debt proceeds or equity issuances.

Going ahead, an investor should keep a close watch on the free cash flow generation by Tembo Global Industries Ltd to understand whether the company is able to generate surplus cash from its business or it keeps on relying on outside funds for growth.

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

Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin of safety in the business model of any company.

Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

Additional aspects of Tembo Global Industries Ltd:

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

1) Management Succession of Tembo Global Industries Ltd:

Tembo Global Industries Ltd was established by Mr Sanjay Patel (age 64 years) who had experience in trading pipes and Mr Shabbir Kachwala who had experience in manufacturing pipe hangers and support systems. (Credit rating report by CARE, May 2023, page 1).

Currently, the next generation of both promoters is active in the business. Currently, Ms Saloni Patel, daughter of Mr Sanjay Patel is working as the chief financial officer (CFO) of the company and Mr Shalin Patel, son of Mr Sanjay Patel is a director of the company.

In addition, Ms Fatema Kachwala and Mr Shabbir Merchant, daughter and son-in-law respectively of Mr Shabbir Kachwala are directors of the company.

Due to presence of the next generation in the active role in the business when the founder promoter is still active shows signs of good succession planning. However, in such cases, an investor should look for signs of disputes among the younger generation and whether they get along well with each other.

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

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

2) Related party transactions of Tembo Global Industries Ltd with its promoters’ group entities:

Over the years, the company has entered into numerous transactions with promoters and their group entities. These transactions range from giving loans/intercorporate deposits, giving guarantees to lenders for loans taken by promoters’ group entities, purchasing goods and services, selling stakes in subsidiaries to promoters and paying a high remuneration to promoters.

Let us see some of the related party transactions of the company with its promoters.

2.1) High remuneration to promoters by Tembo Global Industries Ltd:

At times, the company has paid remuneration to its promoters, which was more than legal limits. For example, in FY2022, Tembo Global Industries Ltd paid an excess amount of about ₹49 lac to its promoters/directors.

FY2022 annual report, page 121:

The Company has paid managerial remuneration aggregating to Rs. 1.08 Crores during the year under review to its Directors which is in excess of the limits as laid down by Section 197 of The Companies Act 2013. The excess amount paid by the company to its directors is Rs. 49.17 lacs for the year.

Moreover, in FY2024, the company proposed to increase the limit of remuneration of promoters/directors to ₹60 cr, which seems excessive as it is more than 4 times its net profit of ₹14 cr for FY2024.

FY2024 annual report, page 11:

increase the overall limit of maximum remuneration payable to the Directors, including Managing Director and Whole-time Director, and Manager of the Company in respect of any financial year upto Rs. 60,00,00,000 (Rupees Sixty Crore Only).

It is advised that an investor may keep a close watch on the remuneration paid by the company to its promoters as it might be one of the means for the promoters to shift economic benefit away from minority shareholders.

Also read: How to identify Promoters extracting Money via High Salaries

In addition, an investor may also note that in 2020-21, when the Income Tax Dept. raised a demand of ₹87,100/- from the promoter, Mr Sanjay Patel, then instead of the promoter, the company paid the tax demand.

Letter of offer for the rights issue, August 2022, page 152 (Tax proceedings):

2.2) Giving loans to and guarantees for loans taken by promoters’ group entities:

As per the credit rating report by CARE, July 2023, Tembo Global Industries Ltd has given a corporate guarantee for about ₹8.21 cr for a loan taken by the promoters’ group entity, Saketh Seven Star Industries Limited. In the same report, CARE has also mentioned that the company has given an inter-corporate deposit of ₹20.11 cr to another promoter group entity, which seems to be United Global Industries Inc. as per the information in the FY2024 annual report and as per the replies to the queries of stock exchange submitted by the company on Dec. 8, 2023 (click here)

Credit rating report by CARE, July 2024, page 3:

corporate guarantees given to bank facilities of group companies for Rs. 8.21 crore…and intercorporate deposits (ICDs) of Rs.20.11 crore given to group entities for project execution purpose.

Please note that both these companies, Saketh Seven Star Industries Limited and United Global Industries Inc were originally formed as wholly-owned subsidiaries (WOS) of Tembo Global Industries Ltd; however, it seems that as the business in these companies grew, the promoters started increasing their stakes in these companies in their personal capacity.

For example, Saketh Seven Star Industries Limited (SSSIL) was formed as a WOS of Tembo Global Industries Ltd and in FY2021, it reduced its shareholding in SSSIL to 75% and then to 15.4% in FY2022.

FY2021 annual report, page 26:

The company has invested in its newly incorporated Wholly owned subsidiary ―Saketh Seven Star Industries Private Limited…Company disinvested in the subsidiary in the ratio of 25% through fresh issue through private placement in 2020-21. Hence the holding of the company in ―Saketh Seven Star Industries Private Limited reduce to 75%.

FY2022 annual report, page 28:

The company’s investment in its subsidiary ―Saketh Seven Star Industries Private Limited from 75%…has been diluted to 15.40%

As per the reply by Tembo Global Industries Ltd to the stock exchange on Dec. 8, 2023, its shareholding in Saketh Seven Star Industries Private Limited is down to 11.18% and the promoters of the company hold a significant stake in the company.

Similarly, United Global Industries Inc (UGII). was established as a wholly-owned subsidiary (WOS) of Tembo Global Industries Ltd as per the corporate announcement by the company on September 26, 2023 (click here)

company hereby proposes to make an investment in our wholly owned foreign subsidiary “UNITED GLOBAL INDUSTRIES INC

However, in the case of UGII as well, subsequently, as per the reply by the company to the stock exchange on Dec. 8, 2023, the promoters of the company acquired a significant stake and the stake of Tembo Global Industries Ltd declined to 21% (click here)

In the cases of both, SSSIL and UGII, initially, they were formed as 100% subsidiaries of Tembo Global Industries Ltd and later on, its shareholding declined sharply and other shareholders including promoters built up their shareholding significantly in their personal capacity. However, still, Tembo Global Industries Ltd is still giving large loans/ICDs to these companies and giving significant corporate guarantees for loans taken by these companies from their lenders.

Please note that in the case of a corporate guarantee, if the borrower, SSSIL, is not able to repay its debt, then the lender will come after Tembo Global Industries Ltd to recover its loan.

Also read: How Promoters benefit from Related Party Transactions

2.3) Sale and purchase of goods and services by Tembo Global Industries Ltd from promoters’ group entities:

Over the years, Tembo Global Industries Ltd has entered into multiple sale and purchase transactions for goods and services from its promoters’ group entities.

For example, in FY2024, it purchased goods for about ₹4.35 cr from its promoter group entity, Saketh Seven Star Industries Limited (SSSIL).

FY2024 annual report, page 133:

Similarly, Tembo Global Industries Ltd received goods and services from B.M. Electro Mechanical LLP, a firm of promoter & CFO, in FY2020, FY2021 and FY2022 for about ₹5.84 cr, ₹7.75 cr and ₹4.80 cr respectively. (FY2020 annual report, page 116; FY2021 annual report, page 163 and FY2022 annual report, page 144).

An investor should be extra cautious while assessing companies that enter into sale and purchase transactions with promoters’ related parties. This is because such transactions have the potential to shift economic benefits from minority shareholders to promoters if the company buys goods/services from the promoters’ entity at a price higher than the market price or sells goods/services to the promoters’ entity at a price lower than the market price.

Also read: How to Identify if Management is Misallocating Capital

3) Promoters’ commitment to Tembo Global Industries Ltd:

Over the years, the shareholding of the promoters in the company has declined consistently. After the IPO, the promoters’ shareholding in the company was ₹72.77% whereas currently, on September 30, 2024, the shareholding of promoters has declined to 55.41%.

Most of the decline in the stake of promoters is compensated by an increase in the stake of public/retail shareholders whose stake in the company has increased from 27.23% in FY2019 to 43.91% on September 30, 2024. The number of public shareholders has increased from 87 in FY2019 to 10,385 on September 30, 2024.

When Tembo Global Industries Ltd came out with its rights issue in August 2022 for a total of ₹36.16 cr, then the promoters restricted their subscription to rights issue only up to ₹5 cr, which was much lower than their prevailing shareholding of 72.77% at June 30, 2022 (click here). As per their shareholding, their share of rights issue subscription might have been ₹26.3 cr (= 36.16 * 72.77%).

Letter of offer for rights issue, August 2022, page 19:

Pursuant to the letter dated June 11, 2022, our Promoter and Promoter group, has undertaken that:

• they would subscribe, jointly and / or severally only to the extent of upto ₹ 500.00 Lakhs;
• they would not subscribe to the extent of any Rights Entitlement that may be renounced in their favour…and
• they may renounce their rights entitlement.

No wonder that in the rights issue, instead of a target of ₹36.16 cr, Tembo Global Industries Ltd could raise only ₹10.5 cr.

Credit rating report by CARE, May 2023, page 2:

company has done rights issue of 10.50 lakh equity shares…total amounting to Rs. 10.50 crore in 9MFY23.

Apart from non-subscription to their full share of the rights issue, another reason for a sharp decline in the promoters’ shareholding in FY2023 from 72.77% to 55.43% was the sale of shares by promoters like Ms Fatema Shabbir Kachwala and Smita Patel who sold 550,000 and 250,000 shares respectively during the year.

FY2023 annual report, page 83:

When an investor looks at the declining shareholding of the promoters in Tembo Global Industries Ltd alongside decisions of the promoters to not subscribe to full entitlement of rights issue and to purchase stakes of wholly-owned subsidiaries of the company in their personal capacities; then she should do a proper assessment of the commitment of promoters to the alignment of interests.

Also read: How to know if Promoters are Losing Commitment to the Company

Moreover, recently, the promoters have started frequently getting warrant allotments from the company in both FY2024 and proposed in FY2025). We believe that warrants are like stock options where the promoters get the right to acquire new shares from the company at a fixed price by paying 25% of the money upfront. After warrants are allotted to the promoters, then they may approach the company any time within the next 18 months and get shares from the company at the predetermined price irrespective of the current market price of the shares of the company.

Many times, promoters issue warrants to themselves in anticipation that the share price of the company will increase in the future. For example, in the case of Indo Count Industries Ltd, the promoters got the warrants allotment in December 2014 just a quarter ahead of its exit from corporate debt restructuring in March 2015 and they benefited hugely by the resultant share price increase.

Similarly, in the case of Tembo Global Industries Ltd the promoters got 584,400 warrants allotted at ₹230/- per warrant in FY2024 and recently have proposed to allot 810,000 warrants to themselves at ₹285/- per warrant. And the company is continuously filing corporate announcements to the stock exchanges about new business ventures even in very unrelated areas like solar power plants, arms & ammunition, electronic weighing scales and disclosing order wins (e.g. from Kalpataru Projects) without even going through terms & conditions of the orders, which it has to withdraw after a couple of days.

Recently, the company has entered into engineering, procurement and construction (EPC) of piping projects after it brought on board, Mr Firdose Vandrevala who has a lot of experience working with the Tata group.

Credit rating report by CARE, July 4, 2024, page 2:

company has also onboarded Mr. Firdose Vandrevala (Ex DMD of Tata Steel and Ex MD of Tata Power) as non-executive director to drive the EPC business vertical

However, even after joining Tembo Global Industries Ltd, there have been occasions when he resigned and then rejoined the board. For example, Mr Firdose Vandrevala resigned on July 23, 2024, citing the reason that he was busy and preoccupied with other matters.

However, now, Mr Firdose Vandrevala again joined the company on August 29, 2024.

Nevertheless, among the continuous announcements of entry into new business ventures and order wins, the share price of the company has risen much higher than the price of ₹230 and ₹285 at which warrants are allotted/to be allotted to the promoters and the number of retail shareholders is continuously increasing in the company.

We recommend that an investor do her deeper due diligence and cross-check all the announcements done by the company with other public sources/regulators’ websites and portals of other govt. agencies before she factors them into future business projections of the company.

Also read: Why We cannot always Trust What Management Claims

4) Weaknesses in internal controls and processes at Tembo Global Industries Ltd:

On numerous occasions, an investor comes across instances that reflect a scope for improvement in the internal controls and processes at Tembo Global Industries Ltd.

4.1) Penalties for non-compliance with regulations:

In FY2022, the company did not file its related party transactions to stock exchanges on time and therefore, was fined ₹70,800/-.

Letter of offer for rights issue, August 2022, page 151:

In FY2025, the company was again fined by NSE as during its board meeting it conducted discussions of key matters like dividend declaration without prior disclosure to the public/exchange.

Corporate announcement dated July 12, 2024:

fees required for discussing Final dividends in the Board meeting without prior notice…the Board paid the fees Rs.10000 plus GST comes to 10800 to ractify non compliance

The company got monetary penalized by the Regional Director, Western Region, Ministry of Corporate Affairs, Mumbai for a delay in filing three forms CHG-4 for ₹34,650/- (Letter of offer for rights issue, August 2022, pages 149-150).

4.2) Other instances of non-compliance by Tembo Global Industries Ltd:

In addition, there have been numerous other instances where Tembo Global Industries Ltd did not fulfil the statutory requirements. For example, while declaring results for Q4-FY2023 on May 29, 2023, the company did not file the audit report for consolidated financials (click here). When the exchange enquired about the missing audit report on June 22, 2023, then the company filed it on June 28, 2023 (click here).

FY2024 annual report, page 88:

Similarly, at the time of the IPO in 2018, Tembo Global Industries Ltd had not taken registration under the Employees Provident Fund (EPF) and Employee State Insurance, which was a mandatory requirement by the govt. The company highlighted that these are offences for which it can be penalized by the govt.

RHP for IPO, July 2018, pages 15-16:

Our Company is required to obtain the following approvals for our business but the same have not been obtained by us…(i) Certificate of Registration under the Employees Provident Fund…and (ii) Certificate of Registration under the Employee State Insurance…We may be penalized for non-compliance with the aforementioned laws

In addition, the company received multiple more notices for noncompliance with quarterly/half-yearly disclosure requirements (FY2019 annual report, page 60).

On multiple occasions, Tembo Global Industries Ltd did not pay its undisputed statutory dues on time (FY2021 annual report, page 105; FY2019 annual report, page 97; FY2018 annual report, page 9).

In FY2019, the company could not fill its vacancy of company secretary on time (FY2019 annual report, page 105) and in FY2020, it did not have the signatures of the company secretary on its financial statements (FY2020 annual report, page 28).

we observe that for signing the financial year 2018-19 CS signing not there on the same.

Also read: How to study Annual Report of a Company

4.3) Errors in the annual reports of Tembo Global Industries Ltd:

On numerous instances, investors note errors in the annual reports of the company, which highlights that the maker-checker mechanism to rule out errors while making public disclosures needs strengthening at the company.

For example, Tembo Global Industries Ltd has filed incomplete annual reports for FY2022 and FY2023 on the website of NSE. You may check by downloading the reports from the NSE website here: FY2022 and FY2023

Both FY2022 and FY2023 annual reports uploaded by the company have entire segments of financial statements and their detailed notes missing.

Luckily, an investor can get the complete FY2022 annual report from the website of the company (here). However, for the FY2023 annual report, there is no resource available publicly from where an investor can download the complete annual report because even on the website of the company, the uploaded document is the incomplete FY2023 annual report (here).

Similarly, in the FY2024 annual report, there are no detailed notes/schedules to consolidated financial statements and the company has simply pasted the abridged consolidated financials submitted with quarterly results in the section for consolidated financials (here).

During FY2024, the data of current assets that the company submitted in its financial statements was different than what it submitted to banks on those dates. For example, on March 31, 2024, it submitted current assets in the annual report (₹44 cr) against ₹28 cr that it submitted to banks for the same date.

FY2024 annual report, page 114:

In the FY2019 annual report, Tembo Global Industries Ltd made typographical mistakes in the financial highlights section of the directors’ report. The company disclosed that it had about ₹14.4 cr of “Operating, Depreciation and Other Expenses” and about ₹57.2 cr of “Administrative and Finance Cost”. So, the total expenses should have been about ₹71.6 cr (=14.4 + 57.2); however, the total expenses in the table were mentioned as ₹58.6 cr.

FY2019 annual report, page 15:

In the next year’s annual report, FY2020, the company rectified this error by reducing the data point of ₹14.4 cr to ₹1.44 cr. However, in this report, the company interchanged the expenses figures i.e. for ₹57.2 cr, instead of “Administrative and Finance Cost” as in the FY2019 annual report, mentioning them as “Operating, Depreciation and Other Expenses”. Similarly, it changed the expenses of ₹1.44 cr (erroneously mentioned as ₹14.4 cr in the FY2019 annual report), to “Administrative and Finance Cost” in the FY2020 annual report instead of “Operating, Depreciation and Other Expenses” in the FY2019 annual report.

FY2020 annual report, page 19:

Similarly, in the FY2019 annual report, while presenting the data of FY2018, Tembo Global Industries Ltd made a mistake in the calculation of profit before tax (PBT). The company highlighted that, in FY2018, it had a total income of ₹62.4 cr and a total expense of ₹60.4 cr. As a result, its PBT should have been about ₹2 cr (=62.4 – 60.4). However, the company mentioned a loss under PBT for (₹19.7) cr.

In the same manner, in the FY2024 annual report, while reporting the profit before tax, in the financial highlights section of the directors’ report, Tembo Global Industries Ltd made a mistake. It reported PBT before prior period items as ₹18.54 cr and with prior period items as NIL, the PBT should have been the exactly same as above. However, the company reported PBT as ₹18.89 cr. In this table, the company made this mistake only for the consolidated financial results for FY2024 and not for any of the other results in the remaining three columns.

FY2024 annual report, page 40:

Similarly, in FY2023 annual report, while mentioning the date of birth (23/05/1995) of Mr Shalin Sanjay Patel, Tembo Global Industries Ltd highlighted that he is 30 years of age whereas in 2023, his age would be 28 years (=2023-1995).

FY2023 annual report, page 29:

Even in the notice for the extraordinary general meeting (EGM) of the company on Oct. 1, 2024, the company made multiple errors in the notice to shareholders and had to rectify it multiple times. Original notice for the EGM was disclosed on Sept 9, 2024 (here) and then rectifications were issued on Sept. 23, 2024 (here) and Sept. 26, 2024 (here). The company found more mistakes even after the EGM was over. It had to issue another corrigendum on Nov. 26, 2024 (here), which was approved by shareholders by e-voting on Nov. 29, 2024 (here).

Additionally, when reading the website of the company, an investor notices that the section “blogs” has some Russian language articles which when translated point to content related to casinos, which seems unrelated to the line of business of the company.

Similarly, the section on the company’s website about “news” is full of news items about casinos, which seem unrelated to the business activities of the company. 

Therefore, while going through the data presented by Tembo Global Industries Ltd, an investor is always uncertain whether the data that she is reading and based on which she has to make the investment decision, whether this data is correct and reliable or not.

We recommend that investors should be very cautious while analyzing the data provided by the company in its public disclosures and crosscheck the data from multiple disclosures, reports and sources before making any final investment decision.

The Margin of Safety in the market price of Tembo Global Industries Ltd:

Currently (December 7, 2024), Tembo Global Industries Ltd is available at a price-to-earnings (PE) ratio of about 31.7 based on consolidated earnings of the last 12 months ended Sept 30, 2024 (i.e. Oct. 2023-Sept. 2024).

We recommend that an investor read the following articles to assess the PE ratio to be paid for any stock, which considers the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.

In the absence of any strength in the business model of the company, even a low PE ratio of the company’s stock may be a sign 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.

• 4 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
• How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
• Hidden Risk of Investing in High P/E Stocks

Analysis Summary

Overall, Tembo Global Industries Ltd has grown its business at a very fast pace of 31% year on year over the last 10 years (FY2015-FY2024). However, this fast growth has come with its own challenges. A detailed analysis of Tembo Global Industries Ltd. raises several concerns and red flags that investors should be aware of.

The company’s operating profit margin (OPM) and net profit margin (NPM) have shown significant fluctuations over the years. The OPM has varied between 4% and 9%, while the NPM has ranged from 1.1% to 5.1%. These fluctuations indicate instability in the company’s profitability.

Tembo Global Industries Ltd. operates in highly competitive sectors, including pipe hangers & support systems, and textile trading. The intense competition and low value-addition in these sectors result in low pricing power, making it difficult for the company to pass on increased input costs to customers, leading to fluctuating profit margins.

The company’s business is highly working capital intensive, with significant amounts of money blocked in inventory and receivables. In addition, the company is focusing on increasing the share of manufactured goods in its business.

Over the years, the company has generated negative free cash flow, relying on additional debt and equity to fund its operations. This indicates that the company’s business model is not self-sustainable.

The company has shown weaknesses in internal controls, including delays in depositing statutory dues, non-compliance with legal regulations, and errors in financial reporting. These issues indicate a need for improvement in the company’s internal processes.

Tembo Global Industries Ltd. has engaged in numerous transactions with promoters and their companies, including purchasing goods, paying excess remunerations, and providing loans and guarantees, diluting stakes in subsidiaries in favour of promoters. These transactions raise concerns about potential conflicts of interest and the shifting of economic benefits from public shareholders to promoters.

Moreover, the company has announced entry into a lot of diverse business segments like arms & ammunition, solar power, electronic weighing machines, construction material, EPC projects etc. It remains to be seen whether the company is able to successfully execute these initiatives.

Going ahead, an investor should keep a close watch on the profit margins of the company to assess whether it gains any pricing/negotiating power over its counterparties. She should check its debt levels and equity dilution initiatives to see if it is able to grow sustainably by using its internal cash flows.

The investor should closely monitor its transactions with promoters and their group entities as these have the potential to shift economic benefits from minority shareholders to promoters. She should also monitor the trend of promoters’ shareholding as well as pledging levels. She should contact the company directly, in case, she notices discrepancies in the public disclosures done by the company.

Further recommended reading: How to Monitor Stocks in your Portfolio

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

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

I hope it helps!

Regards,

Dr Vijay Malik

P.S.

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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.