Sunday, October 21, 2012

Skumars-capex spending amidst declining cash flows reason for low valuations?

A friend pointed out the low valuation multiples of Skumar(low in terms of price to book, P/E etc). A cursory scan convinced me of the apparent veracity of this case, and hence I decided to probe more in depth, starting with the latest annual report FY2011-12

I noted from the financials that though the company has quite a bit of debt, it turned around the operating cash flow situation in FY12 with efficient working capital utilization. However, as the savings went into capex, the net cash position and leverage did not improve.

The company trades at P/BV of 0.19 and dividend yield of 5.5%, but this despite being profitable. As the profits do not reflect in FCF/OCF, maybe that is why investors are shying away from this stock. Otherwise, a textile company with 45+ global brands and global presence(as evident from the above map) should not be undervalued. There are some negative qualitative factors though, which are material, which I reproduce from the annual report. 
  • Aggressive accounting by the company. As mentioned in the auditor's report, they capitalized Rs 85 crores brand spending, which is debatable under accounting norms

  •  Financial Management could be better-this is a company which defaulted for some time on bank dues, which still spending on capex!

  • Suddenly started commission to non -executive directors in FY12-Rs 90 lakhs!
However, promoters exercised warrants at Rs 64.33 when the prevailing market price was hardly 50% of that. This shows some confidence, as they would have forfeited only 25% of the exercise price, and yet been in a profit. Maybe they expected it to appreciate, but still that was a good reason.

CONCLUSION:- It is not very clear as to WHY the company is spending on capex again. The investor relations PPTs/concall transcripts on website are outdated. So without clarity on whether the capex is being well spent, entering this company is risky given the qualitative factors. Upside trigger could be the Reid & Taylor IPO finally happening as planned.

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