The right way of analyzing Companies in cyclical industries is very different from analyzing their non-cyclical counterparts. The parameters mentioned in Anant's post above are more suitable for a growth company such as Page Industries.
Analysis of Companies in cyclical industries has to be divided into two distinct phases. First is how fast they managed to grow in an up-cycle phase and the quality of that growth. Second is how well they managed the down-cycle phase. Voltamp has passed the test in both these phases.
In the last up-cycle phase of FY03-09, it increased its EPS 21 times (from 5.3 to 114), a 6-yr CAGR of 66%. Similarly, it grew it's book value by 11 times during this period, a CAGR of 49%. Another important aspect to note is that it managed this growth entirely through internal accruals while generating free cash flows for most of this period. So it passes the up-cycle test with flying colours.
In the subsequent down-cycle period of FY09-14, although the EPS fell sharply, it remained in green throughout this period whereas most of it's competitors went into red. It managed to grow it's book value by a CAGR of 10% even during this difficult down-cycle period. Not to mention the fact that it continued to generate decent cash flows throughout this period. It also maintained a slightly reduced, but still healthy dividend (from 12.50 to 10). So it passes the down-cycle test as well.
Now, my responses to the specific points raised in the above post.
Their cash conversion cycle is abysmal at 149 days.
The primary reason is increase in the receivable days. Owing to the unfavourable business environment of the past few years, some of their customers are finding it difficult to pay on time. Hence, the receivable months has increased from 1-2 months earlier to 3-4 months now, resulting in increase in the cash conversion cycle. This should reduce going forward when the overall business environment improves.
Further if you look at the PBT it mainly constitutes of other income
(between 60% to 70%) derived from interest and dividend from the
investments. From a pure operational perspective the profits are much
This is typical of any well managed, cash rich company in a cyclical industry. As business conditions deteriorate in a down-cycle phase, their operating profit reduces but their interest and dividend income from investments continues to increase / remains stable. Hence, such income becomes a bigger portion of PBT. However, this situation reverses itself as the up-cycle progresses. In the case of Voltamp, other income constituted only 8%-14% of PBT during FY03-09. However, as the down-cycle progressed, it started constituting bigger and bigger share of PBT and seems to have peaked at about 80% of PBT in FY14.
If you involve WACC and ROCE into calculations the company has been a destroyer of wealth in last few years.
Every well managed company in a cyclical industry generates RoCE and RoE less than the cost of capital during cyclical downturn, but at least manages to generate positive returns (like Voltamp has done). Their mediocre counterparts don't even manage to generate positive returns (like most of Voltamp competitors). You need to consider an entire cycle (involving both up and down phases) to find out the return generated by a Company. Voltamp has generated an annualized RoE of 28% during the 12-yr period from FY03 to FY15, which is fairly good. In any case, the economic down-cycle is (hopefully) behind us now. So the next 5-7 years should resemble the FY03-09 period for Voltamp rather than the FY09-14 period