In your working notes, I would asssume the interest costs at about 220 crores for fy19 at the present run rate of 56 cr/ qtr unless a tangible reduction in borrowing rates or debt levels can be seen. That’ll materially change bottomline estimates.
Depreciation guidance for fy19 is I think about 95 crores and not at the current run rate. During fy18 the AMCU are depreciated at higher rate of 60pc being their first year.
Reduction in share pledging is crucial. The management needs to demonstrate in the coming quarters that they hv the financial muscle and reduce pledging.
Receivables are at 1486 odd crores. I hope there are no sticky receivables or need for provisioning.
They’re focused on improving ebitda margins, but avoid questions on Net profit. Clearly the lenders are benefiting from ebitda improvements more than shareholders.
I’d like to see them collect receivables and pare debt in the coming quarters.
Disc: I’m invested since a few quarters and m looking to buy more if the price declines significantly. However will sell out if the story doesn’t play out.
Can someone please advise on the business model of Kwality as compared to market leader Hatsun?
Kwality turnover was 70% more in the most recent quarter and even profit of Rs20cr was more than Hatsun’s Profit of Rs15cr. However Hatsun is valued at 6 times the size of Kwality.
However, what is glaring is Kwality has lower inventory days of 15 as compared to 30 for Hatsun, but a huge working capital and cash conversion days of 100 as compared to just 5 days for Hatsun. As a result, a huge amount of cash is locked in working capital of about Rs1,500cr. Why is the working capital days so high for Kwality. Are they getting milk on cash and then providing 30 or 60 days credit on payments from customers?
Is it because the B2b is high for Kwality and if yes will this reduce as the B2c increases from current 40% to more than 60% in the next couple of years as I would think B2C will be on cash.
Cash return on invested capital is 16% which I think is not bad. ROE and ROCE are more than 20%.
They are also moving in the right direction of branding with Akshay Kumar as the ambassador who has a pan India appeal. A B2C branded business commands a huge premium in Indian markets generally due to the huge market size.
In the current year, depreciation and interest increased substantially which is stressing the net profit. Promoter pledge of 65% is not helping either. But I believe, Branding and B2C will help Kwality to move into a different league altogether over the next two to three years.
The most important thing to watch out for in my perspective will be working capital days. Any improvement will be a huge positive and any detoriation will be a reason to sell.
Please let me know if you have a different perspective or if I have missed anything important.
You are broadly correct in your assessment. I think in June 17 the split between B2B and B2C was 70:30, which has now improved to 68:32…the company has a target to make it 30:70 by 2020. The overall direction has been positive on this front. Not only will this improve the working capital cycle but the margins are also generally 20%+ in B2C business compared to 3% to 8% in B2B business. Also, i think their working capital cycle will improve from procurement side as they plan to improve the split from contractor and direct farmer from 78:22 to 50:50 going forward.
Disclosure: Invested 2.3% of portfolio.
Regards
SJ
Warrants and debentures were issued to Times Group and HT Media for Rs25Cr and Rs13Cr respectively. I think this is in lieu of advertising in their papers. How much does advertising cost in these papers and how long is this contract for. I feel Rs40Cr for newspaper advertising seems excessive.
I am having a bad feeling about this as the management is doing things at the cost of equity holders in a few instances. Also a high interest loan from KKR. ROE has steadily declined over the years as pointed in other posts.
Firstly, the issue of equity instruments for ad space to media companies is a regular industry practice. Indian terrain and Adlabs are few companies that I can recall, which have similar arrangements and are typically long-term in nature. What was positive about the conversion of warrants by Bennet Coleman was the issue price. The issue price of warrants was Rs. 115.22. Had they even allowed the 75% of issue price to be paid on conversion of warrants into shares comes to around 86.4. Which was lower than the prevailing price then and could have let their 25% upfront payment lapse, which was paid on allotment of warrants. The only reason why Bennet Coleman would have paid Rs. 86.4 to convert options into shares as the 18 month period was ending is because they are positive about the business and also that the price has bottomed.
Did the issue happen for no consideration or for Rs86.4? Were the warrants issued 18 months back and converted in to equity now on payment of Rs86.4 per share?
If that is the case, then the newspapers were actually losing money as they could have purchased for lesser amount in the market. I thought they got the warrants converted for no consideration.
Warrants were issued in lieu of Advertisements and converted into equity shares @ Rs 115.22 per share. Hence the newspapers have lost money in their investments. We can’t say that there was no consideration. I don’t see any red flag in this transaction.
I beg to disagree on this. The issuance are as per SEBI ICDR regulations which don’t let you issue shares at a discount or consideration other than cash. There is a payment which is made by Kwality for advertising and the consideration doesn’t get substituted by equity issuance. Then why are equity shares issued to media companies…think of it as a variable payoff…like leasing a space in a mall…where the lessor will require a fixed rent and a variable component like a 1% of turnover. The media company feels they are entitled to a share in additional business which comes to the company’s way and this they are able to do by participating in equity and riding the share price for 18 months. If they are not satisfied with the outlook, and share price has fallen by more than 25% from the issue price, they may allow the warrant to lapse and not pay the balance 75%. Please look at similar issuance in case of Adlabs, Indian Terrain and very recently in Infibeam. This is the postal ballot notice for issuance of warrants by Kwality in July 2016.
On 9 Aug 2016, the share price was Rs107 which was almost the price of warrant and CCD. While warrant had a 25% down payment, CCD had a 100% down payment. Now that even the warrant has been fully converted by paying 100% ie Rs110, what did the media companies gain by this arrangement? Does Kwality pay advertisement charges in addition to the warrant issues?
Plus, I read Times of India website almost everyday. I never saw Kwality ad. So the ad is only in local Newspapers? Can anyone verify whether Kwality is covered well by these newspapers? Is it like a full page ad and how often?
I do not mind the ad charges as the next leg of growth for Kwality is all about branding and value add. But these kinds of transactions are complex and raises issues besides equity dilution.
Warrants are issued in addition to the advertising charges. By paying 25% of the issue price the media companies are able to ride the stock prices for 18 months. In this case the price fell so it seems that the whole thing was futile, but that generally helps. The advertising on the digital and print version is generally separate and I think they would be advertising in the print version of TOI in North India, where their market is. I think VP members in North will be able to give a better idea about their advertising in dailies.
History repeating in Kwality. Here are a couple of posts i wrote on this thread last year. Promoter integrity is THE MOST ESSENTIAL THING !! Although there are no direct links for these “usual” falls in Kwality with the promoters, though, it makes me wonder, how this is even possible without promoter collusion. Or we can say that this is happening due to high pledging triggering a cascading effect?
debt is rising but from where did u get -ve operating cash flows?
LC has lifted now. Confused what to do. Valuation is 60% of other dairies. If there is no fraud seems like a good buy
