Palred technologies - www.latestone.com

Lynchfan · May 18, 2015, 6:40pm

PALRED TECHNOLOGIES
CMP- 22.5RS
MCAP- 89 C
Previous name- Four soft.

Introduction

Palred technologies - previously known as four soft by Mr srikanth Reddy from Hyderabad. It sold of its logistics software business in 2013-14 for 42 millionUSD. From that same money it paid back a dividend of Rs 29 per share to investors.
Its current operations as per the march results is only trading computer(rams, graphic cards, cables) and mobile accessories (covers, cases, chargers) through its e commerce portal www.latestone.com
In press releases Palred plans to be a speciality e commerce site focusing on mobile, computer and tech acccessories. Palred has invested Rs20cr in it and will pump Rs 10cr in the coming 3 months.

About the business
Its a simple model. Buy it cheap from china, put your name on the cover or product ,sell it online with good margins. I have seen it first hand* ebay shop sellers doing it. Flipkart does it under its brand name ‘digiflip’ (it allows others vendors too, who have the same business model). Latestone. Com does it under ‘ptron’ brand name.

(Firsthand* - through a close friend who owns a ebay store)

Whats the USP?
Palreds promoters claim two things 1) a top notch user friendly website 2) a speciality store. About the first point, without sounding

biased its true, it has a ‘lucid’ user interface and mobile customization is comparable to the best. About the second point Mr Srikanth reddy gives an example of a buyer trying to buy a face cream . Would the buyer have a better user exerience and service in a bigbazaar or a health & glow? Health & glow would beat the big walmart type stores with easy access and a wider range of face creams. This is what Palred hopes to achieve a speciality store for all tech acccessories.

Too DUMB to be SUSTAINABLE ?

Why should a listed company bother with something so trivial as mobile cases which any teenage kid can sell on ebay? If it has such lucrative margins others are going to jump in and crush the margins very soon? The following points counteract the obvious risks.

There are simply too many different mobiles. Every mobiles has different type of cases. Hard back, soft, rubberised, endless designs, colors etc. Its not feasible for one vendor to stock everything. Small and medium scale vendors cannot do it. Only big sellers like flipkart, ebay and amazon do it by letting others sellers use their portal.

2)China imports : Small sellers do not have the resources to import on the scale of a focused big vendor like latestone. Plus after NAMO took over, its been a real pain to clear customs, importing small batches of goods like a 1000mobile cases was feasible 2 years back(via china post, fedex) . Now both direct & indirect hassles has been set up to dissuade the small seller from importing.

3)Margins WILL BE sustained .
Because the buyer is ‘willing’ to or more specifically ‘wants’ to pay a higher margin. A ebay sellers tactic will explain this clearly. A seller imports 1000 transparent clear mobile cases for iphone 6 at a price of Rs 20/case. He lists it in ebay. Not in a single listing, but in 4 different prices. Rs 1499, Rs 999, Rs 499, Rs 199. Sales occurs at all price points.The buyer pays the amount he feels is necessary to protect his 70k love of his life. Imagine if the case is not transparent and has a design element to it…… It seems some of the emotional pull the buyer has towards his devices seems to rub of on to the accessories too.

Computer accessories and cables
The above argument does not work here. Its purely commodity model. Latestone hopes to dominate this market by being exhaustive in its collection (ex 1000 different cable types) . The revenue break up proves this
Mobile accessories 75%
Computer accessories 20%
Tablet accessories 5%
New mobiles will continue to be launched! People change tour mobile every year and some change their accessories every month or two.

Scuttlebutt
A quick check with my friends showed no one had heard of it. But suprisingly (reason for my interest) found a latestone.com courier pack at my home. My brother had ordered it, on enquiry he was ordering from latestone for the second time and was pretty impressed with the site. This from a person who cringes on any stock talk… So no scuttlebutt on his part.

From the news

Sales started 9 months back. From 100 orders a day in september 14 they have progressed to 2000 orders a day in march 15
over 2 lakh orders received
To open new warehouse in delhi to reduce shipping time. At present operates from hyderabad. Plans to open mumbai warehouse too

(Above news from Ameen kwaja of Palred technologies in press meet.Video Available in youtube)

BIG REDFLAG

Complete lack of fundamentals.
Because of the sale of logistics business the balance sheet is completely distorted. None of the ratios bring any clarity. Except for the fact that its DEBT FREE and has cash with it.
(Senior members please forgive me for my inability to put any concrete numbers… The recent balance sheet is difficult to decipher because of the sell off.)
Capital reduction plan
Palred has announced a capital reduction plan. In which 60% of shares from ones holding will be compulsarily purchased by the company at rs 16.5 at a premium of 11.5rs per share of face value Rs 5.

(*this capital reduction plan skews up the ratios even further. I am unable to judge if this capital reduction will benefit the shareholders in the short and long term. Kindly request senior members to shed light on it *)

Conclusion
The complete lack of fundamentals make it a speculative play. The reasons for speculation

A listed ecommerce business .
2)Easy to understand business
Impressive 9month track record
4)Management targets 500 cr sales in 3-5 years time
Mobile market is 70,000cr ,in which accessories market is 15,000cr( from Srikanth reddys press meet talk)
A bet(picks and shovel bet? )on the lucrative mobile market
Management hopes to show profits by next year.
Almost a startup with experienced promoter at the head
Honest management- Sharing the sale money with shareholders via dividends. Honest enough for a indian management?

Request seniormembers to help with these two points

capital reduction plan
Is it in best interest of retail investors? Should one wait for it to be completed)?
valuation
How to arrive at a valuation for this company. Is 90cr mcap too high a valuation?

Disclosure - not invested(may invest if numbers get clarified)

Kindly share your views on valuing it. Please share your views, redflags, negatives on Palred technologies.
(Important disclaimer - I am not related to or a follower of any stock blog. Some blogs owners who promote Palred technologies are yet to have their credentials established . )

varadharajanr · May 19, 2015, 5:02am

I looked at this a while back and found several red flags

they sold their business for about Rs. 260 Cr. - say Rs. 190 Cr. post tax and paid out about Rs. 100 Cr. as dividends/buyback. The rest of the cash has been used to buy promoter’s own companies - which I find ridiculous. These are start-up companies at zero revenues
since when did a 9 m loss making track record become impressive ?
I cannot see any moat/differentiation in the ecom business - there are plenty of websites and shops doing the same - selling mobile pouches etc.

Apart from that the political links of the promoter, moving from a high RoE business into a low RoE cash draining business are all signs of a value destroying capital allocator - not a good businessman.

Also, check the companies that were bought from the promoter - they had no reenues, no website, no product - why then buy them ?

Too many red flags IMHO

Lynchfan · May 19, 2015, 9:22am

Hi varadharajan, thanks for the detailed reply.
I would like to clarify a few points which you raised. Again I am not promoting the stock or trying to convince anybody, just want to be clear about the redflags before we dump it.

• About the 190cr cash : As you said 100cr has been paid back as dividend. In its capital reduction plan the company is repurchasing 234,422,182 shares at 16.5Rs per share. Thats a payback of 38.64 cr. It purchased Palred online media for 12 cr , Palred IT for 1 cr. It purchased deal15.com for an unknown amount from premium web services private ltd. According to the promoters Rs 20 cr has been spent on setting up latestone.com plus Rs 10cr to be spent on expanding latestone.com and assured of further cash support from the parent company.
Only the redflag about this Rs(12+1) 13 cr related party transaction remain(What management needs to clarify on this) . In that aspect the capital reduction plan is shareholder friendly?

• I agree with the point that there is zero moat with other sites doing the same. Only differentiation is through web user experience and focus on a niche segment . Just trying to make a point that the website is not a complete ‘dud’ and the market is big enough for new players to make a impact.

• Agree with you on the point that ‘impressive’ is too big a word for its 9 months perfomance . But we are not expecting a business to churn out profits on the first year? My positive bias was about the sales per day number, From 100/day to 2000/day. Further per day order is expected to be 6000 by the end of the year.

My view is its pointless to look for value here. But IF promoters intentions and sales projections of 500cr in 3 years are true .The stock could produce substantial earnings and price gains is a few years. Can this stock be the 5% speculative bet in a moderate risk portfolio with bluechips. Will it qualify for that?
Please provide your views.

Aksnehru · May 19, 2015, 9:49am

@Lynchfan

I haven’t studied the company in detail at all to be honest. But the 500 cr revenue figure in 3 years seems like a tall ask. For a comparative “Jabong had reported net revenues of Rs 438.57 crore for the full year ended 31st March 2014, averaging around Rs 109 crore a quarter and a GMV of Rs 511.37 crore, averaging around Rs 128 crore per quarter” - Business Standard. And Jabong still lost 155 crores for the same year.

Access to capital will play a critical role in driving traction and scale for the site, and even then I don’t see them turning a profit for some time. The bigger boys with their deep pockets (Snapdeal, Amazon, Flipkart) have a tendency to price the smaller players out of the market - especially in a commoditized low value product.

In addition - If you had to take average selling price of a product on their site at 750 (typically how much people will pay for accessories) - this means they would need to have volume sales of close to 67 lakh orders a year to meet the 500 crore revenue target.

I am not saying its not possible - just seems improbable IMHO.

Lynchfan · May 19, 2015, 5:22pm

Thanks akshay for the inputs. Ya 500cr in 3 years is a stretch. Management claims 2500 orders/day. We can only wait for the end of the year results to know if its true.

varadharajanr · May 20, 2015, 5:54am

The easiest way to lose money according to peter lynch is to get into the hottest and well funded sector and take on the gorillas - getting late into an already crowded space doing a 'me -too" (shop clues, flipkart etc. all sell the same stuff) is a sign of burning cash.

Also, these acquisitions that happened for Rs.20 Cr. were those of companies with zero revenues and not even a website - sounds very fishy to me and looks a legal way to suck out shareholder’s money for personal gains.

There’s never one cockroach in the kitchen - and remember one thing, even if they get to Rs. 500 Cr. after 3 years, when will they turn profitable - at a min ROE of 15% requirement, that’s at least Rs. 15-20 Cr. of PAT - the way irrational competition is in ecommerce, I just do not see that happening.

Surprising that the company did not even make a clear announcement about the related party transaction of acquiring such companies.

Lynchfan · May 20, 2015, 9:37am

Sent a mail to investor relations requesting clarification on related party transaction. Let’s see if they reply to it. Doubt it.

rajm · June 19, 2015, 3:00pm

Lynchfan any response from management?

Per my study regarding capital reduction, # of shares will reduce to 1.5 cr from 3.9 cr which will improve ROE, EPS , book value. It’s hard to estimate exact values of these as companies balance sheet is total mess as so now due to change in business line last year. But comp has cash eq of 82 cr which will be equal to Rs 53 per share after capital reduction. But since 60% of your total shareholding will be bought back by comp at 16.5 per share so you will only have 40% of shares in account. Market should adjust the price of share accordingly. Moreover it should be at least Rs 53 considering cash value alone.
This is not a recommendation to buy or sell. Please do your own analysis.

varadharajanr · June 20, 2015, 12:51pm

@Lynchfan

did you get a reponse - i looked at the video of srikanth reddy - I thought it was a joke - he had no strategy and his only motivation was that a company from hyderabad would make it big in e-com space. At the end of the day, it’s a trinket trading company whcih sells Rs. 300-400 items at discount. I see no brand, no competitive advantage and thought the CEO had no vision and was only focussed on operational details like printers.

I cannot imagine how long it would take for the company to break even and earn a respectable ROE given that all their larger competitors are still making massive losses. Seems like a classic case of capital mis allocation.

Lynchfan · June 23, 2015, 1:56pm

No varadharajan. No response. Got a mail saying I should ask someone else. Forwarded the mail.No response still.

I read his interview text in moneycontrol. He spoke on the related party transaction. He said the palred online company they acquired has some 20-25 people working. It deals with third party web services for content management and ecommerce setups. It took some effort to find that company’s website. Looked like a namesake website. Funnily had lots of spelling errors on the home page.
You may be right in calling this transaction a farce. 12 crores for 25 employees… Must be a few future gates and jobs there…

Thanks for your inputs. Cleared my head.

Lynchfan · June 23, 2015, 2:17pm

There was some excitement when some big investors like Porinchu recommended the stock. But some of his recommendations has a similar profile. For example Samtek fashions - Deals in formal business suits for the export market.He said its a future page or kitex . But in reality 90% of samteks revenue is from trading commodities in Africa. No word about this is disclosed.

Can’t fault Mr Porinchu as he openly says he likes companies with dubious management. The bull market may still give lofty valuations for these stocks. For NOW.

prism2015 · January 4, 2016, 1:33pm

I have been following the development of ecommerce since last 15 years

Since beginning i find ecommerce to be very convenient as compared to tradition shopping. During 2000 when the dot com era started there were lot of factors which didn’t supported online shopping at that time like:

Low internet speed & low internet penetration in smaller cities
Poor logistics and ware house support
Slow computers no smart phones
Few credit card holders
Online frauds
No payment Gateways

All these factors didnt supported ecomm at that time in 2000 but all these factors after 15 years have completely reversed in 2015.
All these factors are now in complete support & the ecomm companies can take advantage of these factors.

Ecomm valuation madness:

Most websites are after increasing the foot prints and are not concentrating on margins. Most of them are after valuations by achieving more sales and negligible profits.
They want to concentrate on a lot of things and want to sell every thing with out having any vendor info, back ground, product quality, etc
Due to this chances are that a wrong product get delivered, or the quality of product gets degraded. It is affecting the customer satisfaction and such experiences can affect the whole online shopping environment.
ALso working on such models the margins are very limited.

About Palred:

Palred was earlier foursoft a logistics product company which sold the business to Kewill group for some 300 crs and when the deal was announced the mkt cap of foursoft at that time was around 100-120 cr

They announced a Rs 29 dividend when the stock was at 17 - 20 and also capital reduction plan.
There is no indian company who has opted for capital reduction the way which palred did. Earlier it was done by Castrol but they reduced the Face value only and returned the ammount. I dont remember if there is any other company.
Inspite of promoter holding of 33% at that time management returned most of the money back to the share holders. Gives a point to trust the management.

After selling the logistic business they started with latestone.com.

Latestone.com:

Its a speciality store dealing with tech accessories only.

Tech Accessories is a 15000cr unregulated market with no big players in it.

They normally buy the Tech Accessories in bulk mainly from Chinese vendors at good prices, store them at their ware house, launch them on their website & deliver it through logistic partners. I think they have good margins on per product basis, without including the logistic, advertising & other overhead expenses. China is a innovative market and they keep on getting new accessories. Latestone can get them in bulk and market them in India. A few months back Latestone launched a android TV and claimed to sell 100000 pieces at Rs 2999/- so its 30 crs to topline. They can keep on getting new products as and when they are launched.

Also since the sale of mobiles online is increasing so will the sale of accessories. They just have to market themselves and their products properly and target to achieve 100% customer satisfaction.

I checked a couple of shops and found that tech Accessories are basically sold in small shops and they have very few options and also i found the price to be 20-25% higher than latestone.com on most of the products. In bigger electronics stores prices are even higher.

If GST comes they will have to account it and will increase their sale price.

In smaller cities there are not many shops selling accessories so they have to rely on websites to get better and more options.

Management says they will achieve 500 crs sales in 2-3 years which i think is possible. If each order size is Rs500/- they will have to do 1 crore orders in the year approx 27500 order per day from whole of India. I have assumed order size of Rs 500 they can get expensive products also.

Their website is good technically and can handle good ammount of orders simultaneously, process and deliver it.

If latest one manages the backend show properly :

Gets the best quality products
Delivers them properly
Develop good relations with vendors so that good products are delivered by them
Achieve 100% customer satisfaction

Palred Stores:
They help in developing websites for already established franchises to have all India penetration.

They are kind of speciality stores developed for manufacturers to sell their products only.

If they get a couple of projects in this it will be big boost. Till now they have not announced any new projects.

Preferential allotment:

They have recently allotted shares at Rs 110/- to new investors

Disclosures: Holding

prism2015 · January 6, 2016, 2:56pm

I have been following the development of ecommerce since last 15 years

Since beginning i find ecommerce to be very convenient as compared to tradition shopping. During 2000 when the dot com era started there were lot of factors which didn’t supported online shopping at that time like:

Low internet speed & low internet penetration in smaller cities
Poor logistics and ware house support
Slow computers no smart phones
Few credit card holders
Online frauds
No payment Gateways