Veto Switchgears -> Next havells or else trap?

Stock Opportunities
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Hi,
Veto Group established in 1967. It is engaged in manufacturing of wires & cables, electrical accessories & all type of range of led lighting, CFL & fans. In the Year 2012, the company has come up with an Initial Public Offer and was listed at National Stock Exchange (NSE) through SME platform. In February 2015, the Company migrated from SME Platform to NSE Main Board. The same year, it was listed on the BSE (formerly known as Bombay Stock Exchange Ltd.) The company incorporated a wholly owned subsidiary company in Dubai by the name of VETO Overseas Private F.Z.E in October 2015.
Its manufacturing cables under Vimal Power brand which is having good presence in Rajasthan and Gujarat.
Sales growth and opm growth is in double digits.
Veto Financials:

Narration Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Trailing
Sales 47.00 53.20 68.60 74.14 94.48 97.30 176.74 230.97
Expenses 41.30 46.12 57.53 63.30 83.67 82.12 155.08 203.43
Operating Profit 5.70 7.08 11.07 10.84 10.81 15.18 21.66 27.54
Other Income 0.08 0.04 0.10 0.28 0.87 0.54 0.24 0.98
Depreciation 0.88 0.90 1.06 1.06 1.20 2.01 1.97 1.63
Interest 0.81 1.29 2.58 2.45 2.05 3.95 4.55 3.77
Profit before tax 4.09 4.93 7.53 7.62 8.44 9.76 15.38 23.12
Tax -0.26 0.07 0.32 1.74 2.34 2.61 2.29 3.20
Net profit 4.35 4.86 7.22 5.88 6.09 7.14 13.09 19.90
EPS 4.02 4.35 6.19 3.53 3.32 3.90 7.14 10.86

TRENDS: 10 YEARS 7 YEARS 5 YEARS 3 YEARS
Sales Growth 24.28% 20.83% 27.14% 33.59%
OPM 13.20% 13.47% 13.61% 12.93%

Negatives:1. Promoters stake is reduced.
March -2016 March-2017 June-2017 September -2017
71.76 58.19 55.05 48.66

Lot of companies registered in the same address.Promoters are diversified into lot of companies which might be leading to stake reduce.
CIN Name Addr
U70101RJ2013PTC042161 PINK SQUARE INFRA DEVELOPERS PRIVATE LIMITED
230 SINDHI COLONY, RAJA PARK JAIPUR Jaipur RJ 302004 IN
U70101RJ2013PTC042162 PINK SQUARE REAL ESTATE PRIVATE LIMITED
230, SINDHI COLONY, RAJA PARK JAIPUR Jaipur RJ 302004 IN
U70101RJ2014PTC045395 V1 INFRADEVELOPERS PRIVATE LIMITED
230, Sindhi Colony Raja Park Jaipur Jaipur RJ 302004 IN
U45201RJ1986PTC003535 RAJASTHAN BUILDERS AND CONSULTANTS PRIVATE LIMITED
230, SINDHI COLONY, RAJA PARK, JAIPUR Jaipur RJ 302004 IN
U31300RJ2008PTC026189 VETO ELECTRICALS PRIVATE LIMITED
230 RAJA PARK SINDHI COLONY ADARSH NAGAR JAIPUR Jaipur RJ 302004 IN
U31300RJ2013PTC042853 AKSHAY VISHNU CABLES PRIVATE LIMITED
230 SINDHI COLONY, RAJA PARK JAIPUR Jaipur RJ 302004 IN
U45201RJ2004PTC019639 PINKCITY BUILDHOME PRIVATE LIMITED
230, SINDHI COLONY RAJA PARK JAIPUR Jaipur RJ 302004 IN
U31104RJ2001PTC017330 SHRINATHJI TRADELINKS PRIVATE LIMITED
PRAGATI CHAMBERS, G-1AB,353/2,RAJA PARK JAIPUR 302004 RAJA PARK, JAIPUR 302004 RAJA PARK, JAIPUR 302004 RJ 000000 IN
U24232RJ2009PTC029447 VETO EXIM PRIVATE LIMITED
230,SINDHI COLONY RAJA PARK JAIPUR RJ 302004 IN

2.CFO for 2014 and 2015 is very low despite of good profit. Decrease in other assets is too high(16,00,55,945) as on 31st March 2015.

Narration Mar-14 Mar-15 Mar-16
Cash from Operating Activity 0.37 -2.07 21.46
Cash from Investing Activity -25.68 3.21 -7.80
Cash from Financing Activity 29.15 -4.79 -0.05
Net Cash Flow 3.84 -3.65 13.62

  1. Promoters stake is reduced to 58.19 % from 71.76 % as on march 2017.But They simply copied and pasted ii.Category of Shareholders from 2015-16 annual report. How can we assume the mistake?

Disclosures:invested in small quantity at 150 levels at 3% of my portfolio

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Good digging. Consistent low tax rate + no dividend put together is possibly biggest negatives IMHO.

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In fact they do pay dividend. The key challenge would be whether they can expand from being a regional player to a national player. Also the LED lights manufacturing space is getting highly competitive.
Disc: Tracking quantity.

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They have reduced the stake by around 23% in the last 18 months.i have the following doubts
1.there is lot of scope for growth in this business.they are having lot of unlisted companies.are they feeling that veto’s business growth is less compare with others and reducing the stake and investing in those companies?
2.dont they have time to prepare annual report withoht mstakes?instead of copy and paste from previous year’s AR?

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@The_Confused_Consult : i am really amazed with your knowledge.i was delighted with your assessment on Fiberweb.kindly give your view on the negatives of veto swithgears?

I have mentioned negatives in my first post.

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I came across this company two years back when it was just got listed. Its products being popular in Rajasthan and got to see their product in local shop. Initially it looked very interesting growing revenue, new production line, new growing subsidiary and many more just one thing i could not digest and it was selling by promoters at regular interval and that too in open market. This thing put me off and till now i could not justify its a next havells or trap? I decided to give it a pass.

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Please check the below link. The reason for promoter selling explained here. This could be the reason.

Disc : Invested small part of portfolio.

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I would request you to be at least cautious about rakesh-jhunjhunwala.in recommendations due to the following reasons.

  1. It highlights the acquisitions of celebrity investors and billionaires with great details but does not generally provide info about their exits. Maybe when the site followers are buying the recommendations, the billionaire may be dumping it in the background.

  2. It produces no original research but copy pastes from other reports, which may not be a bad thing in itself, but it never asks users to be cautious or use prudence. It is always full of buy recommendations endorsed by celebrity investors which I feel may be occasionally used for pump and dump.

  3. I still wonder why Rakesh Jhunjhunwala let this site use his name, when he has not endorsed it. After all one fault by this site may damage his reputation. Either he should endorse it or publicly dissociate from it.

I have been visiting that site for last couple of years, but would request to make your own due diligence before investing on their recommendations.

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@Sreekanthreddy9 are you still holding it?
Can you elaborate on the opportunities going ahead? They have started business in Dubai and how it is going to be in future? They are already expanded in 10 states in India, what about the plans of moving to other states?

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@rkothuri; @Sreekanthreddy9

Hello everyone,

I happened to meet a consultant to Veto Switchgears recently and here are the key takeaways of our meeting.

  • Veto Switchgears and Cables (Veto) started its operations as a retail shop for electrical accesories in Jaipur and gradually became a leading dealer in the Rajasthan market for the Veto brand. the existing Veto promoters had decided to shut operations and the dealer in Rajasthan decided to buy the plant and the Veto brand from the erstwhile promoters. the curent promoters are ex-dealers who are now manufacturers. Veto setup its own manufacturing plant for wire and electrical accessories in Haridwar. Over the years, it has become a well recognized brand, especially in Rajasthan and Gujarat.

  • The company got listed in NSE SME platform in 2012 and later got listd on the main platform

  • Current promoters are three brothers, out of which one is based out of Dubai. They manufacture their own cables, switches and accessories for the domestic market whereas Dubai operations include sourcing the goods from China and retailing in Gulf countries and Africa under Veto and Vimal brands.

  • The Dubai operations are much larger than the consolidated operations of the listed entity. The three brothers had earlier decided to consolidate their operations under one entity and hence gave preferential warrants to one of the promoter and the entire Dubai business is likely to come under the listed entity over the next 2-3 years.

  • In FY16, some part of Dubai operations came in the current entity and as a result, consolidated revenue saw a massive 85% jump. This business requires 40% or 150 days of working capital funds. So incremental cash flows will be used to get more overseas business under the parents name without incurring too much shot term debt.

  • As on FY17, total revenue of Rs240cr is split 50-50, between domestic and overseas business. Currently, Rajsthan accounts for 70% of the total domestic business. The geographic split for overseas operations is 40% gulf, 40% Africa and 20% Europe. They sell in Africa on advance and on credit in all other geographies. The segment-wise break-up of FY17 standalone revenue was wires & cables (48% of sales), accessories (28% of sales) and lighting (24% of sales). On a consolidated basis, wires & cables, accessories and lighting contributed 43%/43%/14% respectively.

  • Wires and cables segment is most competitive and the company earns 5-6% EBITDA margins in this business. Switches and accessories margin is close to 10-14% whereas margins in the lighting segment is close to 15-18%

  • Company has close to 2200 delares and out of these 200 are exclusive dealers. The company plans to convert 100 delares out of these 2oo to its own retail stores, following the Havell’s model.

  • Post conversion of warrants, total equity shares will be 2.28cr and promoter holding will be 1.55cr translating into good 67% holding.

  • They are planning to increase presence in 10 other states in the country and hope to grow in excess of 15-20% in domestic market. The opportunity is immense considering the housing for all and smart city initiatives of the country and electrification drive of the government. The current Dubai business has revenue of Rs400cr which can come to the parent subsidiary over next 2 years. If all goes well, Veto can have Sales of Rs750cr and EBITDA of Rs90cr by FY21. Assuming PAT of Rs60cr and 25x multiple, market cap can go up to Rs1500cr

Disclosure: Not investd. working more on equity structure and Dubai plans and will update in future.

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Before bringing in the Dubai business to consolidated Veto, How can Dubai based brother selling the sourced (from china) products under the same brand (Veto,Vimal). Was he paying any royalty for using the brand?

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Hi Thanks for the detailed writeup.

I have been following the story since last 1year (Disclosure - Invested).

Few Querries -

  1. Outlook for FY18 (% contribution expected from Dubai and Domestic Biz). Outlook on margins ?
    They have a Vasai Plant dedicated for LED products manufacturing. This plant was expected to get operational in the current quarter.

  2. Management had stated that they would be moving out of concentration from Rajasthan Biz, but they have failed to achieve the same.

  3. HOS (Herd of street) Possible disputes among the brothers ? any management clarification you have here ?

  4. Promoters did preferential allotment at 180 / share (worth ~Rs 76Cr) and at the same time they have sold Rs 112 Cr (worth of shares) in last 6months. Couldnt understand this transaction.

  5. FY17 Dubai trading revenue was ~Rs 150 cr and Rs 400 Cr by FY21 - WHICH translates into 28% CAGR. Cant understand this trading business scalability. If you can help me here.

Thanks for the update.

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Investors Meet Veto Management

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Mixed numbers posted by Veto switchgears- Flat topline and Bottom line increased by 22%. Consolidated DEBTORS increased significantly from 56 Cr to 107 Cr and that too when topline is flat… Keep a watch…

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Agreed. I considered this to be a potential multibagger but with today’s result, it is out of that category. I have exited today at cmp. Will wait till revenue start going up now.

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This has fallen very steeply. Has the fundamentals deteriorated? Is there any scam brewing? Is any one tracking this company?

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  1. The company plans to become PAN India for the last 4 years. But the dealers haven’t increased and still stays around 2000 (supposed to be 5000). and the geographic concentration still stays the same(Gujarat and Rajasthan).
  2. The company future plans like launch of geyser is not achieved and making the revenue of 1000 crores before 2020 is likely not possible.
  3. We should also take into account that the competitive pressure is very high and peers like havells are very well established and have a strong market presence when compared to the company.
  4. The company cannot advertise or make a strong market presence through advertising or marketing because the company is already struggling to manage the working capital needs. The company needs Rs.40 for a Rs.100 product.
  5. The industry has very less entry barriers. The company needs very high dealers and distribution which hasn’t grown in the last 4 years. The selling of promoters make things suspicious. If the goal is to make 1000 crores revenue why would the promoter be selling ?.
  6. The company doesn’t have a distributor in the business chain and selling only through the dealers. When distributors are added in the chain, the Margins will be reduced.
  7. The company has either take high debt or shrink the receivable period drastically to solve the working capital problem.
  8. If they take high debt to solve then NPM will decrease which will reflect in the stock performance. We can keep the company in the watchlist.
  9. The company becoming multibagger in the near term is not possible according to me in the near term considering the current situation of the company.
  10. The average operating cycle for the last 6 years is 412.33 Days and cash cycle is 347 Days which is very high at this working capital condition.
  11. The 45L convertible warrants issued by the management for themselves on may 2017 is not yet converted even though the price to execute the warrants can be recomputed. The deadline for it is march 2019.
  12. We can also assume the promoters were diluting their stake(that too in open market) during good times of the company, also knowing they may not perform well in the upcoming years. This could be the reason for convertible warrants just to show they have faith in the company
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In February 2021, Veto purchased 95.5% of Vankon Modular Private Ltd. and it claims that this acquisition will increase its dealer network from 2500 to 4000.

Vankon has a manufacturing facility in Mumbai. Looks like the company is acquiring for Manufacturing footprint and dealer network, because the product profile of both companies are overlapped.

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