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(http://financeandcapitalmarkets.blogspot.in/2011/01/bartronics-next-satyam.html)
  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.

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