I used to own some shares in this company and sold recently. I was very uncomfortable with the corporate governance practices these guys were following. Some of the things I didn’t like:
- Their repeatedclaims that they are the only guys whose pumps run on AC and DC is not true. I looked at KSB Pumps’ website. They have the same thing too - http://www.kirloskarpumps.com/pdf/packaged-system/Solar-leaflet.pdf. Now I understand from Varadharajan that they are also not the only makers of SS pumps. Either they think we are fools or they don’t know who their competitors are. Either way I don’t want to own this business.
- Cash generation has been weak because of continuous jump in loans and advances to related parties. The company has to depend on warrants from promoters for capex needs because of this reason -low internal accruals. Note thatthe impact of dilution from warrants outstanding is very substantial.
- If you see the FY14 cash flow statement, Rs 18cr of positive operating cash is eaten up by 29cr of investment outflow. Rs 12.5cr out of this 29cr outflow is increase in loansand advances (which BTW, is shown as an investment outflow to show operating cash asnice number). As long as this way of cash transfer from the company happens, this company will show reported profits but never generatecommensurate cash.
- Finally, the one that crossed the line for me - there is a new related party in FY14 annual report from which the listed entity has bought solar pumps. It appears that the listed Shaktiis going to trade in solar pumps while the actual manufacturing will be done by a promoter entity. Lets not forget that Shakti has supposedly invested two years of research to develop this product. Now the manufacturing seems to have nicely moved toa promoter entity.
I haven’t spoken to the company on any of this because am never gonna believe what they say anymore.