Arshiya Internationl

Stock Opportunities
1

“Whenever something falls a lot we get interested” , i remembering hearing this line from either Charlie or Warren in one of their interviews. “interested” - finding out more about the company, just a starting point.

So, in that spirit, i aminitiatinga thread on this. The stock has now been down by 20% DC for 2 consecutive days followed by 10% DC for 2 consecutive days and probably all set for for 5% DC starting from tomorrow.

Downfall started based on news that company has laid off 290 employees out of 1700 odd employees and had not paid salary for few months. Also some bank cancelled loan approval at the last moment without citing concrete reasons. The management after initially denying the news, later came out and gave clarification that the layoff part is indeed true and salary part is partially true and bank part is complete true.

I went through the 11-12 AR and had these questions in mind on first look. So here i go:

1.FTWZ - Any simple explanation of what it means? AR talks of it as deemed foreign territory for exports,import, re-import concept ? how does it all work, who benefits from it and how ?

2.The company has dedicated pan india rail infra - Is Arshiya the only and first company to have this kind of rail infra in India ?

3). Total of 5 FTWZ planned - acerage Mumbai(Panvel) - 165 acres, Khujra - 135 acres (part of 315 acres mega logistics hub) andCentral, South and and East india FTZW is pending ? Aren’t these really big land requirement ? Is the landacquisitionalready over for the other 3 FTWZ’s ?

If not, given the so called “policy paralysis” we have in the country and the tough environment to acquire land, where does it leave Arshiya ? Note: East FTWZ land acquisition is still pending ? (Remember Nano, Posco ?)

4.AR talks of FTWZregulatoryframework - Is Arshiya the only one in this field ? why no other competitors ? What does it mean for the business ?

5). All the above point’s make me feel, as if huge govt approval’s are required. So how did Arshiya manage it when so many infra biggies are already present ?

I admit, i haven’t done enough homework to find the replies to these questions myself :slight_smile: i hope to pitch in with more queries and answers as i read more.

Financials :http://www.screener.in/company/?q=506074&con=1

Request seniors to pitch in please.

Disc: Not invested

2

hi,

the company has had excellent quality with investor ppts and disclosures…it will answer most of your questions …please go through a very detailed ppt , you can find the link on Devesh Kayal’s blog , and he has written an excellent post along with it …

Right now the major question is quality of business, is there volume slowdown with ex-im trade? what kind of customers they are getting ? Are VOS services really indispensable to customers ? Are the integrated offerings (end to end transportation, warehousing and VOS) unparalleled ? How high are customer switching costs ?

Because the kind of over-leveraging promoter has done, shows his over-optimism with the business model ,whose quality i have not been able to comprehend adequately till now.

3

Thanks Raj for the post. Arshiya seems to be a case of management overconfidence. I looked at it after Samirrecommendedit, but never liked it or bought it.

What comes to my mind along with Arshiya is Tulip and Pantaloon. These are not the cases where management were dishonest or trying to cook the books. They may had honest intentions but overconfidence killed them.

Tulip is one stock where I burnt my fingers (although a very small position) and in Pantaloon, I was to exit things were still rosy.

Bottom line, we need to becautiouswhen management gets overaggressive. Increased debt and littlecash flowis a warning sign of that.

4

Thanks Aditya for the reference to investor presentation from Devesh blog, somehow i had missed it. That contains more info that i could digest in one shot. Will have to seat again with it to absorb more details.

Thanks Lalit, i have begun to watch this one more closely. Since the debt is so humongous, even though the stock price is falling so rapidly, the Enterprise Value of the company hasn’t decreased much. So, let’s wait and watch.

5

Latest con call trascript -

http://www.arshiyainternational.com/upload/AnalystCallTranscript-10-01-13.pdf

6

From moneycontrol

Arshiya International at its board meeting held on January 19, 2013 has decided to initiate a financial restructuring process under the corporate debt restructuring forum and has appointed SBI Capital Market Ltd to advise the company.Source : BSE

**What exactly CDR mean? and how it is going to effect its financial? Anyone can help me here.
**

7

Hi Subash,

As far as i know, CDR (Corporate Debt Restructuring) means company is kind of acknowledging that they are not in a position to service the current debt (interest & principal) with current cash flows that business generates. Hence, they are requesting the banks to re-structure the loan whereby they have to make less payments now (like say only interest now - exact terms will differ case to case) and will make up for it by paying larger sums in future.

It also, brings me to think interest coverage must be a part of fundamental analysis. Arshiya had 2000+ cr. of debt which at 5% interest requires 100 cr to just service the interest every year. Very tight situation given the EBITDA of past year.

Would be glad to hear from seniors on this though!

My interpretation is, this shows that promoters have been over optimistic about the cash flow from their business.

Also, am worried about another report - "In addition, the company has also decided to put all its existing capital expenditure plans on hold for the next one year to tide over financial troubles.’

http://articles.economictimes.indiatimes.com/2013-01-14/news/36331813_1_arshiya-financial-crisis-capex-plan

8

Hi Let me answer what is CDR for benefit of some members who may be ignorant (I have put through many cases through the CDR mechanism in my earlier employment - was handling stressed assets there). Corporate Debt Restructuring mechanism was set up to help genuine companies restructure their debt. Typically companies have many lenders and if they want to restructure their debt (mainly reduce interest rates and extend loan repayment tenors), they had to engage in separae discussions with each individual lender. This would take time. Also, the company would tend to tackle the largest lenders first, who would be in a position to dictate terms and get preferential treatment. They would then approach other lenders saying that all the main ones had granted them a restructuring and demand that the smaller ones also fall in line. If some of the minor lenders do not agree, the company would simply default. This will force the lender to either give in or the lender would drag the company to court whihc would hamper the business and operations and hence debt servicing capacity for the rest of the debt. Tehre were lot of pitfalls in individual negotiations. In some cases, where a bank would be a major lender, in other cases, he would be a minor one and would suffer a boomerang effect. CDR mechanism brings all lenders to one table. The meeting is usually held every month (used to be in IDBI Towers, Mumbai) where a set of cases are discussed across the table by all the lenders to the company. First step is to “admit” the company to CDR which happens if the lenders decide that they want to allow the company to remain operational. IF not, they dismiss the case and follow individual recovery strategies through or outside legal mechanisms. Upon admission, if the case is complicated (many lenders, many types of loans etc), a common agency is appointed to draw up a restructuring package based on its study of the viability of the company (essentially, financial forecasting). They would state the exact terms of debt restructuting that they deem necessary to establish viability of the company. This proposal is circulated to all banks before the next meeting, during whihc each gives its comments (approval or otherwise) to the draft package. Based on various lenders’ inputs the package may get revised. Finally it is approved if (i speak from 5-6 year old memory) atleast 75% of the lenders by value and 60% by number of lenders agree. If this happens, then the other dissenting lenders have to fall in line. They cannot back out and pursue individually. Many cases have been resolved this way - which is much quicker, transparent and can be termed fair. I have tried to give a gist, however there is much more to it. Hope atleast some basics are clear.

9

Addendum - if there is no need for separate agency to draw up the package, usually it is the main lender’s responsibility to do it (the one with the largest share of debt) unless some other lender offers to do it and is accepted by all the lenders, although this situation is very rare. PS- administrator - when i type in this box, all formatting is perfect. when I click post, everything appears contiguous, without formatting, paragraph marks etc. is it my system problem? i face the same issue while posting from home as well as office.

10

Thanks Vinay, that’s a good one!

11

Wow! Vinay!

Excellent educational piece from you. Many thumbs up for the same!

Sorry to know about formatting issues - what browser/OS are you using? this is the first time someone has reported a problem of this kind. Please revert and we will check out.

Rgds

Donald

12

Thank You Vinay for sharing all that info and thanks to Subash for raising it.

Vinay, if the CDR admission is done will the com be under pressure to report keydeliverablesin performance to the banks regularly? Though this will ease the cash-flow pressure will it affect the normal operations and hence the customers of the com? Arhisya losing customers wont be good new at all.

What is the ratio of cos which manage to come out of the CDR mechanism and continues normal business an what are the chances you see for a turnaround in Arshiya?

It would be great if you can help us analyse Arshiya as a contra bet if not now after some more correction.

Cheers

Vinod

13

Raj,

Thanks for your initiative.

Good to pursue another failure candidate - and trying to establish lessons from it. As Ayush mentions we got reccos from a few players (even conservative guys) who liked the Logistics-Infrastructure sector, the size of the opportunity before a capable player, and Arshiya’s vision and execution track record.

I never studied it in detail. Hope we can get someone like Prabhakar Kudva (who I know did a lot of work on it) and Hemant Gupta (invested significantly -like his clarity and skills - may not have done extensive fundamental work though) to help us refine this for everyones benefit.

You have brought out most of the issues. Lets try and crystallise thefailure pattern: (we can keep refining this, with help from those most familiar with the business):

Failure Pattern:

1). High Debt with High Pledging

High Debt (2.5x plus) with high pledging (72%). Also suspect debt servicing capability with Interest Coverage <2x

2). Cash Flows not Supporting Net Profits

Another case where Net Profit growth (over last 5years discounting FY12) not supported by the Cash Flows

3). Deteriorating Free Cash Flows (probably the same point as above)

Agreed in infrastructure projects, free cash flows will be far off. But even in a long gestation projects if you need higher and higher investments to keep growing, Operating Cash Flows need to keep adequate pace with Sales/Profits growth

4). Dismal Return Ratios

8% RoE despite high Leverage would say to me sub-par Asset Turns (0.4x), sub par net margins.

In Hindsight, many red-flags should have been noticed. As for me, I have learnt to respect Hitesh & Ayush’s judgement - High Debt is a NO; High Debt with High Pledging is a NO NO; just that was enough not to get excited by the Hot story (Sector), vision & track record (Company).

In Abhishek Basmallick’s words (another guy I have come to highly respect - I have never seen him discount the red flags for any, anything) …Please think & rethink he would say …What can go wrong? Aren’t you taking much higher risks in A for the same level of growth/opportunity available from B with say none of these red flags; infact sometimes a very healthy BS…instead of a stressed BS.

14

Thanks Raj. Found a report on Arshiya )- analysing issues raised by you. Should be useful for all.

Arshiya International: A Collapsing Star

**Punit Jain**| Published: 16 Jan, 2013 | Source : ValueNotes.com |

Arshiya International is a small cap Logistics and Transportation firm.

**
**

Business Snapshot:

)- The consolidated turnover is 1057 crores and Profits 118 cr (FY12). Promoters hold 45%.

)- The CMD is Ajay S Mittal, who set up this firm in the year 1999. It has about 1700 employees.

)- The service offerings include freight forwarding, two Free Trade & Warehousing Zones (FTWZ), first and last mile road transportation, a dedicated rail freight infrastructure network, and strategically located industrial & distribution hubs.

)- The main business revenue segments are:

(1)).jpg)

Fig 1 a Segment Revenues FY2012

)- The two FTWZ are located at - Panvel near Mumbai and Khurja, UP near New Delhi. Deemed foreign territory, the FTWZs offer 24X7 customs clearance and services for imports, exports and re-exports.

Pricing Snapshot

**The 3-year view of the share price of Arshiya shows us:
**

)- Share price has fallen by an annual average of 30% for 3 years.

)- The share has been very volatile, as from a initial price of 160, it rose to a high of 362 in Dec 2010; then was at 121 in early Jan 2013, till it started the current sharp fall of 53% in the last 5 days!

Fig 2 a Consolidated Financials Snapshot

)- Consolidated Revenues, EBITDA and PAT have gained by 27%, 48% and 28% CAGR over 5 years.

)- P/E has moved in a range of 6-25 times, before the recent crash to the current 2.8 times.

)- Dividend has been increasing steadily, and the current 70%, indicates a dividend yield of 2.5%.

Opportunities and Concerns

Opportunities

)- In India spending on logistics is at 14% of GDP, much higher than in developed countries where logistics spend is 8-9 % of GDP. This presents a massive market opportunity for Arshiya.

)- Logistics in India is highly fragmented, and mostly from unorganized sector. Thus if Arshiya can attract the business by offering better services, stable pricing, multimodal efficiencies and performance guarantees, it can win customers from the unorganized sector.

)- In transportation in India, the main pillars are Ports, Trains, Trucks and Airlines. However the integration among these pillars is poor, so a big opportunity is in multi modal infrastructure and door to door delivery services for business.

)- Arshiya has certainly executed on a vision, and built high quality logistics assets and a good client base. The challenge in logistics is to achieve critical mass and business volumes.

Concerns and Current Crisis

)- Overall the import/ export outlook is flat to negative today, as imports & exports are falling.

)- Arshiya has built on this business vision, and created good infrastructure by investing heavily in facilities, but is not yet earning much from current operations. The cash flows ofArshiya are poor. See Fig3.

(1)).jpg)

Fig 3 a Consolidated Cash Flows are a Concern

)- The total debt of the company at end of FY12 was 2,195 cr., Debt-Equitywas 2.53 (FY12).

)- Promoter shares encumbered - Promoters as of last quarter have 44.5% of shares. Of this 72% are encumbered/ pledged against loans, i.e. of the entire share capital 32% are pledged by Promoters.

)- All this makesArshiya very fragile financially. If they pay interest on time then it is OK. But the recent news is that they failed to raise a loan of 80 cr. recently. Now they have decided to stop all further capital investments for 12 months in order to salvage the debt condition.

)- Another recent bad news is about employee retrenchments and a company strike. A news article says aArshiya has let go of 290 of its 1,700-people workforce mainly on grounds of performance. WhileArshiya has already relieved 100 people of all their duties, it will now look to relieve the remaining 190 people over the next one week as part of its cost rationalizing measures. The move will bring down Arshiya’s wage bill by about 30% to Rs7 crore from the current Rs10 crorea.

)- Also some sacked employee made allegations about a ‘Satyam type scam’ in Arshiya caused a fall in share prices, which is likely to have triggered a sale of pledged shares.

)- From 122 on 8th Jan, it has fallen 53% in 4 days, hitting trading limits every day to todayas 57.

Opinion, Outlook and Recommendation

)- The Arshiya stock is collapsing today, and in the short term the share can keep falling till strong hands like promoters or bargain hunter supporter steps in. One canat say how much it will fall.

)- Once the fall stops, the stock will be very cheap and oversold. It will then be a high risk/ high gain purchase opportunity. But the share recovery period thereafter is also difficult to predict.

)- But Arshiya is in a terrific industry, has good vision and has shown good growth in the last 5 years. However, its financial plans have not worked out, as Free Cash Flow has been consistently negative.

)- The lesson for us is - Corporate profits are paper profits unless supported with cash flows.

)- The Infrastructure sector is notorious for debt and cash flow issues, and Arshiya is another such situation.

)- Investors need to stay away from this stock untilArshiya is able to repair the highly stressed Balance Sheet, and the debt and Free Cash Flow levels revert to sustainable levels.

_JainMatrix Investments (www.jainmatrix.com) is a firm started by Punit Jain that offers an Investment Advisory Service._The author can be contacted at punit.jain@jainmatrix.com

15

Interesting to dissect a failure stock which is in recent public memory. At least people are more conversant with the psychology surrounding the stock story.

I think there are a lot of parallels with suzlon.

First is that of a sexy sector promising a lot.

Second is asset heavy nature of the business – which often leads to heavy debt burden.

Since the potential of the sector is huge, the promoters also are swirled into overconfidence about the prospects and expand and often do takeovers relentlessly without looking at balance sheets etc. Investors too are taken in by the sexiness of the business and potential returns possibilities.

Next is the pledging factor which adds to the woes once things go awry.

And things do go awry somehow with companies with huge debt piles. e.g suzlon, arshiya, unitech, dlf to name a few. The problems often come in different guises but they do come and cause devastating side effects to the company and shareholders.

I think for me the learnings boil down to following:

avoid hot looking sectors and companies therein.

avoid debt laden companies

avoid companies with a lot of pledging. (small amt of pledging of around 5% or so should not matter too much) - another similar example that comes to mind is that of amar remedies. that also went down a lot from levels of 140-150 odd to 30-40 within no time.

16

I would not touch this stock at this time even with a barge pole. There is way too much negative sentiment in this. It needs a lot of time to stabilize and go away from public (negative) memory.

But the thread is good. I have been thinking of “fallen angels” last few days. But, I think for contrarian plays its better to stick to large caps, so things like BHEL, Siemens, ABB are stocks I am looking into now.

17

The first thing which comes to our mind in such cases are the returns earned in a Satyam or a Wockhardt. When something falls a lot, it automatically starts looking attractive since we are previously anchored and accustomed to seeing a much higher price.

In order to take positions in situations like this, a very high level of conviction is needed since we are going totally against the market.

In my view, it is a **must **to have someone from the industry helping you out. Understanding the business, the value of assets, hidden liabilities, legal screw-ups, reputation of the promoters and mgmt etc is a must.

Such cases can be correctly analysed by businessmen engaged in similar business and not by analysts sitting in the office. Numbers, excel sheets, valuation models, annual reports, talking with mgmt, listening to concalls is not going to be of much help. Proper business knowledge and insight is needed. For that, taking help of industry people is a must.

This is of course, just my view. Wrt Arshiya, I do not understand the business properly, do not understand the worth or even the existence of the assets on the ground. Do not understand whether they have bypassed some legal requirements in order to grow so fast, which may come to haunt them later. Do not understand or know the other business interests of the promoters. I do not have close industry contacts i can trust in this sector. In short, i have nothing which enables me to take a call on the company.

(No positions in Arshiya)

18

One of the main difference between Satyam/ Wockhardt and others is the nature of business. Satyam/ Wockhardt are free cash flow business (as per the sectors) with good RoE.

Rest of business are asset intensive, so tough to estimate real value.

Another stock which has also fallen a lot is Alok industries. (no idea about management, though they are making the right noises). No position.

19

I studied this one a lot about eight-nine months back without actually investing in it. I shot off emails to many stalwart investors who all came back with their feedbacks, none of whom were convinced to buy but all were willing to watch this one.

No doubt it looked like that stock in a new sector that can transform your portfolio into something you can tell your grand kids about. The next pantaloon or the next Bharti airtel right?

Some of us can still tell our grand kids about this one but not exactly how we imagined it in our heads.

To be fair to the invetors it looked like a great business, except now with the benefit of hindsight. The ROE was actually very high with margins as high as 70% for the FTWZ business which is what everyone was betting on. The only problem was debt but then again there are so many debt heavy negative cash flow businesses that have done well.

Our dissection above tells us to ruthlessly discard all debt heavy businesses which I don’t think is the right way to look at investing,although it served us well in this instance. But that doesn’t make it a rule.

If they would have done a couple of qips no one might have even known about this and it would be business as usual today and this possibly would have been a multibagger. But I digress. Shit happened.

what I learnt from this episode is:Buy uncertain businesses only when you see certainty ( and conversly buy certain businesses during uncertain times, which we all including buffett strive to do all the time).

20

keydeliverablesin
Hi - The agency (SBI MF in this case - possibly appointed since SBI may be the largest lender) has detailed discussions with the management about future business. Am not tracking Arshiya at all (my post was more of G.K. - general knowlegde) but in this case I would imagine they would share their estimates of future sales, investment requirement, operating costs etc. and arrive at EBIDTA level numbers. They would also give estimates of their investment requirement, both fixed assets and working capital. This would be validated by SBI MF, and later by all the lenders. Then from the other end, SBI MF would collect all the debt data, and work out how much interest burden the company can bear and what level of debt it can sustain. They would plug this into the projected cashflow statement. Lenders would be presented with options on what to do with the other debt - equity conversion, debt waiver, conversion to long term zero-coupon debt etc. Basically the complete financial plan. Lenders may or may not agree to their expansion plan presented, their requirement for new funds, their share of new equity, promoters’ additional contribution etc. and would discuss these specific issues typically in a separate meeting of only the top 3-4 lenders. Then the plan is circulated to all before the next CDR meeting. In the meeting, after taking views of all the lenders, the promoters are brought in and quizzed about the plan further and whether they agree to any modifications. Sometimes they give their views immediately, sometimes they ask more time to revert. After all this, once the plan is approved and implemented (each lender has to take their own internal clearances), there is regular monitoring and updates are presented at subsequent CDR meetings. If all is going as per plan ie basically the debt is regularly serviced, the promoters are left to carry on business as usual. The mechanism has worked very well in the past where after initial losses to the bank (they have to calculated the loss based on RBI regulations and provide for it), the remaining debt is maintained as restructured, which is then upgraded to regualr after 2-3 years of normal servicing. Advantge is that the company gets a single package from all the lenders at one forum and does not have to run around negotiating individually (2-3 banks are usually manageable like this, but imagine the troubles if there are 8-10 banks or more!). Before CDR the only forum was BIFR (only negative networth cases) or Debt Recovery Tribunal (court case) for recovery. Operationally viable companies were forced to individual negotiating. Like i said, I am totally unaware of Arshiya. However as i am based in Dubai, I have seen the success of free trade zones here , the first one being JAFZA (jebel ali free zone). Now there are almost 10 free zones in Dubai itself and 1-2 each in other emirates (Abu Dhabi, Sharjah, Ras Al Khaimah, Ajman etc). The single most difference is that all these are government owned and the land was also owned by the government, basically sand :slight_smile: whihc is free. All they had to do is come up with a master plan, arrange for infrastructure (roads, power, water etc - headache no doubt). Then they used to hand over parcels of land on rent to private or semi-govt owned developers, who will build offices/warehouses etc. These developers will then rent out these to end users. Sometimes end users can directly deal with the master developer (govt) if their requirement is sizeable. Companies get attraced to set up base here because they are allowed 100% ownership (not so if u start a company within the emirate jurisdiction where 51% compulsarily has to be with a local emirati sponsor), various tax benefits, ease of operations since they are close to the ports etc. UAE has thus exploited its locational advantage very well and all zones are thriving and operational. Financial viability? not sure since data is not public. But I guess the older ones are profitable too. Basically, the idea is powerful. Execution is fraught with risks. PS- terribly terribly sorry for the formatting. I use windows 7. will contact administrator separately.