Innovators Facade Systems Ltd

Stock Opportunities Untested - but worth a good look
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Overview

Facades are the exterior sides of the buildings. They are important from the design point of view. From an engineering point of view, they are important these days as they have a great impact on energy efficiency and costs.
Innovators façade systems limited is an Aluminium Facade contractor for designing, engineering, fabrication and installation of all types of facade systems. The company is headed by Mr. Radheshyam Sharma and has executed total orders of than 1100 crores since inception. He has about two decades of experience in the construction industry.

It has installed facades for many big construction projects such as

Airports (13 of them) – Chandigarh, Indore, Kolkata , Mumbai,etc

Residential - World view Tower

Commercial(for clients like) – DHFL, JW marriot, TCS,etc

And boasts of reputed clients such as AAI, Reliance Industries, Aditya Birla Group, Tata Group, Godrej, Infosys, Cipla ,etc as listed on their website.

All other projects and clients are mentioned in their website.

Financials and Valuations

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The stock has been hammered like most of the market and is near its 52 week low.

FY 2019 results

Annual Report and other Documents

https://www.screener.in/company/541353

Credit ratings

https://www.icra.in/Rationale/ShowRationaleReport/?Id=76243

http://www.careratings.com/upload/CompanyFiles/PR/Innovators%20Façade%20Systems%20Limited-10-23-2018.pdf

ICRA has given B+ and A4 rating for its fund based -cash credit and non fund based -bank guarantee.

CARE has given BBB rating for long term loans of 31Cr and A3 for short term loans and bank facilities of around 60Cr as of Oct 2018.

Brickworks has a BB+ rating for long term facilites but put in a disclaimer stating that the issuer did not cooperate. This is a thing to be concerned about.

Management interview and important points

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Management interview before the IPO on Zee Business

https://www.youtube.com/watch?v=nBRwOwMlZVg

Query about the company on Zee Business

Shareholding Pattern and Key Investors (As of June 30,2019)

One of the major reasons I became interested in the story and wanted to explore it was presence of marquee investors in it. Their presence shouldn’t hamper our judgement but it is well worth a look.

  • Promoter Holding is around 62%.
  • Vijay Kedia has a 10.14% stake. He initially had a stake around 6% in pre-IPO and has increased it gradually to above 10%.
  • Pantomath Sabrimala Aif Pantomath Sabrimala Sme Growth Fund Series I has a 1.07% stake
  • Madhusudhan Kela owns 3.76% of the company.

Underlying Investment Thesis

Indian facade industry is expected to grow by 20% yoy and Innovators facade is one of the major players in facade industry. It is the only listed player at the moment and available at a market cap of less than 100Cr while the market is valued at 15,000Cr and expected to grow rapidly as use of facades increases in newly constructed buildings. It is one of the few organized players in this segment and boasts a portfolio and well-established projects.

https://www.apnnews.com/indian-facade-industry-worth-inr-15000-cr-growing-20-annually-anarock-report/

The company had revenue of around 100Cr in FY17 which grew around 50% in FY18 to 154 Cr but remained steady to 157 Cr in FY19. Margins declined in FY19 which led to decrease in profitability from 7.91 Cr to 4.65 Cr. As a result, the stock has been hammered to almost half the IPO price and available at close to book value. It had a 300 Cr order at start of FY19 and if the management is to be believed, order book is not a challenge but their capacity to deliver on it is. Given the huge demand and growth of the industry, attractive valuations, presence of marquee investors and a huge order book, this business seems like a story worth exploring. There are certain risks I am certainly aware about and they should be taken into consideration while evaluating this business.

It is an interesting story and if management plays it right, it can generate good returns due to its huge market potential.

CMP - 34.5
Market Cap - 65 Cr
Book Value - 36.21
P/E - 8.22
ROCE - 18.28
Debt to Equity - 0.77

Risks

  • Illiquid stock - Difficult to get out once invested. Especially if the company underperforms or falls in some trouble.
  • High Debt - Money from IPO helped them to reduce their debt by half and to help them with their working capital requirements. But still total debt(long term + short term) is at a high level when compared to shareholder equity and liquidity.
  • Management Risk – Not much information is there available on the management. The board is led by father-son duo. This point is important because there has been great erosion of wealth in many companies in the past couple of years majorly due to management issues i.e. bad ethics and bad capital allocation. So, it is important to keep an eye for it.
  • Lack of information available – There is not much information available about the company and it is not covered by any research analysts. This makes it hard to evaluate the business. Also, I was not able to gather much information about its competitors from India and outside India. A simple façade google search will show some of its competitors and a few of them have completed some impressive projects.
  • Company’s operations are working capital intensive and have high receivables and inventory days. Also, the revenue from top three customers comprised 40% of their total revenues in FY18. Majority of their contracts are from Maharashtra and Delhi. This exposes them to the risk of geographic concentration and client concentration.

Other Information:

  • Bankers – Indian Bank, Oriental bank of Commerce
  • Auditors – S G C O & LLP
  • Listed only in BSE
  • Had IPO in May 2018 at BSE SME platform

I am a new investor and this is my first write-up on this forum. Please tell me if any inconsistencies are present in this write-up. I will be happy to correct them and grateful for inputs.
Fellow valuepickrs, please share your thoughts regarding this opportunity.

Disclosure: Invested small tracking amount and looking for more clarity. Interested in the story as I feel it has great potential.

Disclaimer:

I am not a SEBI registered analyst or a financial adviser. This post is not a recommendation or endorsement in any way. Please exercise caution before making an investment decision.

References:

http://innovators.in/

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You have put in invaluable information in here and from my experience this is what I would suggest.

–> In this sort of times, try to stay away from Debt laden companies…
–> Management quality is the most important thing you should look for…
–> Even after above mentioned points if the story looks too compelling, only put small amount into these scripts, the money you can afford to loose.

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Thanks for the reply.
I completely agree with you on above mentioned points. That is why I only bought some tracking amount because I am looking for more clarity on debt and management side.

On the debt side, it is true that many companies don’t get refinanced in a tough economic environment. Banks are only willing to lend to the best assets in such times and this will most probably not be one of them. Also, slowdown in the wider economy may put a stress on their order book ,expenses and margins.
And judging management is very difficult and more so in case of an SME. Presence of marquee investors may tone down the fears but it is better to be informed rather than rely on someone else’s judgement.
But, I am just speculating here as I couldn’t find much news and information on this company regarding these factors to take a better judgement. It would be great If someone else is able to gather some invaluable information regarding this company.

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Please share the feedback from AGM held today, if any member has attended it.

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I held this for a short time & booked profits a quarter later. I have been tracking this though since its IPO. I really feel that this is certainly a company to keep track of. Biggest problem is the lack of news.
I couldn’t even get hold of info on their order book size.

From what I know :

  1. They design facade custom made for the client’s building and also implement/install end to end
  2. Prior to SME IPO, the management claimed they wanted to take more work but they could not because of lack of cutting edge machinery. Also, most times they had to go to client side, setup stuffs and make the facade things on site. They did not have enough machinery to prefabricate in the factory. So, the main purpose of the IPO was to buy these machinery and help them automate.
  3. If you see the latest annual report, we can see the plant & machinery cost has gone up to 13 crores from 2 crores
  4. According to last year filings, these machineries were meant to be delivered by Dec 2018 and trial run done. I believe they have been done
  5. From works point of view, they have been doing facade work on Loda World tower 2.
  6. Theare are general delays in getting the alloted contracts or payment after work finish. There is no problem in quality its just that the sector they work in, has so many delays every step.

In the Bloombergquint, promoter gave this month, he did say that business environment is not great & he sounded subdued in general. He did say that company is currently transforming its internal processes.

I am just tracking company for now.

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Yes, biggest problem is lack of communication from the management. They had mentioned in RHP that plant renovation will be completed by December 2018 but as per the annual report, the work is still going on. They only mentioned that it will be completed this fiscal year. No information is provided regarding order book and the specific improvements they are doing. In FY19, out of 11 Cr profit, 7 Cr was written off but they only mentioned that the solvency proceedings are going on against the client. Will they partially or fully recover their dues or how to prevent such things in future, no clue on that.

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If one goes through the AR, you can see net profit of 4.65 Cr, after writing off 7.39 Cr as Exceptional Items,without any explanations. Further Co has given 35,44,000 as CSR to Pantomath Investor Awareness & CSR Foundation. Pantomath Capital Advisors Pvt Ltd were lead manager of this SME issue.

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According to me the biggest risk is
Management Risk – Not much information is there available on the management. The board is led by father-son duo. This point is important because there has been great erosion of wealth in many companies in the past couple of years majorly due to management issues i.e. bad ethics and bad capital allocation. So, it is important to keep an eye for it.
They have to add some professionals in their board.
There is graeter chances of best wealth creation.

Disc.: not invested

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Rating reaffirmed by Care with short term bank facilities limit enhanced. Innovators Facade Systems Limited-10-04-2019.pdf (393.6 KB)

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Thanks. Company seems to be reasonably placed overall. Huge opportunity to scale up the business. Proper working capital management is key here.

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One of their competitors who apparently seem to be way more capable atleast capacity wise.
Innovator facade is the only listed company though.
http://glazium.in/

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Here are some of my takeaways from annual reports, credit report and various other sources:

  1. Order Book has grown to around 375 Crore. Revenue visibility for at least two years is there.
  2. Economy is sluggish, still the company is doing fine. If construction sector booms, then the company can most likely grow its topline.
  3. In recent interview on Bloomberg, the promoter was not that optimistic and admitted that business had slowed down. This reduces some of corporate governance fears as he seemed honest and straightforward enough to admit the difficulties in which business was operating in currently. He was also not overly optimistic and trying to mislead retail investors. Doesn’t mean that management risk is not there, but it was a positive. Also, Vijay kedia and pantomath are known for investing in good managements.
  4. Vijay Kedia increased his stake to 10.6%. All other investors have kept their stake constant.
  5. Valuations are really cheap. Available at below book value and single digit PE. It might not mean much if business does not perform well or grow but can really act as a booster for the returns in case the company performs well.

Some observations I have made from 2018-19 annual report:

  1. Topline growth has been disappointing and margins have also been low. Also, debt is still high on the books.
  2. CSR fiasco with Rs. 35 lakh given to Panatomath has been perplexing. A small cap with debt giving such amount to its lead IPO manager is somewhat shady.
  3. Rs 7.3 crore of balances were written off in previous year. Implies that some client of them might have gone bankrupt.
  4. Cost of contracts has gone up 50% whereas the revenue was almost constant implying increase in raw material process and furthermore may imply a potential lack of pricing power.
  5. Directors remuneration increased about 40%.
  6. Company has unbilled revenue of 23.3 crores which might be recognized as revenues in upcoming quarters.
  7. All unsecured loans taken by directors from the company which was around 1.2 Crores the previous fiscal has been paid back.
  8. Almost all the raw materials are sourced domestically. So, international pressure or China factor on pricing of raw materials is very low.
  9. The Company is recognising revenue on contracts on percentage of completion method due to revision of mandatory Accounting Standard 7 “Construction Contracts”
  10. Long term Debt has decreased to 13.5 cr from 16.7 Cr. Short term debt has also decreased. Trade receivables have also decreased slightly with payables increasing around 20%.
  11. The utilization of proceeds form the IPO has been done almost the way it was projected.

Results are going to be posted on 14th November 2019.
I am still bullish on the story even though there are some issues regarding this company. Will wait some more time to get clarity and hope to accumulate more if the story plays out.

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The results are out. They seem good when you consider the slowdown in the economy. The profit has increased slightly and balance sheet has grown a little stronger.

Also, IPO proceeds have been done in the manner they had projected. This is a big positive.

Any views

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Within a month two company secretaries have resigned???!!!

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Found some more unlisted competitors.

  1. https://facadeone.com/ - Boasts 138+ projects and 92+ clients
  2. https://www.glasswallsystems.in/ - Boasts 300+ projects
  3. http://glazium.in/ - Boasts 150+ projects

Glasswall Systems also works with Lodha. Showing Lodha World View as a residential project on it’s website.

From listed projects on the websites of all 3 competitors, no one worked on airports.

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Hi Adhiraj,
“Order Book has grown to around 375 Crore. Revenue visibility for at least two years is ther”

Where did you find this information?
i tried to read AR, but coudnot find the information.

Also , can you suggest any site or podcast where i can find information related to this company

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I maybe wrong here, but i decided to sell all my holding , as there will be a credit crunch in India and most of the Infrastructure projects can be stopped due to credit crunch. And Innovators main dealing is with Infra and buildings.
I sold at 70% loss , but happy that i got my 30% capital back.

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Hi,

I got this from the credit rating report of CARE ratings.

Micro cap companies generally don’t have a lot of information available for the retail investor so one has to scuttlebutt a lot. There isn’t much information available about the company other than annual reports, IPO disclosures, credit ratings( CARE, ICRA, Brickworks), 2 management interviews( whose links are in the thread) and the company official website. There are many competitors who one can check to get an idea about the nature of the industry. I also am always on the lookout for any information I can lay my hands on about the company but lack of sufficient information seems to be the norm when it comes to investing in microcaps.

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Fair point but I don’t think that the problem of credit crunch will be restricted to infrastructure companies only. The economic system is too interlinked such that no sector will remain unscathed from all that is happening right now.

All small caps and microcaps have been tarnished badly. Economic situation is also not good. Many mediocre companies will die and the ones that survive will do good for many years. I think innovators façade will survive as most of their revenue comes from good reputed clients who aren’t facing insolvency or have low risk of being insolvent. They also have a good reputation as a result of backing by marquee investors. Given to choose between its competitors and this company, I would back Innovators to survive. I maybe wrong here but who isn’t.

Price influences perception. Investors assume that there is something wrong if the price goes down too much. It is true sometimes but this assumption can be wrong also. I believe price has gone down because of massive panic selloff in the market which has spared no one. I think at this price the company is still a good buy if there isn’t any management risk or insolvency risk as of now.
I see it as an asymmetric opportunity( as many other small and micro caps) which can gain multiple times.

Small caps and microcaps have been tarnished badly. Seems like market has lost faith in them and such lack of faith gives great opportunities to lap them up if one sees from a 5 - 10 year perspective.

Disclosure: Adding slowly this fall

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Conisder the Risk in investing also, Dont just invest just because some marquee investors are invested, they allocation is around 2 or 3 % of thier portfolio.

This is 38 Cr market cap company and how can they increase their sales ? They have limited capacity. TO expand the capacity they again need to take loan or raise equity and it will take a long long time before the company can deliver returns to their investor.

This doesnt mean that tommorrow the share price will not increase , it can increase, but keep allocation to micro cap as 2 or 3% of your portfolio.