Control Print - Deserves attention?

Stock Opportunities
62

But look at operating cash flows vivek - they are getting dragged down because of the ever increasing amount of inventories that they have to keep at their cost to service customers.

That also explains why their BS is bloating although margins are increasing - al the free cash is getting stuck into ink. As munger would say, their purchases represent all the hard earned profits. Unless this cycle breaks, this will be a drag

Look at operating cash flows - they were not even RS. 4 cr. in FY 14 for a mcap of 360 cr.

4 Likes
63

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/E588F3A0_938B_4638_9927_3A01B3567E86_201837.pdf

At first glance appear good result with growth in top line and Bottom line.

1 Like
64

yes v good set of results .

Approx 20% growth in both topline n bottomline on a good base last year.This when Q1 FY15 performance was also good.Even QonQ growth is good

1 Like
65

There was exception item of around Rs 70 Lakhs (post tax around 56 Lakhs) in June 2014 quarter. If we adjust for same, growth in normal bottomline is significantly higher.

Also any update on CS appointment?

66

I think private sector is performing due to its exit policy and PSUs are languishing due to absence of work culture.Lets believe the owner when he says that investors have nothing to worry due to CFO termination.

What was this exception item Dhiraj?Also crude softening will help CP or not as its ink RM is made from it or not?Is it still not reflected doe to high cost inventory?

67

http://www.bseindia.com/corporates/anndet_new.aspx?newsid=e588f3a0-938b-4638-9927-3a01b3567e86

@Vivek_6954

Pasted image1155×769 965 KB

Please refer to June 2014 Results. There is exceptional gain of Rs 69.94 Lakhs which is what I was referring to. In case we exclude Rs 69 Lakhs (with 24% tax rate, Net Rs 52.4 Lakhs), the growth in PAT for June 2015 quarter would be around 36% (601.41 PAT for June 2015/441.95 Adjusted PAT for June 2014)-1

68

Good point.What abt benefits from Crude softening?maybe due to high cost inventory it was not reflected in current quarters and may wel do so in future quarters.

69

For those naysayers of print and packaging, here are some numbers to crunch.

The global demand for pharmaceutical packaging will be $101 billion in 2019 from $ 74 billion in 2014.

The global green packaging market will be $ 203.15 billion in 2021 from $ 132.47 billion in 2014.

The global dyes & organic pigments market will reach $19.5 bn in 2019.

1 Like
70

Dear Niku

Sorry for missing your post earlier.

Any luck with meeting the Management?When is the AGM as it seems management will open their mouth in AGM only.

You can ask on why are receivables and inventory on the higher side?Why is cash flow negative?What has been the impact of recent strictness n banning of Maggi noodles by FSSAI?How are they faring against competition? Why was CFO sacked recently?Any more chances of warrant allotments to promoters or is the chapter finally over?How big is the opp size n whats the moat of the co?Any plans of expansion? was the Nalagarh plant taken on lease n will it be closed down n production shifted to the new Assam plant as the tax benefits are over?

In the recent carnage it was heartening to see that CP stood firm …any instl entry here?can this Maruti turn into Mercedez ?we need to find out.Thanks

1 Like
71

Snapshot from AGM in Mumbai On Sep 25 2015.

The company got award from Business Today in SME less than 100 Cr category. It share enclosed article which provide information about industry size, growth and other players.


(Unfortunately, I lost my pad which has all points and the enclosed note are based on memory and has substanstial scope of errors on Figures. Please note that while reading the notes).
The following were other discussion points:

  1. The company has increased market share from 7-8% in 4-5 years back to 17% in FY15. The growth in industry is linked to industrial production. Typically, industry growth 2-2.25X GDP/IIP growth. The company has advantage against other competitor as it being able to indigenous the production. However, other players have manufacturing facility in China which has very large scale advantage. Control Print aim sales growth around 15-20%.
  2. The company make profit from selling consumable (mainly ink). The raw material for ink are mainly petrochemicals. Like in normal toner, it is difficult for the user to switch from printing machine supplier to other players, same applies to this industry as well. A typical printinng machine currently price at around Rs 2-2.5 with life of 15 years (some well maintained machine are running even after 20 years of operations). During the year, consumable used by a machine are around 30-40,000; so over life of machine, the company make revenue from AMC/Spare/Ink of around 3.5-4 Lakhs over period of 10 years. In industry like Cement and Chemical, life of printing machine is around 6-7 years while in other sectors life is longer.
  3. The key factor driving demand in industry is Identity (or tracability), regulatory requirement and industrial growth. Tata Steel and HLL are the largest client to the company. Top 10 client contribute around 25% sale of the company. The company serves Lafarge/ACC in Cement, HLL/P&G/Emami/Godrej Consumer in FMCG (ITC and Nestle are serviced by other competitor Markem and Domino respectively), Finolex/Astral in Pipe sector. Current population of machine serviced by Control print is around 5,000 units with every year sales of around 1,400.
  4. Realisation per printing machine is a hybrid figure and not much can be infered from same. Like in case of Maruti, average car Realisation without product mix does not make sense, same applies to the company.
  5. Current market size is around Rs 650-700 Cr. The company intends to increase market share and also plans to move in exports market like Bangla desh, Pakistan, Myanmar and Some African countries. The German partner is more concerned about developed market. Further, the customer decision to purchase has more to do with service company provides.In Export market, the company market product through dealer expect in Sri Lanka where it has own subsidiary. It spent around Rs 2 Cr and expect Rs 5 Cr (not sure on these numbers) sales in first year of operation (FY16). However, due to teething problem, the sales may be lower than Rs 5 Cr. Current exports is around Rs 5 Cr which also company is attempting to increase.
    In India company has 100+ Engineers and 70+ Sales manager. The engineer training in initial years took great efforts. However, with experience the engineer resolve problem with very limited support from central office. In particular region/segment, a good Engineer support may be a key decision for buyer.
  6. The company currently have three plants. With Guwahati plant operational, it has closed production in Vasai Plant. Vasai plant would remain back up for printing consumable (ink/spare) manufacturing in case some issue with Guwahati plant. Guwahari plant capacity is sufficient to meet next 3-4 years requirement for inks. Guwahati plant would have 10 years of exemption from IT till 2015.
    In HP plant, the company manufacture printing machine. Current capacity in single shift is around 2,000 machine. So with marginal capex and double shift the company can easily meet requirement for 3-4 years. HP plant tax exemption is expiring in 2017. In HP, there are restriction on storing inflammable chemical quantity (which are used from ink) and hence company decided to manufacture ink at Guwahati
    The company does not envisage major capex in next 3-4 years. In Guwahati plant, it spent Rs 19 Crore as capex. Guwahati facility is capable to manufacture printing machine but company intend to keep same at HP as of now.
  7. The company has no long term debt. all the debt are working capital debt
  8. The legal and professional increased due to usage of service of a reputed solicitor for Arbitration with Videojet. That was one time and expected to resume to normal level.
  9. The CFO cum CS resignation was due to going beyond board delegated authority. Also, the adverse Secretarial Audit report was a consideration in discussion. The company is presently looking for professional independent CFO and CS. There was no financial issue with CS/CFO.
  10. The working capital for company is streched as it need to service at various location of client’s plant as well sales depot sufficient spare of all products. That result in increase inventory and would continue to remain so. However, the product categories were increased from 3 to 9 during last 3-4 years. At initial stage, the company has to maintain sufficient inventory to meet customer requirement. As business grow, the inventory holding period may decline marginally. In any case, no increase in inventory holding shall be expected. FY15 being the largest level. On obsolesce, the company had asked Haribhakti to independently assess fixed assets and inventory valuation in FY15. Haribhakti conducted audit with 100% location for value of 90% of inventory and found inventories valuation being proper.
  11. On receivable write off, there were couple of old customer whose due company written off. Although company has taken legal step, as a prudent accounting, it decided to provide for same during FY15. We shall expect normal bad debt going forward.
  12. There were question about promoter issuing share at lower price and shareholder did not given opportunity to participate. While company management did not commented much on same, it did said that pricing was in line with SEBI formula.
  13. The company fulfill criteria to be listed in NSE. They already have given reply to NSE queries. But for some minor issues, the company expect NSE listing in FY16.
  14. The margin in printing machine are relatively lower. However, margin are better in consumable. As company’s share of consumable increased, that has driven margin in last 3-4 years. The company expect Machine to contribute around 30% of sales and Consumable at around 70% of sales and see no major change in margin (expect for scale and efficiency in manufacturing)
  15. There was demand for bonus/spilt in silver jubilee year. Management said would consider and revert.
  16. Three to four member asked about why warrant were given the management when already sufficient amount was with the company. Management did got the message and hopefully would not see further dilution in future. There was also enquiry about Cairn India share held by company and mark to market loss.
  17. While generally shareholder appreciated Rs 4 dividend payment, sought higher amount in context of EPS of Rs 20 per share.
  18. All finance related question were answered by Mr. Jangid, while operational question were answered by Shiva Kabra. Shiva is a young competent/confident Director. I got confidence after talking to him. In fact post meeting, he spent almost more than 60 minutes with interested shareholder explaining their question on business.
  19. Company did not address issue about Real estate development although there was question about same,
    Personally got comfort from discussion in AGM and more after discussion with Mr. Shiva.
14 Likes
72

Many thanks for painstaking good work Dhiraj Bhai.

73

Thank you so much for the update. Invested in CP since ~200 levels and it is great to hear from someone who has interacted with the management.

1 Like
74

Dhiraj

Much appreciate these detailed notes - the one concern I had speaking to their customers is that CP holds the consumables inventory at the customer’s premises at their cost which results in WC getting locked up and hence to low OCF - OCF is consistently not even 10-30% of EBITDA which is really low.

I spent a lot of time on what generates cash in a business - out of OCF of Rs. 27 Cr. more than Rs. 19 cr. went back again as inventories and receivables - that’s not a sign of a moat. If they have one inventory write-off because of technology obsolescence etc,it will hit the business badly.

Like charlie munger would say, its a tread mill business where more and more of the profits have to be invested into the business to keep running. Given that, the sales growth means not much until they can shrink the WC.

Would you have a view on when the company can improve upon this ?

5 Likes
75

Varadha,

While I appreciate that they would constantly require inventory in order to increase sales, please also note that despite higher working capital requirement, there is no capex requirement. Further, the inventory level has been marginally higher as company increased product range from 3 to 7-8 segment over last 4 years. So there might be working capital efficiency achieve from Minimum scale of operation coming in the newer segments. Having said that, it would be 10-20% lower inventory days in my understanding and not more due to nature of business.

What I see positive is that even after accounting for increased working capital, the company generate free cashflows. The increase in dividend from 2.5 per share in FY14 to 4 per share in FY15 does in a way give indication of promoter willingness to share wealth with minority shareholder. There were concern about promoter getting warrant at 43-63, but then at level of 320/-all shareholder are questioning the promoter issue. The price at which warrant allotted was SEBI determine formula price, at which anyone could have bought share from open market. So to me, it would have great had promoter not diluted equity, still to an extent, it align promoter interest with increase stake in business with shareholder.

Further, the company can almost double the sales from current level without much capex. An indirect way to check cashflow of business is also higher debt raised/ or large equity dilution. As against Rs 19 cr capex in Guwahati, there is no term debt in company. I see that also positive. Increase in working capital requirement is partially financed from working capital limit without much gearing. In my opinion, one way to look at company contribution in working capital being only deducted from free cash flow rather than total incremental working capital can also be a way to look at free cash flow. Of course, that would apply only if company has gearing say less 0.7 times as at higher level of gearing, the bank may not be willing to finance working capital and it may be tricky to that extent.

Last, personally got a good comfort from management, particularly Mr. Shiv Kabra.

To summarize, not a HLL business which would see increase in free cashflow with higher sales, but at the same, not even Infra company which would use cashflow with increase in sale. So increase in sales, does translate in lower free cashflow. If you are looking at HLL type business, then this is not one. But if you are looking at 20%+ growth Sales, 25% growth Profit growth (and also cashflow) with moderate profile promoter for next 3-4 years, I would find Control print fit that segment

Disclaimer: I hold share in the company and my view may be biased. Investor shall do its own due diligence before investing.

4 Likes
76

Dhiraj

There is not capex because this is a services led business - world over most of hardware + services companies do not need a lot of capex.

I did talk to a packaging head of a FMCG company and he told me control print is offering much looser credit terms than their competition - look at inventory + receivables days and it’s jumped from 232 days in 2009 to 335 by FY 2015 - hardly sign of an increasing moat. Infact, that explains the reason why promoters have to keep bringing in money in what’s a high margin,high ROE business. Look at operating cash flows as a % of sales and they are falling too.

ultimately for a Rs. 300 Cr. mcap you are getting 8 cr. of OCF - Even without growth, its about 15-16 cr. of OCF - that’s very expensive IMHO. A company that keeps growing EPS without a growth in OCF has a lot of risks - eg., opto circuits, suzlon

I did look at their competitors - their receivables/inventory are not as high.

Look at what munger has to say about such a business -

“There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested — there’s never any cash. It reminds me of the guy who looks at all of his equipment and says, “There’s all of my profit.” We hate that kind of business.”

14 Likes
77

Vardha,

Appreciate your view but I think I did said that it not HLL kind free cashflow business!!! Finally, it is individual call to invest or not. I got comfort after management discussion so would hold. You and other investor can decide on your behalf.

All the best to all of us.

Regards

Dhiraj Dave

78

Vardha,
Couple of more thoughts, what mater for valuation in my opinion is free cash flow ( Operating cashflow less capex) and not only OCF. While calculation of OCF would be low, may be free cashflow would be higher given limited capex. I have not calculated same and stand to be corrected based on facts.

Secondly, please compare Opto circuit and suzlon debt equity ratios. Please note that the company has lower but positive operating cash flow which I believe was not the cash with Sulzon or Opto.

Anyway, your observation about OCF to Market capitalisation is valid. But finally, one need to take its own call about investment based on comfort. Thanks for providing valid issue for discussion.

1 Like
79

Dhiraj

If OCF is low, how can FCF be higher unless the company is selling non core assets and releasing cash. Free cash flow is the complete surplus available to shareholders after paying financial obligations/investments.

It does matter if you have to spend on capex or on WC, money blocked has no colour. Even EPC companies have no fixed assets but their cash gets locked up in WC,

I only highlighted an issue that’s confirmed by my scuttle butt too. I did not understand why this company could not generate cash until my contact helped me understand that they are investing more and more into inventory/WC in search of future growth. If they can break that cycle/squeeze it down, this can generate prodigious cash flows.

Good to discuss with you - we learn from each other.

3 Likes
80

Point about cashflow well taken. Only limited issue I was highlighting as compared with other sector where high operating cashflow but huge capex requirement would leave very limited free cashflow. While in cash of control print, OCF is almost equal to FCF without any capex. It would be great to get free cashflow business. Control print does not fit into to A+ business model. Hope this bring clarity.

81

Vardha,

One more point to highlight is some comparison with suzlon, Opto and EPC companies. Please check gearing and free cashflow and dividend payment. While Control Print is not A+ business model, it is definitely fit B grade and not D grade model which are cited for comparison. EPC companies need to infuse capital in business and Sulzon/ Opto had constant debt funded acquisitions history. Both these issues are absent.

Again, my view may be biased due to my holding and investor shall do their own due diligence before investing