Thursday, May 31, 2012

SKS Microfinance-time to buy at book value?

The riches-rags story of SKS Microfinance has been fascinating-be it the borrower 'suicides' induced microfinance bill in Andra Pradesh that reduced the share to less than 7% of its IPO price, the management tussle between the founder and the professional CEO which eventually led to both of them being ousted, and so on. Mutiple case studies could be written on this subject, but I restrict my case here to whether SKS Microfinance is a good asset play. Market perception is that since the bulk of its loan portfolio is in andhra pradesh and therefore irrecoverable, one should wait till the legal clarity is there.

 Earlier, I did get egg on my face by purchasing it at Rs 142(, seeing it dip to less than Rs 100, and then frantically selling it when it touched Rs 147. Given the governance paralysis here, many of the upside triggers I'd noticed then now seem a distant dream. However, when I read the most recent earnings release and investor presentation( and, there finally seems an end to the nightmarish exposure of SKS to Andhra Pradesh. As explained in the earnings update, SKS has written off nearly 1100+crores of its exposure to Andhra Pradesh(thus the bloodbath losses and negative EPS/erosion in book value which has now touched merely Rs 60). However, at market capitalization of Rs 467crores and debt of Rs 1021 crores(adjusting for cash of Rs 690crs), one can get the company at an enterprise value of just Rs 788crores(i.e 7880 million INR). For this, one gets the following assets
  1. Non Andhra Pradesh Loan portfolio of Rs 529crores(deducting Rs 236crores residual Andhra Pradesh exposure from the Rs 765crores advances on books)
  2. Deferred tax assets of Rs 460crores(even say 50% of that is in form of carried forward losses which can be written off for tax purposes, that still gives Rs 230 crores).
  3. and the biggest prize of them all-The Rs 1129 crores of loans to AP borrowers written off in the books, which could become recoverable if the Central Microfinance Bill 2012 becomes law. Of course, this needs recapitalization, political willpower to enact the law, executive support to restore order in the districts, and above all, the borrower's willingness to repay. I feel that loans being overdue for nearly 1.5yrs now, nothing short of a Ponzi scheme(borrowers being extended new loans to induce them to repay existing loans) will obtain repayment, whatever the law may saw. The lack of a rural credit bureau aggravates things further.
Hence, aggregating the assets in (1) and (2), there is very little margin of safety remaining for the investing, and this is certainly not the deep value cigar puffs which Grahan or Buffet would have purchased. Hence, despite the rule of law, I am not optimistic about the microfinance bill giving a Rs 1129 crore windfall gain to SKS and other microfinance companies.

Recomendation- Still, the market is irrational, and does overreact to such announcements. So what I would suggest is to accumulate at book value, and then sell ASAP when the share price zooms on the passage of the MFI Bill 2012, thus exiting the counter

Tuesday, May 29, 2012

The bar is too high to invest in Bartronics-avoid now

With a price to book of just 0.13, you would think that Bartronics would warrant a 'eyes wide shut' investing approach. It can make 80MM smart cards per annum(but it just made 20MM of them in FY11 leading in a capacity utilization of just 20%), and given the financial inclusion/debitc card/UID boom, you would think that a company making Rs 100Cr+ profits is a screaming buy on a market cap of just 85 crores! Yet, reading the past 3 annual reports and the latest earnings release on the company website, threw up the following factors that would warrant a relook. Earlier, I'd commented in my other blog on the governance issues in the FY10 report(
  1. Suspect audit quality:-Till FY09, the audit partner of Deloitte, Haskins & Sells(Hyderabad) did not have any issues with the audit. But when the audit partner changed for FY11(and maybe the Satyam scam resulted in more rigorous audits), he qualified the audit reporting casting aspersions on the competency of the(then) sole individual auditors, fixed asset verification etc. Bartronics then had to engage another professional internal audit firm, improve their controls etc and it worked as they got a clean chit for that in FY11. But what is worrying is their retaining the same internal auditor albeit jointly(loyalty should only go too far) and that it took the Big4 auditor a change of partner to clamp down on this. 
  2. Aggressive accounting for sales(and therefore debtors):- This is best described in the company's terms Sundry Debtors include trade receivables aggregating to Rs. 84,193.09 lakhs as at March 31, 2012. On account of the economic slowdown and consequent recessionary conditions in the global market there have been delays in recovery of such amounts.
    Given the fact that the amounts are recoverable from customers with whom the Company has a long standing relationship, the Management is confident of realising the amounts due and no provisions are required on these accounts at this stage,notwithstanding the "disclaimer" by the Auditors in their report for the period ended March 31, 2012. Consequently,Management believes that the recognition of revenue and the corresponding foreign exchange translation gain(loss) to the extent of Rs. 29,891.93Iakhs and Rs. 9,757.33 lakhs respectively for the twelve months ended March 31, 2012, including Rs.9,797.27 lakhs and Rs. (3,125.80)lakhs respectively for the quarter ended March 31, 2012, is appropriate, as there is no uncertainty regarding recovery of the corresponding outstanding amount.
    This issue had cropped up in the FY2010-11 audit report as well, albeit confined to debtors only. This year, it has gone to include revenue as well. And to put figures in perspectives, the translation gain on those doubtful debtors is nearly equal to the net profit of FY12! So without this gain, the company's profits would have been wiped out, to say nothing about the profit on the over due sales! One would ordinarily trust management to know its customers best, except that this management has had tussles with its auditors before on tax provisioning under MAT, revenue recognition on software transactions etc. So on this, it is better to adjust the accounts as per audit qualifications in which case they look much less impressive. 
  3. Tussle with Municipal Corporation of Delhi:-As described in the Mar12 press release, Bartronics has spent Rs 218 crores(capital advances, security deposits, capital work in progress) on the 2000 sites contract awarded by MCD, which has not allocated further sites despite just 15% of the contract being fulfiled. While Bartronics and MCD are locked in arbitration, any upside from this will only help the valuation. But given the lack of disclosure from the company on this issue, I'm not very optimistic on the outcome. This may adversely impact the chances of getting contracts from other governments/PSUs till the issue is resolved.
  4. Extending the accounting year to Sep30:-This has resulted in a 18month accounting year for no possible reason! what I suspect is that to avoid the 'going concern' qualification in audit report(most recently suffered by SpiceJet and Kingfisher), Bartronics has delayed its accounting year in the hope of manna falling from heaven to save the accounts!  
  5. Low ownership stake that too mostly pledged:-With a 23%odd ownership of which 58% is pledged, Bartronics management does not have skin in the game except the portion of debt for which it has personally guaranteed.

Is their 80MM smart card plant worth Rs 722 crores?:-The present enterprise value of the firm is Rs 85crores(equity)+Rs 637crores debt(i.e Rs 587crores as reported for FY11+Rs 50crores MTM change on the $50MM FCCB due for redemption in FY13). Thankfully, the current liabilities & provisions are more than met by the non doubtful sundry debtors/other current assets(nearly net zero assets otherwise). As I'm not an expert in this field, I invite readers to give their views on this one, considering the possibility of capacity utilization etc. Assuming that this is not the case, the only other upside sources are the MCD arbitration case going in their favour OR the Rs 400odd crore sundry debtors suddenly paying up their share despite the worsening global economic recession.

HCL Infosystems stock analysis-AVOID despite low price to book

By conventional ratio analysis metrics, HCL Infosystems(belonging to Ajai Choudhary, not related to HCL Technologies owned by Shiv Nadar) seems cheap with price to book of just 0.52, low price to earning(based on FY11 consolidated EPS) and so on. Also, the company does have a good cash pile with near zero not debt. However, things are cheap for a reason, and in case of HCL Infosystems, the  lesson is to dig deeper however attractive the stock may seem. My reasons for passing on this stock are
  1. Declining performance over the past 5yrs:-Though the stock does give dividends(very high div yield of 16% and payout ratio c.f 50%), its revenue has stagnated for the past 5yrs & profits falling.
  2. Only a well timed QIP+preferential allotment to promoters of 51million shares @ Rs 152, helped the company raise Rs 780crores(of which 50% remains unspent). THAT is the secret of the cash surplus(not operating cash flows which have been negative for the past 3 years at -42,-42,-64 crores respectively for FY11, FY10, FY09 and just slightly positive at Rs 64crores for FY08. Agreed that they may be in a capital intensive business but still this does not make sense. I do not suspect the company of financial jugglerly despite the alarming sign of persistently negative operating cash flows, but it does not inspire confidence in their financial management. 
  3. EPS of Just Rs 2 for 9month period July11-Mar12=>even if they have an excellent quarter to close FY12 at EPS of Rs 3, that gives P/E ratio of around 14x, which is quite high for a negative/zero growth company. The 'ASPIRE' transformational strategy has neither fixed the topline nor the bottom line.though they have received IDC awards for being the top ranked systems vendor, that does not reflect in their market share/profits.
  4. Business profile is also quite unusual for listed IT companies as it is into IT manufacturing(laptops, desktops and tablets) and systems integration for the domestic market(it has negligible export earnings). The domestic focus should have given it first mover advantage but some how that has not happened. And since it imports components for manufacturing, that exposes it to FX risk, and the depreciating rupee exposed it to sizeable losses in FY12. Hence, do not make the mistake of comparing it to domestic BPOs/other foreign BFSI focusses ITES Cos.
While they have  have well qualified staff(CEO is gold medalist from IIT Delhi), as Buffet puts it, when a good management confronts a bad business, it is the reputation of the business that stays intact.