You are right, no point in to fret over shake ups in price. Even best companies go through shakeout mechanism. In fact I consider a shakeout healthy within consolidation base. But what we should not ignore business valuation behind a price, corporate governance the least to say. Speculation alone can not drive price as one point of time speculators will move for better avenue.
Accumulation occurs when price breaks out with big volume, followed by minor correction with lower volume. Big breakdowns with high volume is a big red flag or warning. When an initiative buyer redesigns it’s forecasts they start buying in trenches. The price and volume picks up with buying only to contract in subsequent days. The retailers will book profit and again it breaks out when next initiative buyers joins.
Talk about buyers and HNI are all insider information. There can not be any publicly available data. Other way these information are punishable offence.
Personally I do not subscribe to growth story from financial numbers. I had 30 minutes look on last month on Annual Report. I could gather 4/5 flags. For your benefit I am putting them here.
Widening gap of debtors to sales
Debtors to sales has moved from 4.28% to 12.91% in a matter of 2 years. It is a 3 fold increase. The classic good old red flag.
Extraordinary cash balance
From 5.84% of revenue in a matter of 2 years now its 20.49% cash in hand. That’s just staggering, Satyam had the same issue. Why some one would be keeping so much money in current account? Excess cash if not suspicious it will impact ROA, increase cost of capital. Satyam wanted to have cash as it can give them flexibility in working their way out of problem of failure if not assessed. More so when cash is not getting any interest income, it destroys business value. I would love to have counter arguments here.
Rule book inventory
Inventory has been around 10% , no change. Cost of material consumption increased from 52 to 67%. Within closing inventory its raw material value is higher than finished goods. In fact stores and spares is equal to finished goods inventory. I am clueless here, what is that getting traded, raw material or finished goods? Some one who trades should have finished goods higher. If you are a manufacturer what explains this big rise in raw material cost percentage? Where is cost auditor, are you exempted?
Conjunction: big increase in cash, debtors while inventory remain same. You don’t keep inventory as required (inventory goes through physical verification, it’s tangible), difficult to understand massive surge only in cash and debtors which are more third party balances controls. Auditors understand the meaning of third party confirmation, difficult to perform a substantive testing.
A company claims to be 100% EOU, yet it does not provide break up between DTA and export sales. If I see director report it states 45 Cr earned in forex (down from previous year actually), that’s roughly around 40-42% of revenue. Auditor makes it a point (notes to account)’ The audited statement of accounts of USA Branch have not been received till the date of signing the Audit
Report of the company. All original documents are lying with US office. We have verified the same on the basis of Xerox/scanned copy. The Value of total transactions is Rs.1,65,52,498/- as against total turnover of Rs 105,70,12,327/-, i.e. 1.56 % which is insignificant, from the materiality point of view.’
If USA is your major destination and you are not raising invoices from USA branch. Forex is not to the tune of 45% even. I do not see either any indirect tax claim (like any 100% EOU). The business model requires more than superior intelligence for normal guys like me.
There are hundreds of red flags floating in forum now. You take your call basis on your satisfaction.