Posting this since I’ve gotten to doing detailed research on the company just now and also because these aspects have not been discussed on the thread -
Accounting change from Q1 FY18-19
Revenue recognition for the CSM business has changed to booking revenue upon completion of production rather than delivery acceptance by customer, principle being control as opposed to ownership all these days. Under CSM model PI has long term contract with specific customers, hence each batch or consignment is earmarked for a specific customer from day 1. Which means control can easily be ascertained and one does not wait for ownership transfer to happen to customer which usually follow delivery acceptance by customer. To explain clearly
All these days - Say PI produced 10 MT of molecule X under long term supply arrangement with a customer in Europe. First molecule gets produced, tested for quality and then sent to port. The consignment spends time in transit and eventually reaches Europe where customer takes delivery; revenue gets booked now
Going forward - For the same consignment illustrated in above scenario, revenue booking happening as soon as PI internal production manager certifies and sends to logistics team for dispatch
Implications -
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The ability of PI Ind to manage sales numbers for the CSM business goes up drastically after this accounting change. What this will result in is revenue getting booked much in advance as per existing model with receivables cycle getting elongated while inventory comes down proportionately. It will be working capital neutral since it is moving from inventory to receivables bucket, sales will get upfronted based on the transit time for the consignment
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Since production completion is now the basis for revenue recognition, most likely they can use the POC method (Percentage of Completion). Effectively management can now recognize 30% sales saying 30% production is complete rather than wait till production is 100% complete
Put this in the context of the 28% and 31% revenue growth shown in Q2 and Q3 resp and one gets the picture. There is a good chance that the books reflect a much better situation than is reality. Ideally one needs to see Q1 and Q2 result of FY19-20 to be sure that the run rate has indeed gotten better before concluding that business is back to 20% growth. Chances are it may be actually only be a hygienic improvement in actual growth rate with the accounting change making up for the rest 8-9%. I am yet to go through Q2 and Q3 transcript so if it has been explained there will update my post later
The strange case of commissions paid to directors
From the AR one can see that each independent director makes not just a sitting fee but also a commission linked to business performance at the discretion of management. Directors have no role to play in operations so this sounds very strange. Why should an independent director get paid 25 lakhs per annum for attending 5 board meetings while the CFO gets paid 83 lakh
There is also the case of Narayan Seshadri - Independent director, ex KPMG partner and head of current audit committee who owns 4.84 lakh shares of the company (he has been on board since 2009 at least and owned 50,000 shares in March 2009). Nothing wrong with it as such since he has been a high profile corporate achiever who is on board of other companies too but he basically has 50 Cr of his own net worth riding on PI Industries stock.
Did he acquire these from the market (as any other investor would)? If not one needs to probe deeper here.
I am not coming to any conclusions but just pointing out some observations and non standard practices when it comes to the remuneration for independent directors. Anything non standard calls for a deeper view in my opinion, irrespective of all other aspects. That said I do not see anything else that calls for a deeper look, quality of corporate governance on all other parameters has been pretty good including constitution of the board
Anyone with a view on any of these?