Wednesday, December 14, 2011

Time to buy ICSA at a price to book multiple of just 0.19?

When I saw the stock pop up during a routine stock screen, I was stupefied. After all, the company has been profitable, not been caught in any scams(yet) and has a well decorated annual report. A P/E of 1.25, dividend yield of 5.5% and price to book of just 0.2 would imply a screaming buy ordinarily. But having learnt from hard experience that the market is usually right(or at the very least there is fire behind every smoke!), I decided to probe deeper. And the first place is the annual report(, which I read from the back to start(like a Japanese comic novel). Some points
  1. Liquidity;-For Mar-11, of the Rs 67 crore cash balance, only 6 crore was liquid. Rest was margin money, fixed deposits lodged with Banks etc,  against letter of guarantee issued and so illiquid. That might make the company dilute later
  2. Debtors:-To fund the debtors increase of 284 crores Rs, the company had to take out long term debt of nearly the same amount. Higher leverage apart, that makes the asset quality a tad suspicious. 
  3. Inventory:-Note 7(pg 89) has the red flag in notes to accounts that Inventories are physically verified and certified by the management. That usually implies that the auditors are atleast partially washing off their hands
  4. Heavy Contingent Liabilities:- As of Mar-11, the contingent liabilities included Bank Guarantees given to various government departments to the extent of `38,043.18 Lakhs and letters of credit of `11,043.73 Lakhs. Given the precarious liquidity position, even if a fraction of that is invoked, the company will be in distress.
  5. Non objective Board:- 4/4 directors share the surname 'Reddy' and the other one does not inspire confidence. This board would seem just a rubberstamp. To their credit though, the directors did attend all the 30 meetings/yr conducted in 2010-11
  6. Power sector paralysis:-Due to mounting SEB loans, generation companies are finding it difficult to tie up financing. The fiscal deficits and policy paralysis at Delhi is delaying decisions for awarding those contracts which ICSA depends on
  7. Inadequate segment disclosures: One would need to know the extent of the debtors which are government departments/PSUs, since that would affect the risk of delayed payments/political risk. The company does not disclose this.
I know one can find a dozen negatives if one probes enough about anything. The positives though are
  1. innovative business model matching government priorities
  2. ready product slate after policy paralysis ends
  3. Technology driven company into smart grids
  4. Well presented annual report-so some institutional interest can sustain
  5. Present in several corporate rankings for growth, profits etc. 
 My final call:-The stock being a midcap and with other appealing options out there, I would monitor this stock closely for a chance of 5x multibagger, but initiate investments only when there is clarity on the debtors(of company) and power sector fate

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