Sumedha Fiscal- A hidden gem?


(shreys) #1

Dear all, I’m a 20 year old student of science with a desire to become a decent investor. I’m a novice and I’m here to grow as an investor. It’s the first time I’m presenting a stock idea on this forum. If I’ve erred in my method of presentation please correct me.
Stock Name: Sumedha Fiscal
Sumedha Fiscal is a Kolkata based, BSE listed financial services company.
It has 3 major business divisions:

  1. INVESTMENT BANKING:
    Investment banking is a major source of business for the company. It generates more than half of the company’s revenue. As the economy improves, I believe, their investment baking division will perform even better.
    Any company could be in need of funds and may raise it from financial institutions -banks, investment organizations, etc. Even governments raise money at regular intervals by issuing bonds. When the sum to be raised is huge, several organizations may come together and form a syndicate to lend money to the organization in need. These activities are complex. They need to be planned with precision and well distributed. It’s an industry that functions on trust. Sumedha Fiscal is a veteran in this industry and must have built solid contacts. There’s no reason why their business wouldn’t improve when the economy gets better. They have all the ingredients to get business for their investment banking division- experience, expertise and trust.
    STOCK BROKING DIVISION : They have 1600 equity clients. Scope for improvement exists, which might lead to increased revenue.
    WEALTH MANAGEMENT DIVISION : Financial planning and wealth management services are provided by the company. It might prove to be difficult to compete with the financial services behemoths who also offer this service.

The company has cash and equivalents of 8 crores and reserves of 26 crores. It’s available for a market capitalisation of 35 crores.
This company has never surprised investors with a loss even when times were tough and the economy was in doldrums. It is a consistent dividend paying, tax paying company. Audited by leading auditors from Kolkata. Management appears to be decent and there’s a healthy promoter stake. There are not many related party transactions. Its net profot margins are comparable with peers in the industry.There’s transparency which is indicated by the well detailed website. Current time is favourable for the company. It’s grossly undervalued compared to its peers operating in the same business divisions. This company definitely deserves attention from the investing fraternity. Is there something I’m missing? If so, please guide me.
Disclosure: Invested


Arihant Capital Markets
(Nolan) #2

Why would you want to start your journey with a high risk bet when you can choose more steady performers like Edelweiss, JM, IIFL and MOSL in the same industry?


(shreys) #3

Dear @Nolan ji,
I’m in complete agreement with you that it’s a high risk proposition. But, the rewards can be outsized if my assessment is proven right. In my limited understanding ,there’s nothing I’ve come across that could be a deterrent or a red flag. I’m willing to acrept the high risk associated with it. I’d be delighted if you could share your thoughts about the company.


(The Confused Consultant) #4

You may consider to put more comments in these areas I guess for now.

A. Financial analytics- kindly put down your comments on key ratios and number. What message they convey i.e. internally healthy or superior to others? For example increase client share, healthy recoverable etc.
B. Business understanding: as you know brokerage business have been streamlined with lesser barriers what would stop others coming? Even investment banking remains tight with few due to privacy, expertise and many other reasons. The entry barriers are too high there.
C. Management: as far as I know this firm has the pedigree of Vijay Maheshwari. Not sure after who? What you feel good about management with respect to performance.
D. Special situation- to my knowledge Sumedha was holding real estate at cost value (under valued to a large extent). Not sure whether situations changed?

Industry is volatile, you would see Sumedha being an old player remain restricted to a narrow growth trajectory. A large part of loan syndication was suppose to be strength. But I am not updated these days.

I have written extensively on how to analyse company in Guru Mantra series.

Start writing your thoughts, you will get much more specific feedback. This may help accelerating your learning cycle. If you are already at upper plateau ignore my comments.:grinning:

Disclosure: not invested but the man who signs Balance Sheet is my guru who has been an influence in many of my decisions.


(shreys) #5

Dear @The_Confused_Consult sir,
It’s a pleasure to see your message. I’ve been reading a lot of your content recently and trying to learn. Many thanks.
For Sumedha fiscal,frankly, I don’t think that it can grow its revenue significantly. As you rightly mentioned some investment banks have a firm grip on the sector. There’s no reason to believe there’d be migration of clients from those top investment banks to smaller players. Frankly, I see this company more as an investment bank and less as a wealth management firm. A preliminary assessment of investment banking companies in India shows that they’re trading at earnings multiples of not less than 40. But, I understand that there’s anticipation of growth in those companies and they have an excellent revenue mix.Here, the lack of growth may cause assignment of lower multiple. Providing a steep discount for low growth, this company could be trading at 15-20 times earnings. If that’s the multiple it could be a doubler from current levels. Globally, investment banks in more developed markets trade at around 12 -15 times earnings. Would it be an unfair, unrealistic to expect Sumedha Fiscal to trade at those levels and since we’re in a roaring bull run, a little higher than it’s fair value is not a misplaced expectation, in my opinion. I reiterate, I’m a novice and I know very little. I need help from veterans like you to get better. I request your insights.


(The Confused Consultant) #6

No it wont be unfair to expect Sumedha catch up the value. Couple of time I was also excited by their raw book value power and undervalued asset. But where I was forced to no man’s land, few pointers below:

  1. See the accelerated revenue growth, there is no consistency. With a tide it goes up along with others only to fall flat. This is a cyclical nature, agree. But why a fall of revenue in Jun 17.
  2. I feel too much capital employed vis-a-vis earnings. Sumedha have 8 Cr paid up capital for 15 Cr revenue. If you look at Motilal capital employed around 14 Cr for 1500 Cr plus revenue. The high base of capital would substantially drag return ratios unless significant increase in revenue. Which is yet to happen.
  3. I wonder about their expansion, they had branches all over India (at least major cities). If these offices turned to be profit centres then where is revenue?
  4. As a financial services company Sumedha should demonstrate operating leverage at some point of time. Cost to revenue ratio hardly changes.
    Yes, there is a value gap, it was always there. Question for us then why it is not recognised by investors? Let’s look at 10 year chart:

A clear breakout has happened with big increase in volume. But if you see the pattern there was a big surge earlier landed up giving away to competition or market cycles. Value may catch up but in my opinion keep a watch on:

  1. Efficient usage of capital, they just can not have so much of capital without increase in top line and operations. Till the time return ratios will struggle.
  2. I still a trading activity, not sure why? Possibly this gives confusing signal regarding core competency.
  3. To enjoy operating leverage company has to expand its wing properly. Take trade offs against risk may be. A static employee cost does not indicate much on expansion. Let us not forget this is not tangible asset heavy company.
  4. Some point of time company has to revalue it’s real estate. But I guess they are scared to do. It may further pull down profitability indicators.
    I suggest put through 5/6 years financial side by side including income, expenditure, asset and liabilities. Let’s see what comes out.

Good wishes!


(Nolan) #7

Their profit lines have been almost flattish over long periods and I would want to see a steady growth for few more quarers before being convinced on whether the breakout is sustainable or not. The reason for my negative bias is that it does not meet some very basic filters like the size , which I use while choosing businesses. A company which is having a reasonable base of atleast 150-200 crore Mcap or maybe a decent coverage by broking houses can be considered safe. But Sumedha is very small in size and is not widely covered. Now it is very difficult to highlight red flags based upon the limited available information for such companies. The price breakouts in these penny stocks can easily be manipulated which is difficult to spot (although delivery volume of above 70% gives me some confidence that accumulation could be on). Secondly, smaller companies are more prone to market risks and can easily get wiped out due to even small environmental changes which are common in financial services business. Lastly, all broker companies with good potential have already taken off while Sumedha lags behind. This blind run for big payers will soon end as the current bull cycle comes to an ends. I wonder what impact would be upon Sumedha when its competitors would begin to cool off a little.

These are my general observations just to caution you on certain aspects which you might have overlooked. But each individual has a different risk-taking capacity and you may choose your investments in line with your risk profile.

Disc: Not Invested. Sold Edelweiss and MOSL in last 2 months.


(shreys) #8

Dear @The_Confused_Consult Sir,
I do not disagree on even one issue raised by you in this message. There’s hardly any growth. I definitely dont see this a play on India’s growing prowess in financial services. Companies like JM Financial, Motilal oswal are better bets for that strategy.I see this is a bet on their decent balance sheet and investments. Ibelieve that monetizing the land asset they possess can create tremendous value. Recently, a holding company sold its shares in a leading fertilizer company. Market rewarded it with a 60 percent zoom in share price in less than 2 weeks. Also,they have a significant amount of cash. It might mean that there’s a dearth of opportunities for employing the resource. In my opinion, it’s a decent balance sheet play and with that, we get a lucrative investment banking business complementary. In my opinion, their broking services division might be a let down. The management seems decent. I’ve read on several fora and interacted with people who shared that the executive team was communicative.


(madhavikkutti) #9

Based on the request from @shreys and @rajsuccess on the Arihant capital Markets discussion thread, I am providing my view on this stock below. Please note that, I have never followed this stock in the past and there is also very limited information available in the public media on this stock (understandable, as it is a micro cap with just 36 Cr market cap), hence my views are very limited.

Also, both @The_Confused_Consult and @Nolan have already raised all the right questions and points here, hence I limit my points to the below ones:

  • Company’s past inconsistent results are understandable, considering the kind of business they are in. Good to note that, they have always come up with positive results, even in unfavourable market conditions
  • A couple of other micro caps in the comparable businesses are Prime Securities and Pioneer Investcorp. The recent results of these companies also signal revival in the sectors in which they are in.
  • After going through available information, I am somehow getting slightly more confidence about Sumedha, compared to Prime Securities and Pioneer Investcorp. Reason is that, Prime Securities has a troubled past history, whereas Pioneer even recently has come up with extremely unpredictable results.
  • However, as @Nolan mentioned, I would like to see steady growth for at least two more quarters, before investing in this company.
  • At the same time, I do hope that, the on-going bull run in Indian market (largely driven by domestic liquidity) will continue for a very long period of time (may be, for many years), hence it should be very conducive environment for the companies in the capital markets sector. However, we have to be mindful about cut-throat competition (which is likely to favour larger players) and see how the small players like Sumedha can emerge as winners. Here, innovation will play a big role. @shreys, How do you think, Sumedha will innovate and differentiate itself?
  • Q4’17 operating income is much higher than that of Q1’18, and the expenses are even proportionately very high. @shreys, Any insights on why it is so?

(shreys) #10

Dear @madhavikkutti ji,
Many thanks for posting your analysis. In my opinion, out of the three business divisions - investment banking division has the most promise. In investment banking, It seems unlikely that companies exploring big ticket mergers or acquisitions would go to boutique investment banks. In my opinion, their best bets are the debt syndication and merchant banking divisions. Most competitors of Sumedha fiscal must be having the right persons to do the job. So, human talent may both be a differentiating factor here. In my opinion, the way Sumedha fiscal can differentiate itself is by offering services at a slightly lower fee and being totally focused on customer satisfaction. I believe, for small companies needing these services fees play an instrumental role in deciding the investment bank. Comparatively low fees and excellent customer services will encourage customer retention and might lead to an increased lifetime value of the customer. I feel, in investment banking word of mouth publicity plays an incredibly important role. In the short term, there might be margin contraction but crucial relations will be established. Also, an updation of their corporate magazine and a modern website might help them. Also, customer engagement and acquisition should receive attention. In my opinion, Sumedha has the right ingredients to be a success. Also, along with this business activity, they’re also in possession of some assets, which, if monetized can bring decent gains. All considered, at its current valuations, a lot of the negativity seems to be priced in. Would appreciate your thoughts.


(shreys) #11

For cyclical industries like broking services, investment banking, etc the PE ratio may not be such a good indicator of the company’s performance. This company has zero debt, healthy cash balance, profitability. This stock pick is definitely not a multi year investment. Here, we can utilise the change in fortunes of the industry and make decent gains. Like the change in cycle of commodities like aluminium, steel.


(shreys) #12

Results update:
Prima facie, the results seem very healthy. Their total income has increased by 30 percent and their net profit has increased by 80 percent on a Y-O-Y basis. Margins have also expanded by 400 basis points. Their half yearly EPS of Rs.3.75 is 75 % higher than the corresponding period last year. On a conservative basis, if they report an EPS of 4.5 for the year it’s trading at less than 10 times its earnings. In a raging bull run, it sure seems mispriced. Would request seniors to share their thoughts on the result.


(shreys) #13

394352b8-c2f8-41bd-b902-3548e4eb347f.pdf (444.6 KB)


(shreys) #14

Results update:
The results for Q3 are fabulous to say the least.
Their net sales have increased to 5.42 crores from 2.33 crores on a YOY basis.
The net profit has increased to 1.6 crores from 16 lakhs.
Indeed, a tremendous performance.
The company has a TTM EPS of 5.68 and trades at 50 rupees. Debt free balance sheet. It seems to be a value investor’s dream.
Please share your thoughts.


(Vijayk) #15

Net loss posted this quarter


(dhamanpr) #16

Can you attach the annual report.


(nipunmohta) #17

How is other income a negative number? Any idea?