there are improvements in all other aspects. But, still CFO is in -ve territory from last many years.
Can any body has dug deeper in CFO issue?
I strongly oppose the company who pays dividend despite of high debt or deteriorating balance sheet but here, the catch is that the Management is not taking high salary( with respect to profit) and i think the dividend is for management to get compensation indirectly. I cant say it is right or not. If we go through Last ARs we can find so many eco friendly and innovative products in pipeline but when i read AR17 there was not any mention of those products like use of waste oil and recycling of used PVC piping and selling them. Management is talking about R&D based product i could not find any significant money spent on R&D(4.32 lac in FY16-17 and 4.32 in FY15-16). One more point that Mr. Ashutosh Verma is CEO and R&D expert in. He should be there in the conference call and should give comments on the product pipeline. After reading AR17 u will get to know that they are planning big for products and sales but remaining working capital heavy is a risk to me. Allotment of preferential shares is a good option for company because it gives the confidence to retail investors that the management has skin in the game.
@anand_paxonet and @abhishek90, would be great to get you guys back in the discussion. Think both of you did a great job late last year and early this year in pushing forward the research and thinking
When management blames high receivables to Demon and GST, they are saying a straight lie. The only fact which emerges from their last > 5 AR is that they are consistently having high receivables far in excess of the profits they make in every single year without exception. Moreover, this is deteriorating every quarter. Latest quarter once again has gone the same way. Now this fact suggests that their product is not extraordinary and buyers are able to dictate terms. I will write more on this in another post.
On studying 7 Annual Reports of Vikas I found two major concerns:
- Extremely high trade receivable Rs. 151 Cr equivalent to about 148 days revenue (31.03.2017). This is having very big impact on company, as the entire cash profits earned by the company in last 7 years are locked in these receivables leading to zero cash generation by the company for 7 years!
- R&D: The 2017 Annual Report makes extra effort to narrate R&D works, the rich benefits derived and expected in business sustainability of company. But only a meager Rs. 4 lacs were spent in R&D in 2017. This is in complete contrast to the AR narrative where a full CRI (Centre for Research and Innovation) team of scientist is working in world class infrastructure and test laboratories.
I wrote to Mr Garg asking 2 questions: “Are you planning to change the Trade Receivables situation? If yes, how? and when?” and “Please elaborate and explain the R&D point”.
However, the company choose not to reply. This shows that management is helpless in managing these situations.
The above leaves a big question mark on management claims like:
- Their product is extraordinary-If that was so, how come they have neither pricing power nor negotiation power with buyers?
- 50% sale is in export- generally export revenue comes either in advance or in max 60 days. The 150 days credit is too high and extremely risky.
- R&D is real or virtual? There is no tangible evidence in last 7 years which supports it is real.
In conclusion, reduction in trade receivable is the acid test of this company. If they fail another 2 quarters, the hope story will end.
Thanks Dear Ak…very valid points… think these issues continue to persist and while management may keep on tomtoming about their products, numbers dont lie (unless thry are fudged)…the only silver lining is the stake sale done to another competitor (presumably to raise cash to keepops goin)
Disc - Exited Few months back at 22
I totally agree with you that cash flow is the real issue. It appears that
the business has no moat - at present. However, if govt issues the
directive to stop use of lead based chemicals in PVC, it could result in
shooting up of demand and return of moat and improved cash flow. Next two
quarters will determine that. Till then let us keep a watch on entry of
smart money , if any, into the stock by keeping a watch on investment by
mutual funds and HNIs etc.
Tremendous upside along with volume today. Just now on CNBC company’s MD (Vikas Garg) confirmed taht company’s Kandla plant will start production in next 15-20 days and Dahej plant will start production in next 1 month.
Big positive. Expect Govt or SC will soon issue directives keeping in mind the pollution level increasing. We can’t let the situation out of hand and start balancing act later on like China.
Disc: Invested from levels of (14-15) and holding very large quantity.
NGT order to ban lead stablizers , if implemented will give trememendous boost to business:Vikas MD
Sorry but i am not able to understand what is link between pollution and non-toxic lead stabilizer to be used in PVC pipes. Kindly enlighten.
As PVC is highly heat sensitive during processing (extrusion of pipes) heat stabilizers are used during proccessing. Most stabilizers used are lead based stabilizers. their residues will be left in the pipes and can leach out to the water. this is a major cause for lead poisoning of drinking water. In devoloped countries the use of lead based stabilizers is either banned or discouraged. Non toxic organo-tin based stabilizers are used instead of toxic lead based ones.Vikas Ecotech is the leading producer of organo-tin based stabilizers in india. Hope this explanation serves the purpose
Any idea what is the reason behind recent run up?
My take is on recent run up is the type of market rally we are having apart from this i dont think anything substantial has changed. Even the transcript call was not that enthusiastic. Management did not talk about the tech collaboration it had with Nafigate, link of the news attached http://www.business-standard.com/content/b2b-plastics-polymers/vikas-ecotech-to-produce-bio-plastics-from-waste-cooking-oil-116060700138_1.html. If you read their last 3-4 years AR they are supposed to produce many breakthrough products but apart from Organotin as a new product and new tech they haven’t done any good. Look at Fairchem, it also manufactures products from Waste Cooking Oil, look at its growth very promising. No breakup or info on upcycled PVC products, no new or concrete steps for Trade receivables.
Discl: Invested from lower level.
I like the concept of the Company ie replacing a key material in the manufacture of PVC pipes that will change the character of the pipe from being harmful to health and environment to a ‘green’ product. So in effect the investment thesis is:
VEL makes a chemical that will replace another chemical eventually as legislation or conscience mandates a change. With only about 10% penetration in this market, VEL will benefit as the market leader when this change happens.
Given this opportunity, what intrigues me is the apparent inability of the company to turn in positive operating cash flow.
I have taken the above numbers from screener.in, please do let me know if there is any error.
The other concern is the very high debtor days (nearly 130 days?). If the company is indeed an exclusive producer of a cutting edge product whose demand is outstripping its supply (presumably, hence the high capex) then should the producer not get favourable terms of trade from the buyer? This does not seem to be happening in this case.
Then does VEL have the ability to fund its sales by extracting better credit terms in turn from its own suppliers? This also does not appear to be the case. Because “other liabilities” (screener does not give creditors for input separately) have gone down from 18% in FY13 to 17% in FY17 even as debtors as % of sales are up from 23% to 41% in the same period. It is not a surprise then to see VEL’s debt levels rise over 3 times in the same period to Rs111 crore. While it is true that D/E ratio has fallen to 0.83x from 1.41 in last year, I feel it cannot be relied upon as a measure for liquidity in this case where the equity, which is nothing but accumulated profits, is itself suspect (as profits have consistently failed to translate into cash).
So the situation appears to be that there is a price cap on its products (maybe imposed by threat of cheap imports) resulting in VEL using credit period as the only customer retention tool, even as its own suppliers demand their payment promptly. This suggests that the balance of negotiating power is always tilted in favour of the other party be it supplier or customer of VEL. I feel as it begins utilising its new and expanded capacity, VEL will feel the pressure to extend this credit period carrot as it struggles to absorb fixed costs of the new facilities.
This is not to say that the stock will not perform well. If enough positive news flow is accompanied by VEL beating street estimates of profit I hope the stock will do well. Just that given its competitive position as it appears from my first glance at the numbers does not make it ‘fit’ into the way I would invest.
Disc: I am not invested but would keep a watch for changing terms of trade to take a call.
You have raised a very important issue. However, this and some other issues
have been discussed quite well in the last Q2 earnings concall which is
Disc: Cautiously Invested.
Many thanks. I just went through the concall transcript. It is encouraging to see the management targeting to bring down debtor days to 120 days over the next 6-9 months. I will re-evaluate when that happens. However, just looking at terms of trade it appears that it is not as cash-accretive a product as an initial reading suggests and I am unable to shake the feeling that the Company will likely struggle to translate profits to cash in the medium term. I hope I am wrong and will look forward to take a position in this stock then. After all a good story gives many opportunities to enter
Very valid points have been raised by you and same concerns have been posed by many investor in the concall. Results are encouraging on revenue and margin basis but the balance sheet is deteriorating YoY. If you read company’s last 2-3 years AR you will come to know that it has very good chemical products touching our daily life and many more which are ecofriendly, made form waste PVC and Waste cooking oil. One company named Fairchem with same type of product from waste cooking oil is trading at very high premium though its growth and balace sheet is strong with comparison to Vikas. As per my knowledge this organotin stablizer product have been launch last FY or so and clocked 80 crore revenue form it only. Management has done so many technical collaboration with many MNC for unique products but very few if to say only one product organotin stablizer has been introduced. Management will be the key to turnaround its finance.
Bulk of investor wealth has been destroyed by the lure of glittering P&L and ignored BS and Cashflow. Remember , P&L is just accounting . Disc : not invested and not interested . Have paid enough tuition fee in life
Could you please help me to understand on “P&L glittering” with respect to Vikas EcoTech ? I understand that the company’s profit is looks good on papers, but yet to convert them into cash. Is this what you meant to or Is there anything which I’m missing ?