Vikas Ecotech - Chemical Company

(Abhishek shah) #139

Hi Anand,

The prospects are not that bright as we think. There is a huge China competition, which is worse than a competitor from India. An Indian competitor would like growing together, where as a China competitor would sell its products below cost to kill competition first and then try to cater the market single handedly.

Where everyone among us is thinking that China has lost its battle of cost leadership to India; the story is very much wrong. China is still far better in cost terms than Indian counterpart. In such a scenario, you can either play with margins or play with working capital (debtors) to penetrate the market. Vikas Ecotech chose the second option.

I think with the current fundamentals, the stock is fairly valued. These are purely my views. Valuation is a subjective matter. I would not pay more than 12 PE for a business like this with such fundamentals. It would command a different valuation when the debtors to sales ratio go down and cash flow becomes positive. On that line, dilution has been done at a proper price.

(Alphin) #140

Has anyone analysed the effect of crude going back to the original price on the margins of the company. From annual report it seems they are not highlighting this fact. But raw material cost is one thing that can significantly affect the profitability?

Any comments on this are welcome.

(Abhishek shah) #141

Hi Alphin,

I had the same question to the mgmt. They said they have to pass on the price increase/decrease to their customers - with a time lag. This applies to all the raw materials like tin, crude, etc. However, they have got some benefit due to raw material price decrease, because the impact takes with some time lag. So, the margins that you see right now are inflated to some extent. The sustainable margins are 18%.

(Raj Panda) #142

Hi Abhishek,

Great work on this thread.

Any idea, if any kind of lead stabilisers are used in paint’s ? who are the suppliers to paint industry and how are stabilisers used in paint industry different from PVC.


(Abhishek shah) #143

Hi Raj,

Yes lead stabilizers were used in paints till sometime back. They have been banned now by govt. I did come across some media reports on this. I really dont have details on this. But let me find it out. We should try to check why the lead based stabilizers were banned in paints.

(Rohit) #144

If their financials are accurate, why are they not paying adequate taxes? Any SEZ / tax advantage I’m not aware of?

Year -----------------------------------------2015 -------------------2016
PBT -------------------------------------------6.22 cr ---------------39.25 cr
Actual cash tax paid (CFO)-----------1.26 cr---------------- 2.65 cr

PBT up more than 6 times but actual cash tax paid only doubles, how? why?
(#Not touching this)

(Hari) #146

Maybe due to carried forward losses of previous years

(Rohit) #147

Unlikely, given they pay taxes in 2015, show record profits the next year and don’t pay taxes. Anyways, don’t want to pursue this any more as I have no position or interest in this scrip, this came up while I was looking at the company so thought it maybe a useful heads up to others that have / maybe thinking about taking a position.

Happy investing to all! :slight_smile:

(bullrun1988) #148

Well see the standalone result in march 2016 result they had paid 20.52cr TAX on 365.90 cr sales ( as on screener)

(rahulparekh22) #149

I had pushed the sales guy from Vikas a couple of times for products and pricing and I got this email from him today (shown below).

Two takeaways from this email for me:

  1. Product pricing - If you compare the pricing of similar products from other sellers on websites like Indiamart - we can see that the gap in pricing is only 2-3%. However, there may be subtle differences in product quality or features which I may have missed.

  2. Secondly, in the first two lines, he mentions that they have added all the companies as their clients recently. I did google check some of the names (Miraj, prince, Kankai) and they seem to be genuine pipe manufacturers. This means that we can see hopefully more revenue in the future and then a positive CFO with a lag

All in all, this seems to show good progress.

(vibs6615) #150

Do you know which are the new clients from this list… It doesn’t say added all of them recently.

(rahulparekh22) #151

He refused to divulge much,… said that out of this list of names - some have given their first orders, so are negotiating and some companies they have given their sample products and are awaiting replies…

(vibs6615) #152

Thank you… Mar or Jun quarter result will reveal that.

(sushildarveshi) #153

v good write-up Abhishek & v good story as well.
As pointed out, Working Capital intensive business. Similar company is Omkar Speciality Chemicals where the promoter is selling stake to meet the working capital requirement. Market hammered Omkar because of stock pledging by promoters.
Can this high working capital be reduced in future ?
Nestle / Britannia were able to reduce - that is because they are able to have significant control over their customers as their customers were small compared to Nestle / Britannia.
However in Vikas’s case, their customers (Finolex / Havels / Liberty etc.) are v big players - hence Vikas cannot have control over them + China’s products are 5-7% cheaper limits the bargaining power further.
Overall - v nice story & business, will keep in tracking list and will invest once CFO is +ve.

(stock_passion) #154

Hi Rks00,

they have paid tax of 13.6 Cr for year 2016. Am I missing something here.

From the Annual report - They have adjusted the deferred tax for 2016 and this leads to only 2.6 Cr of tax for this year and shown in cash flow statement,

From results

(Dhiraj Dave) #155

Find enclosed my observation on the company:

  1. Cash tax payment being very low: AR FY16
  2. Average Salary of Staff has declined by 23% (excluding managerial person). (Refer to Page 59 of AR FY16).

    One more interesting thing, First company I have come accross where Median salary of staff including managerial person is lower at around Rs 2,30,643 vis Median salary of staff without managerial person at Rs 2,40,000. Please read this note with context of innovation focus of the company. Nearly first 15 pages in annual report talk about propsect and various innovation of the company. I am just wandering what kind of manpower it employ with median salary of 20,000 per month which result in such innovation !!! it is not making sense to me at least.
  3. There has been lot of restruring, name changing high court scheme. In fact, ICICI Bank business of around Rs 3 Cr was given to group company Sigma plastic which is yet to be trasnferred on the company name. Also, Vikas Globalone is another group company whose assets are offered as collateral for working capital loan. While we do come across such issue in small companies, still one shall understand about related parties and so many strcutural changes in business.
  4. Delay in payment of ESI premium and EPF as per auditor report
  5. Other issues
    Management salary without EPF, Page 130 of AR FY16

    Note 45 About booking other income from ESOP provision reversal, with no qualification from auditor
    Refer to Note 41, the company reported negative prior period item from export incentive

    Page 124: the company reported Rs 1.2 cr by acturial gain of obligation of defined benefit plan. There is no change in assumption in table preceding the note. So what lead to acturial gain?
    Note 32

    Note 29: Why company is purchasing real estate ?
    No breakup of trading sales is provided in sales. Total purchase goods is around Rs 67 Cr as against total raw materail consumed of Rs 173 cr.
    Note 10: Current Account with Bank has Rs 6.47 Cr, which I belive is kind of overdraft.
    Page 103: None of employee excercised ESOP

Disclosure: I have no investment in the company and investor shall do its own due diligence before taking any investment decision.

(Samir) #156

Dear dd1474,

Thank you for the note. Appreciate it. This brings out the my discomfort in the open!! Sold my tracking position after your notes.


(Prasad India) #157

Hi all,
Check this link -
Mr. Saithilak has explained about FCF.

(bullrun1988) #158

I am sorry this link is correct

(Abhishek shah) #161

HI Dhiraj Bhai,

Sorry was travelling, hence could not reply. Thanks for writing. Your points are very much valid. I had similar concerns as you have raised regarding tax payments, ESOPs, etc. I did inquire about them with the management when I met them. Here is my understanding about each issue.

1). Tax payment - Yes, they had liquidity issues last year. They couldnt pay full taxes to the IT authorities. Their 50% sales were held up in debtors and the rest of the funds were either reinvested in growing business or paying out expenses like salaries. To this justification given by Mr. Vikas Garg; I pointed him out the necessity to pay dividends in such scenario. He said, it involved an outgo of 1-2cr only and the decision was taken from the shareholders perspective. I was not convinced with that answer. Rather they should have pad 2 cr of taxes and reduce the liability. This was a case for capital mis- allocation. Vikas Garg took salary of 3.6 lacs only. Dividend was the way out for him to sustain his lifestyle - “backdoor salary”. However, company has paid all its tax liability of 15-16 and have been now paying all the taxes in advance. Any company having a new business would face such a problem in the initial years. I have personally visited the facilities in Shajanpur, cross verified with the President of All India Plastic Association and with the China guy whose company is into MTM and enjoys leadership position in China. So the business is real and genuine. Every startup takes time to generate positive OCF. This is a case of transformation from trading to manufacturing.

2). Median Salary - Number of employees have increased from 60 to 80 in one year, whereas the median salary has decreased. This is a limitation of median method. If the additional employees are hired at lower levels in the organisation, the median salary point will move down and not up. I confirmed with the IR. He said almost 18 of the newly hired are hired at lower levels in the organisation. Coming to the point of median salary with managerial remuneration, Mr. Vivek Garg earns NIL salary and Mr. Vikas Garg earns 3.6 lac. Again, if we use the median method to calculate the median salary, the amount is going to shift down rather than go up. All the middle level managers are earning far more than the MD. Vikas Garg shared his views of creating his wealth through growing his business and increasing his Market cap rather than taking salary. On the other hand, he must pay all his managers good. So, Mr. Ashutosh Kumar Verma is paid 16lacs (approx) and all other managers are being paid average 8-10 lacs. It is just because the total number of managers with salary of 8-10 lacs are far less than the employees that are paid below 15000 pm in the total count, the median salary slips down to such levels. Ashutosh Kumar Verma is the R&D head and he is getting paid respectable salary. I have seen their R&D dept. You must always discount 20% of what mgmt talks in the AR. The rest 80% is very genuine. You may check the linkedin profile of Mr. Ashutosh Kumar Verma and his ex bosses and colleagues commenting on his work. Plus, MTM is a purchased technology. So R&D has been done in the TPR and TPE part.

3). Restructuring - Vikas Globalone is not another group company. It is the old name of this company. Restructuring has been done in past, which is better for us. Company had invested in a partnership firm and one another company. Due to this there were many related party transactions. They actually decided to consolidate the operations. Today the financial statements look more transparent. Zero investments in companies and far lesser related party transactions.

4).Disputed Statutory dues - I think this is a pure business issue that occurs in every other business. The amount is small and is under dispute.

5).EPF for top level managers - As per EPFO guidelines - contributing to EPF is mandatory for the employees who have a basic salary plus dearness allowance up to Rs.15,000 (earlier it was Rs.6,500). And those who are earning above Rs.15,000 may contribute voluntarily. Does this case fall under these guidelines?? I have not checked this with IR or mgmt. Will come back on this. But, do you still consider it a red flag?

6). ESOPs - Good point. I agree to your concern. It should have been transferred to general reserve. The profits got inflated by 1cr. Would send this concern to the mgmt along with the ICAI guidelines on the same so that the same can be forwarded to their statutory auditors.

7).Export Incentive - Can you please clarify further on this. Did not get your point.

8).Acturial Gain - Acturial Gain booked is not 1.2 cr but 12 lacs. (correct me if I am wrong). There are two set of assumptions - financial and others. Financial assumptions include discount rate, salary hike %, etc. Others include attrition rate. Attrition is very high at the lower levels due to which the PBO keeps on changing. If an employee does not stay for 5 years, he would not be eligible for gratuity. Since a lot of employees left job within 5 year period, company had to reverse the PBO (liability) booked and hence acturial gain. I confirmed this case with the mgmt. Would like to have your views on this. Do you still see a red flag?

9). Real Estate Purchase - I need to check this with mgmt.

10). Break up of trading and manufacturing sales is not provided in AR. However, they have provided the same in the Investor Presentations. You may refer that.

11). ESOP lapse - In AR 2013-14, the top management/executives have applied for ESOP (656000 shares). Ashutosh Verma and all the top executives have got ESOPs. All the rest ESOPs were available to middle level managers. This is a concern and I agree to your views. I need to get justification from the mgmt on this.

Overall, I find this story good and the mgmt running the show genuine. I have done cross checks at the ground level. The product is genuine, their main customer is having 8% stake in their company, the competitor in China is well aware about Vikas Ecotech. It is transforming, and the road is not going to be straight.

Disc - Invested and a major position in my portfolio. These are purely my views. Please do your own due diligence.