Only perplexing fact remains in their ability to achieve what PI, Rallis and other Agro chemical companies have not been able to deliver, consistent growth but still none of the big investors or fund house are attracted to it.
It is quite odd how much employee productivity has improved at Bharat Rasayan.
Sales per employee is now nearly 2x the average of the peers. EBIT per employee is also nearly 2x the average of the peers. This despite the average pay of Bharat Rasayan (7.9L) being less than the average pay of PI (12.8L) or Dhanuka (8.45L). They somehow manage to be LOT more effective which is suspicious.
Employee headcount has been falling. From FY15 to FY18, the employee strength fell from 546 to 443 or down 19%, even as sales expanded 81%. In contrast, the employee count increased for all of its peers during this period. Dhanukaâs employee strength rose by 7% from FY15 to FY18 while sales went up 23%. Insecticidesâ employee strength rose by 12% from FY15 to FY18 while sales went up 20%. PIâs employee strength rose by 27% from FY15 to FY18 while sales went up 17%.
Food for thought. Something doesnât feel right about their numbers
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Hi Rudra
Wanted to have your two cents on this recent âsleuthingâ going on @ valuepickr, vis-a-vis SHP of Bharat Rasayan, its links to various âshadyâ brokerages.
YOUR view point will be of great help to me in this particular matter, since I have been invested in BR for over a year. That no major âbig investor/sâ are invested, or dividend pay out is less is irrelevant to me.
But management integrity being questioned makes me edgy.
Did a cursory glance since I am looking at this industry now. Points that stand out which need further checking as below (during the initial phase I look more for negatives or red flags, this does not mean that the company has no positives, please adjust for this bias of mine as of now) -
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Composition of the Board - Pankaj Gupta and Sujata Agarwal are the only two independent directors who have board seats in other companies. They are board members of Bharat Insecticides & B R Agrotech, hence practically there are no independent directors on board who have any incentive to consider minority shareholder interest. This by itself is not surprising since most promoter companies at this scale operate this way
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Related Party Transactions - Sales to Bharat Insecticides and BR Agrotech were 40 Cr and 24 Cr in FY2014, for FY2018 they were 128 Cr and 36 Cr.
This means between 2014 and 2018, of the total incremental sales of 420 Cr, 100 Cr was to related parties. This is not a small number though not high enough to qualify as a red flag by itself
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Total Employee Salary of 49 Cr in FY2018 of which 15 Cr was to Directors. For the remaining 430 odd employees the average salary works out to 6.8 lakh which is reasonable. Other companies at this scale may have higher number of employees but that is possibly due to a distribution led sales model. One needs to see what is the institutional business component here, Exports are 165 Cr and Related Party Sales are 160 Cr which do not call for a large sales force. This point I can evaluate only after I do a proper analysis hence will refrain from commenting on this.
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Large promoter holding at 75% and then some more through other entities/brokers. This can be seen as both a positive as well as negative - can imply skin in the game or can mean a promoter who believes in micro managing and controlling everything. If the second option is correct then such promoters may not care too much about any investor other than themselves. Then why list the company in the first place?
Based on whatever limited info I have seen over the past 2-3 days I would rate the quality of the board and governance standards as below average. At the same time I have invested in stories where the governance is on an equal footing, no company starts off with 100% clean governance in India.
Will need to understand the story better but this clearly is not a management that one can accord a high rating on governance. That does not mean that integrity is under question, those are two different things.
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I am just wondering/curious as to why so much of hullabaloo over Ambaa Securities/ Shiv Shankar securities holding in BR NOW, when they have been invested in BR since Dec 2006/March 2007( Earliest SHP data available on BR @BSE, and could have been even longer who knows).
Didnât read your post carefully, but could not digest the assumption that Promoters at BR might be micromanaging and thus not care for the retail investors. There is nothing wrong in micromanaging as long as one is doing it with efficiency, and as far as âcaringâ for retail investors, I wonder if such caring is done by ANY company, let alone BR.
Gruh was considered by me as the safest stock , one that you can buy and sleep on it like Rip Van Winkle, until the news broke about its âstep daughterâ like treatment of giving it away( the most treasured gem of HDFC ) to Bandhan. I wonder where the âcaringâ part of the management with impeccable integrity(as I do believe HDFC still holds the âtrustâ of being truly dependable) for the retail investors vaporized into thin air! Caring for retail investors is an overrated term!
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I have been tracking the story for more than 3 yeas now and have attended 2 AGMs till date. Few friends have attended its AGM for more than 5 years now. Lemme answer the queries raised by you. I think there needs to be more work done regarding what does the company do and how does the industry work. First of all lets talk about what exactly does the companies in the agrochemical sector mentioned by you do:
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Bharat Rasayan (BR): Bharat Rasayan is a pure play technical manufacturer. Technicals are like what APIs are in pharma. They are the active component of any formulation which are in turn sprayed on crops. Its a pure play B2B company. It supplies to formulation players and has customers like Bayer, Nissan, Sumitomo, Rallis, Indofil etc as its customers. Its a pretty well diversified company with more than 20 products and no product and customer contributing more than 20% of its sales. In some of the intermediates and technicals it manufacturers like meta phenoxy benzaldihyde (MPB), as per market reports, it has a significant market share in India. It manufactures generic technicals and has also getting some contracts for manufacturing of innovator molecules.
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PI Industries: PI Industries is into formulations and also does CRAMS for innovators. It has it own branded products like Nominee Gold and Oshin under its Indian formulation portfolio. It earlier used to import technicals for its formulation basket portfolio but is not backward integrating for manufacturing technicals for its formulation portfolio also. Its a mix of B2C and B2B capabilities.
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Dhanuka Agritech: Its a pure play formulation player and doesnt manufacture its technicals. Its a branded player and has extensive distribution reach. Its a B2C company.
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Rallis India: Rallis India is primarily a formulation player with some technical capabilities which they havent been able to ramp up and also manufactures seeds through Metahelix. Its a pure play B2C company and is also trying to scale up in technical manufacturing.
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Insecticide India: Insecticide India is primarily into formulations and has some technical capabilities. Its primarily a B2C company.
The direct comparison of BR is Astec Lifesciences (acquired by Godrej Agrovet now) which is a pure play technical manufacturer and a B2B company. There is a lot of difference between technical manufacturer and a formulation player. Technical manufacturer requires chemistry skills and established relationship with clients while formulation manufacturer requires tie up with innovators (for launching innovator molecules in India), distribution network and brand.
Now, I would like to answer you queries in a point wise manner as mentioned by you:
- In most of the growing manufacturing companies, it is difficult to generate FCF if one is growing and needs capital for both expanding capacities as well as for working capital requirements. For Rasayan, the turning point came when the company put up a new manufacturing plant at Dahej (15,000 MT) in 2012 which had 3 times the capacity of its first plant in Rohtak (5,000 MT). From there on, the revenues increased from 90 - 100 crore in FY11 to more than 900 crore on trailing 12 month basis currently. Its almost 10 times increase in revenue. Let us look at the increase in capex of the company from Fy12 - FY18:
Lets look at the source of the funds for these capex, it was funded through debt, internal accruals and unsecured loans from promoters (at one point of time on account of big capex requirements, promoters had infused funds to fund a portion of Dahej capex and these loans still remain in the company). Company has never diluted a single share in its history post IPO unlike some of the peers which have. Will answer the second part on working capital in my next point.
- Increasing receivable days: Let us first look at the receivable days of some of the technical and formulation players over the period FY15 - FY18 in the table below:
Overall for most of the formulation players, receivable days have increased in past 2 - 3 years on account of distress in rural economy. In case of Astec, receivables days have remained pretty high in the range of 120 - 140 days over the past 4 years. In case of BR, the absolute debtor amount seems to have increased primarily because its sales have doubled and even its debtor days have increased. The major reason for increasing debtor days is given below:
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Increase in debtor days of its key customers ie formulation players
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The whole story about BR revolves around structural shift from China to India for manufacturing of technicals due to increased costs involved with following environmental norms and large MNCs diversifying their sourcing base to de-risk a bit from China. China used to give credit period of 6 months to its customers. BR had to increase its debtor days to get contracts from some of these large customers which its balance sheet could afford. However, during the AGM interaction with investors, RP Gupta (the promoter) highlighted that there will not be any loss from these MNC customers. Also, the payable days have reduced since they get cash discount for upfront payment. As per some scuttlebutt from their suppliers, they never delay their payments and even give payments on the day of delivery.
Now, let us look at the impact of these increasing debtors on the debt of the company as highlighted in the table below:
Companyâs debt/equity despite increase in working capital requirements has infact reduced from 2.10 times as on March, 2013 (due to Dahej expansion) to 0.43 times as on March 31, 2018. In fact, out of the total debt of Rs.128.34, around Rs.70 crore is from promoters. Off course, they get 9% interest on these unsecured loan but they had infused most of these loans when the company needed it most - during Dahej expansion.
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Receivables part have answered in the above question.
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Dividend payout mentioned by you for FY17 and FY18 is incorrect. They paid dividend of Rs.1.50 per share during FY17 and FY18 each. On the low dividend payout, the management said that since they are in expansion mode and are seeing good growth opportunities they are paying low dividend payout (imagine the promoters holding 90% share directly indirectly taking low dividend - the maximum impact will be on them as compared to minority shareholders). On expansion front, as mentioned in my AGM notes that they are expanding capacity in Dahej for technicals and intermediates as well as for backward integration with total cost of Rs.80 - 100 crore (to be spent in two phases) and are doing a greenfield expansion at Sayakha, Gujarat for which they will decide funding soon.
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On the issue of shareholding, its anybodyâs guess that they hold more than 75% stake in the company. However, it is very important to look at promoterâs intentions. **Promoters havent sold a single share since its listing despite the price rocketing 80 times since FY10 - current year (Rs.80 - Rs.8000). The company meets investors only during AGM and doesnt entertain either the large or institutional investor in between. The promoters come across as focused entrepreneurs and are not much interested in stock markets. May be thats the reasons people speculate and float lot of stories about them. Further, if one gets the channel checks done from industry insiders in agrochemical industry whether its their suppliers or customers, one would get pretty good feedback about them.
(Disclosure: Invested)
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I am saying the exact same thing - I have invested in such companies and frankly more often than not things have worked out. For the record I like companies where the promoter holding is > 50% and the promoter is in charge of managing operations as well. When such a promoter manages the show well, chances of wealth generation are much higher than that in a professionally managed company. The bulk of my money has been made by investing in such stories and not in companies which have bullet proof corporate governance policies.
However, that the promoters are micro managing is a possibility one needs to consider, you can decide either way based on your world view but it needs to be considered is all I am saying. One single factor never makes or breaks an investment thesis, by all means do a well rounded analysis, weigh all possibilities and then decide.
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Well, maybe my interpretation was not what you meant to write. Anyways, I reckon that we are in the same boat then.
Disc:- Invested in BR for over a year and 2nd largest hldng in PF.
Thanks. Hope it clarifies lot of issues that other members raised.
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Yes. It did. For me , the worst nightmare as an investor is , if in any way, the managementâs integrity is questioned. Of all the 15 points that Mr.Fisher has written about in ,âWhat to Buyâ, the last point has stuck deep in my mind, which even he rates an usually high score in regard to all the rest. Other things being questioned I wasnât jittery about, and you reaffirmed that faith with your response.But, all of a sudden this ânoiseâ about Top Public holders, who are invested way back since 2006 was giving me a headache. But all is well now. So thanks.
Great post @ankitgupta. Appreciate the hard work you have put through to compile the detailed post.
Couple of things, high receivables needs to be always looked into from perspective of industry dynamics and quality of receivables. BR being a technical vendor would always feel the squeeze from large MNC buyers but at the same time there would be very little doubt on their payment abilities. Thus high receivables always need to be validated from who the payers are - recovering large sum from few global MNCs is different from large B2C receivables.
The AGM notes gives some insights into companyâs conscious effort on targeting difficult and complex chemistry on the technical side. This is a large entry barrier and getting trust and traction from large B2B buyers would take many years as seen in other industries too.
People raise all kinds of doubts as a late reaction to stock price crash, while these should come before you make the investment decision - not as an aftermath.
Large drawdowns are part of any multi year stock journey and is inevitable. More important is to understand structural shifts in the industry and effective outcomes for all players.
Discl : still largest position in pf, trimmed a bit during exuberance phase, no addition in last 2 years
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One of the member @Divyachawla has done extensive work covering most of the Agro Companies. Though many would have seen it , still sharing for other members.
https://drive.google.com/file/d/1aJNIsxXg3IoENdrtVA9EYQSVH9vsCiEJ/view
@ankitgupta has answered most of the concerns regarding Poor FCF , High receivables and high Debtor Days.
Rahul Kumar Newatia is a director in lot of companies like Ambaa , Ritesh , Dynamic Portfolio.
The Dynamic Portfolio shares the same address with Weldon Fincap which is a promoter entity.
Weldon Fincap has a director Rajesh Gupta who is owner of RSND Group.
This Rajesh Gupta of RSND Group ( https://www.freshfalsabzi.com/about_rsnd ) is different than the One Rajesh Gupta who is a director in Bharat Rasayan.
If one looks a Bharat Rasayan Zauba and check Rajesh Gupta Other Directorship , one may find that he is director only in Bharat Rasayan. If one looks at Weldon Zauba , The Rajesh Gupta present there is director in lot of companies but not Bharat Rasayan.
So there are two persons with same names possibly.
The presence of Weldon Fincap as a promoter in Bharat Rasayan and itâs address matching with Dynamic Portfolio where Ravi Kumar Newatia accused in Mishka Trading is present , remains an issue. One thing can be said definitely that Ravi Kumar Newatia and promoters are connected.
Ravi Newatia with his Holdings in Bharat Rasayan via Ambaa , Shiv Shankar and Ritesh Broking which is classified as Public may have easier access to insider information. Regarding no stake sale by these entities , it is a possibility that these entities usually trade in Shares of the company and maintain the usual holdings before declaration of Share Holding Pattern every quarter. Only a Possibility ?
The entire thing depends on the promoterâs integrity.
So far , no dilutions , no selling by promoters and nothing looks wrong.
For how long , difficult to say� Though these risks are associated with all of the companies.
Those who have met management can have more insights and thus more conviction.
Anyone having idea of other clients of the Auditors
- M/S. R. D. GARG & CO.: Statutory
- M/S. M. K. SINGHAL & CO : Cost Accountant
Disc: I neither hold any shares of the company nor i have any interest. I prefer companies with good dividends , Positive FCF for last 10 years, No or less related Party sales and thus has not made any investments when i looked at it sometimes back as it did not meet my checklists. Currently , the Ravi Newatia factor reduced the interest more.
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A business is ultimately about cash flows accruable to shareholders. A business that exists primarily to service the lenders and/or vendors isnât such a great business.
In case of Bharat Rasayan, if you ignore the capex and just use the cash flow from operations (an aggressive approach since we are ignoring even maintenance capex), the max CFO has been 60 cr in FY15. At current EV of nearly 1800 cr, that translates to 30x EV/CFO multiple. If we actually use the FY18 numbers, the CFO was only 29 cr. Using that EV/CFO multiple is nearly 60x. Either ways, it is very expensive.
Letâs take this one step further. Letâs ignore even WC, not just capex (i.e. âWC and capex being used to grow the bizâ). If we adjust CFO up for WC changes, we get max CFO at 116 cr in FY18. Using that number, the EV/Adj CFO multiple is 16x. And mind you it is usually a bad idea to ignore WC changes when doing valuation as that WC is unlikely to be released unless the company is in liquidation.
So here we have a company that under fairly aggressive valuation assumptions is still not attractively priced. PAT is meaningless if it doesnât eventually translate to cash flow for shareholders. This business with its optical 40% ROCE actually generates less than 10% CFROI most of the time. A PnL focused investor may ignore this but anybody paying attention to BS and CF will have a hard time valuing it as aggressively as it currently is being valued.
The whole argument of no dilution is moot if the business is mostly run for lenders and vendors. How will the cash come to shareholders?
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Hi ,
I think calculating an Agro Company or for say any company on basis of EV/CFO alone is very vague. Unless the CFO is negative for past few years or debt is very high , there is less to worry. Besides CFO , lot of factors determine the valuations such as P/E , EV/EBITDA , MCap/Sales , ROCEs , Sales and Profit Growth Rate , Future outlook et cetera. I do not hold Bharat Rasayan but can talk about two companies in the sector which i have in my core portfolio.
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Rallis India : If you will calculate current EV/CFO, it comes around 73. For last year , it was 11. (EV was around 4500 , CFO around 408). Does that mean it was very cheap last year at Rs 240 and very expensive now at Rs 160. As i said above , it is not correct to value any business on CFO/EV basis alone , Growth & other factors too matters . Market factors future opportunities too. As per the FICCI report on Indian Agro chemical industry, Agro chemicals worth US$ 2.9 billion are going off patent between 2017 and 2020. Total estimated value of products going off patent between 2014 and 2020 is US$ 6.3 billion. With China shutting off its capacities on pollution concerns, the global market is looking out for substitutes for constant and affordable supply of raw material for agro chemical and other fine chemical products. This phenomenon may potentially unfold high growth opportunities for Indian CRAMS players. Rallis made a modest entry in this area last year.
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PI Ind : If you look at Current EV/CFO , it is around 37. Last Year ,it was around 34. It has never gone below 30 as far as i know but still it created huge wealth and remains expensive. Reason being , the business has generated 30+ % ROCEs every year , Sales and profit growth above 15% for last 5-10 years and a very good visibility for future growth as it has Strong order book of around Rs 7,000 crore in the CSM segment from the existing product basket and improving contributions from recent new launches in the domestic market and revenue from new molecule additions every year in both CSM and the domestic business.
There are lot of factors which determine valuations. As it is said " beauty lies in the eyes of beholder" . Mere looking at any single ratio is not be a just criteria to evaluate any business.
Disc: I do not have any interest in Bharat Rasayan as of now. I hold shares of Rallis and PI Ind.
Regards
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@BreakingBad01 - 100% agreed that free cash that can be distributed to equity shareholders is the ultimate metric that should be looked closely for any kind of business. And I think we both will agree that BRLâs business economics are such that it would fall in âGoodâ business bucket according to Mr. Buffettâs three buckets of businesses; Great, Good, and Gruesome. So a prudent investor should value it as a Good business. The trick lies in figuring out how to value such businesses.
To a man with hammer, everything looks like a nail. Personally for me â P/E, EV/CFO, P/B, etc are all dumb shorthand for valuation. These short hand valuation tools donât tell us anything about what growth rate is implied in current price orwhat market expectations are or what the intrinsic value is. We all know, the simple rule is to buy something at price that is lower than its worth.
I will share my thoughts which went into evaluating a good business like BRL, where the business economics demands incremental investments in CAPEX and WC to grow the business.
Mr. Buffett shared âOwner Earningsâ concept in his 1986 letter. He said it is âthe relevant information for valuation purposesâ. Below is what he wrote:
"If we think through these questions, we can gain some insights about what may be called "owner earnings." These represent (A) reported earnings plus (B) depreciation, depletion, amortization, and certain other non-cash charges such as Company Nâs items (1) and (4) less ( C) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in ( c ) . However, businesses following the LIFO inventory method usually do not require additional working capital if unit volume does not change.)" (emphasis mine)
I made small adjustment to my FCF available to equity shareholders with the help of Mr. Buffettâs Owner Earnings concept. Letâs call it âOwner FCFâ. Below is how it would look:
(a) CFO + (b) Incremental WC invested to grow the business (leave out the WC that is needed to maintain its competitive position and unit volume) - ( c ) the average annual amount of CAPEX that business requires to fully maintain its long-term competitive position and its unit volume.
Annual depreciation generally becomes good proxy for ( c) but determining (b) requires judgment and good understanding of the business.
The end result of Mr. Buffettâs Owner Earnings is similar to âOwner FCFâ. Itâs just that one needs to change the formula since starting with CFO.
My central point (from Mr. Buffettâs Owner Earnings concept) here is that its safe to treat incremental CAPEX and WC used to generate the growth in business as Owner Earnings/FCFE - as long as you understand the business, trust management, and you have good confidence in its future prospects. Cash spent on CAPEX and WC to grow the business is ultimately going to bring more cash which will be again deployed to grow the business and the cycle will continue forever until management sees growth prospect. It will be good if these investments are funded from internally generated funds or minimal debt. If funded full with debt, then it should be a big red flag. IMHO - one needs to treat this cash portion differently which is spent towards growth of the business.
They are expanding capacity in Dahej and greenfield expansion at Sayakha. Once these expansions go live - future Owner FCF or Owner Earnings should be much higher from current levels. EV/Adj CFO of 16x doesnât look crazy expensive to me.
Disc: invested and hence biased. Started with tracking position at Rs. 5000. Most of my position built recently as it fell between 3500 and 4000. Hoping for it to fall more so that I can accumulate more. Giving full disclosure as I will be actively buying in immediate future.
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Q3 resultsBharat Rasayan Q3 results.pdf (3.9 MB)
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Decent Q3 results:
Relevant extrracts from UPL Q3 concall on their India business which ivery relevant for all Indian agrochemical companies incl Bharat Rasayan :
âLetâs start with India. I think in India, quarter 3, was quite disappointing. After poor rains in Kharif, the erratic rainfall situation continued and it was really quite bad in central and south India. The Kharif crops continued to be in very bad shape with a very poor yield, which has also affected the ability of the farmers to go in for heavy crops. Cash flows in the markets are very poor and the ability of the farmers to invest in the subsequent crop in Rabi was really impacted. We took a very conservative approach and ensured that we did not leave inventories in the market after the Kharif season. And this has really impacted our Q3 results. The positive part to this is that we will not start with inventories in the market when we start the new season, and that should give us a head start in April and May in the next Kharif.â
Considering the industry scenario, results of BRL is decent
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We need to see how peers are doing in the same industry. Need to have a look at PI Industries which reported good performance.