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Jyoti Resins & Adhesives Limited (with bloated reserves)

Jyoti Resins & Adhesives Limited has hit two back-to-back 20% upper circuit on BSE in last two trading sessions and made a new 52-week high today. I spent some time to understand the business and numbers and wanted to share my findings. I found questionable bloated unpaid expenses reserves and few other anomalies which raised many questions as mentioned below.

CMP: 165.05
Market Cap: 66.02cr

Introduction:

JRAL sells various adhesive products under EURO7000 brand which was launched in 2006. Unfortunately, management has not bothered to share any business specific information with the investors. It has same content for MD&A that it has been using for last several years. Company is based out of Ahmedabad, Gujarat with manufacturing plants in Santej, village Kalol in Gujarat. More about their products can be found here: https://www.euro7000.com/events.html

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Business Numbers:

Overall business has decent gross margins (north of 50% until 2018) but low net profit margin.

Receivable days have increased as high as 300 days. Current receivables per FY18 balance-sheet is 43.38cr. It forms 78.63% of the FY18 revenue.

Its requirement for fixed assets has been low, but heavy investments have been needed in Working Capital (mainly receivables and inventory) to grow the business. Business has generated enough cash from operations and with help of some debt to support its working capital requirements. It had debt of almost 5cr until FY17, but repaid all debt in FY18 and now has cash surplus of almost 4cr on its balance sheet as per FY18 balance sheet.

Below please find some details in the table:
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Source: screener.in

Promoter Stake Consistently Increasing:

Company has 40 lakh shares outstanding. Not a single new share has been issued since FY2011. Promoter’s stake has grown from 25.47% in FY11 to 40.86% in FY18. Management has been increasing stake by purchasing from market.

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Below screenshot shows a small list of many market purchases made by promoters lately:

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Promoters Happy with Increasing Salary than Increasing Dividends:

Promoters are happy with increasing salaries than increasing dividends. Management has not paid a single rupee in dividends so far. Also, total of their FY18 remuneration was 107.5 lakhs, whereas, Net Profit for the company was 105 lakhs. So promoters took more than the annual net profit of the company as salary. What happened to the ceiling per the act? May be prior they took approval to announce more salary than net profit of the company.

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Source: Company Annual Report

Bloated Reserves and some other anomalies:

Company has created unpaid expenses reserves on liabilities side in their balance-sheet. It has grown from 1.45cr in FY14 to 46.7cr in FY18. It’s steep jump in unpaid expenses (where vendors or suppliers are not asking for their money :blush:)! We have a business with annual revenue of ~54cr with 47cr of unpaid expense provision.

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Source: Company Annual Report

I found some unusual Target Incentive and Sales Promotion expenses that were charged under Other Expenses. I suspect some portion of these expenses charged have made their way to Unpaid Expenses Reserves for Promoters. It seems like all this money has been reinvested in the business in the form of COGS, Receivables, and Inventory. And surprisingly company removed Target Incentive and Sales Promotion Expenses from the list of Other Expenses in FY18 annual report.

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Source: Company Annual Report

Need explanation on below items from management:
 Bloated unpaid expenses reserves amounting to 46cr.
 Where did Sales & Target expenses go away in FY18 financials?
 How are promoters able to take home fat paychecks which is more than annual net profit of the company?

Disclosures:

  1. The content of this write-up is only for information for the readers and not to be construed as investment advice. Please consult your Financial Advisor before acting on it.
  2. My main goal is to document my findings and follow-up later to get more understanding on the open items.
  3. Never had any position or holding in JRAL.
7 Likes

Here are my initial impressions about the company.

Working Capital Levels

The company’s fortunes seem to have shifted drastically from 2016. While the Net Profits seem to have increased in a smooth curve, Cash Flows paint a completely different picture.

From 2007-2015, 7 out of 9 years have had Negative OCF, largely owing to Working Capital of course (Screener shows Taxes as ‘0’ for so many years, which I believe is a mistake). From 2016, the company suddenly turned OCF positive. I read the Annual Reports of 2015, 2016 and 2017. There is no special mention of why the productivity of the company improved so much suddenly.

From the looks of it, from 2015 to 2016, the company was somehow able to drastically reduce inventory requirements (An almost 68% reduction) and improve their bargaining power with suppliers a lot too (A 136% increase in Accounts Payable). This has contributed the most of their OCF being positive. Same is the case with the following years too.

This really bugs me. Without a catalyst (Like an overhaul of strategy or a new management team), productivity often increases slowly or most of the times, remains range bound.

Random Investments

I understand that companies usually invest in Mutual Funds / Debt Funds. But this firm seems to have invested in random companies, especially all of them being in the BFSI space (A completely unrelated industry)

I wasn’t able to find anything on the others, but Arcadia seems to be a company with a never-ending web of other companies related to it:

Kalupur Bank is related to something important. It’s covered in the next point.

Stock Manipulation - Multiple Counts

  1. In 1997-98, SEBI investigated the unnatural increase in the price of Jyoti Resins and concluded that it was indeed a case of price rigging:

Jyoti Resins and Adhesives Limited: The SEBI conducted investigation to look into the unusual increase in price and volumes in the scrip of Jyoti Resins and Adhesives Limited. The SEBI concluded that the share price of the company was manipulated and the main promoter of the company in collusion did the manipulation with an operator. With a view to prevent manipulators from benefiting from undue gains arising out of manipulation, the proceeds of auction and close out were frozen. The investigations concluded that the promoter of the company along with the manipulator were the main persons who would have walked away with the proceeds of auction /close out. Nearly Rs 3.25 crore of the proceeds were impounded in pursuant to the investigations. Enquiry proceedings were initiated against the intermediaries-brokers, registrar to the issue and merchant banker. Actions are being undertaken as per the SEBI Act and Regulations against non-intermediaries including promoter and other manipulators.

Full Report here: https://www.sebi.gov.in/sebi_data/commondocs/ar97982g_h.html

  1. In 2003, there was once again a case: Sebi vs Jyoti Resins & Adhesives Ltd. on 10 April, 2003

Investigations by SEBI prima facie revealed that Shri Devendra Kantilal Dalal in connivance with the promoters of JRAL heavily dealt in the scrip to manipulate the price of the scrip. It was also noticed that funds of JRAL and Jyoti Cosmetics Ltd. (hereinafter referred to as “JCL”, a group company of JRAL) were also utilized for this purpose. Further, it was revealed that shares, during this period, were purchased in large volumes by UIPL (to an extent of 13,69,500 shares) through various brokers and sub brokers. It started buying shares from 14.8.95 when the price was Rs.10/- and continued to purchase shares when the price moved to Rs.181/-. Investigations against UIPL and its Director, Shri Sunil K. Patel brought out that orders for purchase of shares of JRAL were given by Shri Devendra Kantilal Dalal.

Complete case summary here: https://indiankanoon.org/doc/1596918/

The promoters were de-barred from Capital Markets for a period of 1 year:

I also direct more specifically that the public companies in which the above persons hold control or have substantial interest shall not be allowed to raise funds from the capital market for a period of one year.

  1. In 2015-16 once again, the price was supposedly rigged. Related MoneyLife article here:

The MoneyLife article brings out even more pertinent details such as the Promoter pledging his entire ~35% stake in the company with Kalupur Bank (One of the questionable investments from the last point) for no particular reason. Most likely to take advantage of the price spike.

Old habits die hard. I think I’ll pass.

17 Likes

On a different note, I think their product is seeing some improved distribution. I have seen the Euro7000 stocked in adhesive shops in Bangalore.

1 Like

Last week in some scuttlebutt process, found both Users (Karigars) are positively using it and products also available at most Hardware Shops.

If Co able to use it’s sales and working capital than there is case for huge growth.

Disc :- evaluation stage not yet invested

it is extremely hard to understand what is going on in such small companies. I will track this co since it is quite cheap, but whether it is cheap for the right reasons or the wrong reasons remains to be seen.

Apart from some changes in investments, I could not find much changes in the annual report. It also does not help that the company does not pay any dividends.

1 Like

Promotors increasing stakes since September.

Recently they created a youtube channel which contains ads of EURO7000.

Could’t get much details than these.

Something good is happening in the company for last 3-4 years. Despite covid lockdown, their topline and net profit have gone up meaningfully in the current FY. Worth watching.

App for Sales team

JYOTI RESINS has developed an app: “EURO7000” app for enabling their sales team and to improve their productivity in sale field. The app provides daily data of sales order & payment collection of sales team.

Concerns about stock manipulation

I generally do not give too much weight to very old bad actions of the management. The 2003 and 1990’s manipulation give some concern but not a lot to me.

Latest one is an acquisition at best. No SEBI actions. In last 1 year, many adani group companies have gone up 10x. Are those stock manipulations as well? I don’t know.

Personnel working at the Company

One of the sales executive working at the company did his bachelors from BITS. Will add more info about personnel when I find out.

Growth of fixed assets in balance sheet.

Their fixed assets have gone up 4x-5x (5cr to 23 cr) between Mar-19 and Sep-20. All of it is property, plant and equipment. Sales has only gone up from 69cr to 85 cr (23%). This means some severe hidden operating level exists and is waiting to burst out when the time is right.

Working capital cycle

Some potential investors might be off put by the very high trade receivables. Trade receivables of 45cr on TTM sales of 85cr are indeed high. However, we need to look at two factors here. First, for a microcap B2C company to push its brand, some favorable trade terms have to be given to the distributors o/w why wouldn’t they prefer to stock pidilite products? Second, we need to look at the trajectory of the trade receivables. In mar 2017, on a sale of 41cr trade receivables were 37cr. While sales have doubled to 85cr, receivables have gone up only 20% to 45cr. The trajectory is good. Receivables are down from Mar-20 and Mar-19. Another thing which gives some delight to investors is that the unit economics is great despite the high receivables. An ROCE of 57% (as per screener) is quite delightful.

Disc: Studying

4 Likes

Very interesting scuttlebutt that I found online:

Heard similar scuttlebutt from others too. For the same work, one ends up using much lower amount of Euro 7000 compared to Fevicol.

7 Likes

Production Capacity scale up

Following table shows how the production capacity has scaled up in the last 5 years or so. The production capacity data was only available for 2015, 2018, 2019, 2020 so I have taken only these years:

Year Sep-20 2020 2019 2018 2015
Plant capacity (ton / month) 1500 1500 1500 1000 500
Revenue (TTM) 85 74 69 54 26
Working Capital 53 57 57 46.5 14
Net Fixed Assets 23 19 5 4 1

Observations

  1. Revenue has scaled almost linearly with plant production capacity showing an almost stable capacity utilization.
  2. If we look at last 3.5 years, working capital position is improving vis-a-vis the revenue growth. Regarding trade receivables the AR says the following: “Exposures to customers outstanding at the end of each reporting period are reviewed by the Company to determine incurred and expected credit losses. Historical trends of impairment of trade receivables do not reflect any significant credit losses Given that the macro economic indicators affecting customers of the Company have not undergone any substantial change, the Company expects the historical trend of minimal credit losses to continue, Further, management believes that the unimpaired amounts that are past due by more than 30 days are still collectible in full, based on historical payment behavior and extensive analysis of customer credit risk”.
  3. The net assets has really blown up Since 2019. 4x-5x now. Diving a bit deeper into the Fy20 AR we find out that:

    the net assets have shot up due to a re-evaluation of the land company is holding. This sounds like a slightly shady thing to do. This means there is no effective large increase in the net assets, only a re-evaluation of the land.
  4. This above point is a bit confusing because as per the cashflow statement, 14cr rupees were used to purchase fixed assets:
    The figures in cashflow and balance sheet match, but as per cashflow statement, the cashflow was used to purchase fixed assets. As per balance sheet note, the addition in value of land is due to reevaluation of the land. So, where did the money go? I’m not sure.
  5. If we look at the balance sheet, specifically current liabilities and the provisions section we see following picture:

    Looks like company is capitalizing the expenses directly to balance sheet rather than taking it through the P&L. This would lead to optically inflated earnings and thus optically depressed valuations.

I think the last couple of Qs raised are significant and needs to be investigated. Company website does not work. Had called up the company and informed them about the website not working. Have also emailed on their email address info@euro7000.com. Will see how this goes.

Disc: Studying.

12 Likes

Nice observations. Detailed and incisive.

  • On 14 crore expense, I found an entry in deposits of approximately 14 crores. However, no details are there.
  • “Provision of expenses” figure, 80 crores when total annual expenses are 62 crores; making current liability is beyond understanding. Is it provided for certain losses expected in bad debts in receivables, or inventory, etc? It needs further investigation.
  • It does not appear to be capitalizing on any expense. In fact, the accounting profit in the balance sheet is the same as profit figures offered for tax on which income tax has been paid. Yes, if a certain debt has gone bad, it can be claimed as a deduction in profit and loss account as per IT law and IT benefit can be taken.
  • The company is in the process of expanding the capacity to 1500 Tonnes. In Investor Presentation in April 2021, the Company said- “The company has steadily increased its plant (at Santej, Ahmedabad) capacity to 1000 Tonnes per month, and is currently expanding its capacity by 50% to 1500 TPM to meet growing demand for its product.”
    Thus we can expect growing sales in foreseeable future.
  • The company further said- “Over the last 10 years, we have grown at CAGR of 38%/43%/55% on Revenue/Ebitda/PAT We are targeting a growth of +30% CAGR over the next 3-5 years.”
  • The company website has started working- www.euro7000.com
    I am attaching a copy of the presentation.
    JRL_Investor-Presentation.pdf (3.5 MB)
3 Likes

I am not able to understand this entry, can some one please look into it and also explain how is this not a red flag?

1 Like

Passing the revaluation reserve entry through cash flow was an error which has been corrected this year. Revaln reserve was done in line with revaln of assets as per IndAS

Also, the company Jyoti Resins and Adhesives yesterday featured in the list of Forbes Asia Best under a Billion $ list for 2021

3 Likes

Results - https://www.bseindia.com/xml-data/corpfiling/AttachLive/164bd933-76c3-402e-b410-7e78e69502cb.pdf

2 Likes

Not a big fan of Promoter / Institutions buying or selling.
But I have been observing that promoter is continuously acquiring shares for the past 1 month.
Been observed this similar pattern in Mastek for last few months and I posted yesterday about their £45M deal win for 4 years. So, Let’s wait and see what’s up with Jyoti Resins.

2 Likes

Good to see the thesis is on track as far now.

First FII entry in the past few years. Cathy Wood’s - Ark Global Emerging Company’s Fund one and only Indian Investment as per Screener.

1 Like

Thanks @rupaniamit for initiating this thread.

What has caught my attention here is the sharp rise in gross block from 1 Crs. in 2017 to 40 Crs (a 40x climb in less than 5 years).

  • Context here is that company was making (or rather reporting) very negligible profit till 2018 though sales increased from 3 Crs to 54 Crs by 2018.
  • Reported cashflow over last 10 years are just insignificant - in line with reported margins. Company has not reported any significant borrowing to fund for CapEx. Neither is there any equity dilution.

So, how is the significant CapEx even possible? This is where it becomes interesting:

  • First big change in Gross Block happened between 2019 to 2020 where PPE jumped from approx. 8 Crs to 22 Crs.
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    The same was duly charged under cashflow, as represented below:
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  • However, the catch here is the foot-note on page 83; AR2020 which reads “ Addition in the value of land during the year is on account of Revaluation of the land”. As correctly highlighted by @harsh.beria93 above, how can that even be possible? Charged 14 Crs to cashflow while assets on B/S increased due to revaluation of land. :roll_eyes: Irrespective of the math making sense or not 14 Crores went out of company in one master stroke.

  • It does not stop here only, again in FY21 the PPE has increased from 22 Crores to ~44 Crs. Part of that is explained by way of revaluation of Building (~0.2 Crs) and office premises (~4.1 Crs). Rest is new addition of ~16.3 crores to PPE.
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    The same amount has also been duly charged from cashflow.

  • Pretty much same playbook, except being smart enough to represent it as ‘as new addition’ instead of admitting ‘revaluation’ (as happened in 2020). Nevertheless ~16.34 cash gone out/taken out from company.
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At this point, I am expecting someone to turn around and say “what is wrong if company has “genuinely” increased PPE from 22 Crs to 42 Crs.”. After all they are increasing the capacity from 1000MTP to 1500 MTP (as claimed in Investor presentation and AR).
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  • Lets verify the 1000MTP capacity first. Company has been using this visual in investor presentation giving an impression that the 1000 TPM capacity was achieved by 2019.
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    Interestingly, MoFE&CC GOI granted them the required environment clearance approval on July 2020 via. approval letter (F.No J-11011/429/2017) Link

  • For that matter, Jyoti Resin itself admitted about current production of 600 TPM while responding to MoFE&CC query on April 2019

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  • Thinking about the recent (past 3-4 years) topline/bottom line growth for a minute, is it being implied that all the growth has been achieved even without the new capex for which approval came by in July 2020. OR is it right to conclude that formal approval was just that (a formal-ity) and the capacity was/is already on stream.

  • In case of formal, this perhaps will be one of the best business to buy today. (think where it would be……………asset turn has roughly been 15x – 20x and large capex is STILL underway.) ** [ P.s - dont take this statement about this being best business to own seriously]

  • In case the answer is later scenario, where capacity is already/mostly there. It raises more questions. If and why company has added additional PPE of ~16 Crs in FY2020-21? Are there further CAPEX on the cards?

  • Cann’t be the case. Initial assessment for current Capex from 600 TPM to 1500 TPM was 0.80 Crores only (yes 80 Lac only, there is no typo). Even after all cost overrun etc. the most updated estimates are total cost outlay of 2.8 Crs.

  • From the very beginning they have a land admeasuring ~8400 Sq. yards. Current capex is using only 60% of the existing land (25% built-up and 35% green belt). Company still is left with ~3350 sq. yards to meet approx. ~1000 TPM capex (if required).

So, the question is still unanswered, why there is PPE new additional of 30 Crs + in last two years alone.
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OR, may be to frame it differently
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"IF THERE HAS BEEN ACTUAL PPE ADDITION OF ~30 CRS IN LAST 2 YEARS


  • Also, very interesting observations on business vitality (they claims to be #2 in retail adhesive market with industry leading ratios):
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    . Selling and distribution expenses:
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  • 23 Crores of S&D to drive a sales of 97 Crs this year. 13 Crs of sales promotion and gifts (think………from whom to whom, you will get the drift).
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    And despite all this debtor days are stretched. Interestingly amount due 6+ months is even greater than the annual profit that they have ever earned prior to this year.
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  • As @rupaniamit had pointed out precisely in his very first post, here is a company which is carrying provisions of 95 Crs on the B/S whereas Net Profit for last 10 years has been ~25 Crs. Notice the sharp acceleration between 2016 to 2021:
    image

  • Company has spent more on CSR then what was required from them. No complains as long as it’s “CSR”.
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  • Intrigued by the management remuneration in comparison to Net profit. Even today it’s on little higher side.

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  • Also, seems that management had indulged in some luxuries of life in FY2020. Good that majority of loan has been paid back.
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Keeping those accounting hygiene aside, overall, my take is…this was a sleepy business as early as 3 years back, started cranking the numbers all of a sudden with claims of industry leading return ratios. On top of that, significant addition to Gross block can make one extrapolate for another Favicol type business at hand.

However, looking at it from operating model POV the picture is altogether different. No product tech/innovation to take them to places, very high asset turn similar to some trading firm, working capital as stretched as if a question of survival in market.

Regards,
Tarun
Disc: No Investment

25 Likes

Pretty well done forensics!
Any ground level scuttlebutt details from any source to understand their claims second largest brand (euro7000) after Fevicol.

Also any comparison between jivanjor (Jubilant Industries) vs euro7000.

Rgds