ValuePickr Forum

Shilpi Cable Technologies - at 2 times PE definitely worth a look!

Old article in Hindu.
Shilpi Cable Technologies: Limitation in scaling up of operations exists.

  1. Looking at the March 14 Balance Sheet from screener.in, the company’s current Price to Book ratio of 0.93 implies a very safe stock since most of the funds are used for working capital which can be liquidated with relative ease - the debtors are large telcos which are unlikely to default and stock is a commodity with ready market
  2. Not paying dividend for a high growth company is normal as future growth rate can be estimated by this formula Growth (est) = ROE*Dividend Retention Rate(100% in this case). We can estimate a growth rate in coming year to be higher than 30% based on 3 Year Avg ROE of 33.44% and dividend retention ratio of 100%. The company’s DE ratio is also stable and has come down from over 2 in 2010 to 0.68 in 2014
  3. Given the growth and relative safety of the stock valuation, I have invested in this script even considering the negatives mentioned by other members. The downside risk seems limited and upside could be huge if management comes through on its target revenue of $1 Billion by 2018. There could be a re-rating of the PE multiple which would provide additional upside
  4. Ofcourse if the numbers are fudged by management, then there is no protection but I am giving the benefit of the doubt to the company in this particular case and keeping allocation in my portfolio limited in this stock until more information becomes available

Now Business Today also came up with story on Shilpi Canles as most emerging company
http://www.businesstoday.in/magazine/issue/july192015
Things to be consider:-
1…Tax Payout ratio Very Poor
2…YoY Increase in Debt
3…Pledged share
4…Very high fixed asset turnover (Unimginable in cable industry)
5…Stock Movement in last 2 years

Another Interesting thing in this report is:-
IT ALSO INCLUDE kwality ltd (Who the hell make such report?)

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Continuing on this thread - I like to pen down facts and my views - so this might be a little lengthy. But perhaps some issues like low tax, high turns, increased debt, etc would be discussed. I had bought a bit of the stock a few months ago to track. While I am cagey about the astounding growth and capital efficiency numbers, I believe valuations offer downside protection.

Shilpi Cable Technologies Limited, founded in 2006, is a manufacturer of cables used in the automotive, telecom and energy segments. It specialises in radio frequency cables, copper wires, wiring harnesses, and cable accessories. At present, SCTL’s 26 per cent revenue come from telecom segment, 21 per cent automotive, 12 per cent from the consumer durables/assemblies, 7 per cent from energy cables and rest 34 per cent from copper wire conductor business.
The company has three plants, two in Rajasthan, and one in TN. The Hosur (TN) plant was put up to cater to the wiring harness requirements for a large OEM (likely Ashok Leyland).
It has an arrangement with an Aurangabad based company for manufacturing RF cables on a contract basis, which effectively doubles its capacity. This creates flexibility and also increases throughput without creating capacity. Being in an industrial hub, there is an in-built locational advantage.
Additionally, it has another arrangement with a Bahadurgarh (Haryana) -based manufacturer of wires and cables on a contract basis. This arrangement is strategic with an equity infusion into the manufacturing facility by SCTL promoters. The arrangement provides for a contract size extending to INR 200 crore per annum.
It has two wholly owned subsidiaries, Shilpi Worldwide JLT (Dubai), and Shilpi Worldwide Private Limited (Singapore).
The company currently exports to UAE, Taiwan, Philippines, Turkey and USA, with a view to widen this base in the future to South America, Africa, Middle East and South East Asia. Exports started in FY14 and contribute to 12% of standalone company turnover in FY14 (per AR14). Most of such revenue comes from the telecom segment through solutions, onsite provisioning, and trading. Tie-ups with OEs in the future could likely bring substantial business to SCTL at better margins.
Investments into the 4G/LTE technologies along with the urgent requirement to address coverage and capacity issues will give a boost to revenue from the telecom segment. While incremental additional of towers could be slow (due to expected higher tenancy ratios), the requirement for telecom cables and assemblies will be necessitated for each base station, creating sustained demand.
Within the automotive segment, SCTL caters to the 2W/3W and PV segments. According to a Roland Berger report, the passenger vehicle and 2W markets in India would grow at 12% per annum through 2020. Among the BRIC nations, this is the lowest, India has a car ownership of 12 per thousand compared to Russia at 216, Brazil at 126 and China at 44. The close correlation between GDP growth and PV demand growth could mean strong medium term growth. Current low penetration makes India an attractive global outsourcing hub, which is augur well for SCTL.
SCTL has recently announced that in 3Q16, it will launch its own brand of LED lighting under the brand name ‘SAFE’, indicating a movement into the B2C segment. ‘SAFE’ already has a presence in the wires, switches and MCB segments in the B2B segment. In FY15, the company is reported to have racked up retail sales of ’50 crore. SCTL is present in 9 states through 250 distributors and 1,200 retailers, which indicates a good coverage.
The Company announced a preferential allotment of 40,00,000 equity shares upon conversion of warrants to Shilpi Cables Private Limited at INR 65 per share, indicating the dilution at a price 50% higher than the then prevailing price. The Company had earlier announced a preferential allotment of 1,18,00,000 equity shares to several Mauritius-based FIIs at INR 30 per share, at a 200% premium to the then prevailing price. Very recently, there was an announcement of a preferential allotment of 1,50,00,000 warrants to the promoters. The conversion price has not been indicated in the press release. The practice of having preferential allotments is a concern since it dilutes the minority shareholding every time. The only solace is the pricing of such conversions which thus far have accreted book per share rather than diluted it.
Promoters (inclusive of Trust) hold 47%, FIIs own 23%. There seem to be some large holders per the shareholder pattern on BSE – if these are PAC (persons acting in concert), the free float would be reduced substantially. 78% of the promoter shares have been pledged – a concern.
SCTL has ambitious plans to raise sales to USD 1 billion (INR 6,500 crore) by 2020 through organic and inorganic means.
SCTL has shown a tremendous growth over the past 5 years. Consolidated revenues have grown at 67% CAGR, EBITDA at 53% and PBT at 61%. Despite dilutions and a bonus issue, earnings have compounded at 30% CAGR over FY10-FY15. FY15 marked the first year of a dividend payout of INR 1.00 per share.
Standalone operations pays full tax. By virtue of the zero tax structure in Dubai, and low profitability in Singapore (both these operations account for 25% of the consolidated revenues of SCTL), consolidated operations have been paying a far lower tax. Dubai operations contribute over 40% of consolidated PBT (versus 7% in FY13) resulting in overall tax levels at 10% of consolidated PBT.
SCTL ended FY15 with RoE of 37% and pre-tax ROCE of 27%. It is instructive to note that the 5-year averages for RoE and RoCE have been 32% and 25%. Due to this shrewd outsourcing arrangements, SCTL currently churns its native gross block an astonishing 18x a year. Including the working capital requirement, this still works out to 4.7x total asset turn. With a large capex completed in FY15, free cash generation would enhance as utilization increases. Interestingly, capex just in FY15 has been higher than that in at least previous 6 years! Additionally, the retail business over time could enhance the margin profile of the company. Industry PE is 30x while industry P/B is 2.5x. While this is not strictly comparable (Havells, Finolex, V-Guard have spent substantially on branding; Havells, V-Guard have other businesses; etc), there lies a large gap between SCTL and its peers.
SCTL reported a consolidated profit of INR 160 crore or earnings per share of INR 16.20 on its enlarged share base. Net Debt is 50% of book equity. Trading at 1.2x trailing book and a multiple of 3.7x on FY15 earnings and EBITDA, the security offers a good margin of safety.
Key risks, other than the concerns mentioned earlier:
The Company has no enduring brand franchise as of now (mostly a commoditised operation), and is looking to create the same with its brand ‘SAFE’ LED lighting. Enhancing the distributor network and creating further scale could take time and burn cash. However, SCTL is already present on 9 states and has a large distributor and retailer base, giving it enough reach to make a measurable impact.
The company imports a lot of material, including copper, etc, which are subject to volatile fluctuations. Since the end product is commoditised, passing radical price changes could be difficult thereby pressuring margins. However, copper is at a six year low, offering respite on margins.
The standalone operation has an interest coverage ratio of 1.8x, indicating a lower margin of safety. However, the consolidated operations have an interest coverage ratio of 3.1x, which is more comfortable.

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Hi Harsh,
I have looked at the Receivables of Shilpi in FY 2015 and for the previous years.Most of it is unsecured in nature and considered good but the strange thing is that it has’nt recorded any Provisions unlike its peers, which for me seems quite an aggressive accounting practice.

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Hi Anirudh

I do not see the unsecured portion of the receivables to be an issue. The
movement in Receivable Days and the Cash Conversion Cycle is something
that I would spend more time on. If the reported numbers are to be
believed, receivable days have slightly reduced to just under 4 months.
Also, CCC has gone down from 96 days to 58 days, a pleasing change.
However, despite being a very small portion, they should have provided for
the receivables which are more than 6 months old. It is less than 3crore,
so it should no affect us as much. It is a small irritant.
I am concerned about interest costs though. They seem higher with “other
borrowing costs” contributing to 15cr and bank charges being 5% of the
loans drawn.

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Hi, Just wanted to updated this old thread since it is a valuable news. Stock is now trading at 12 times PE. In the latest interview of the CEO mentioned about taking on 1000 cr worth of debt for expansion in UAE. Link http://www.moneycontrol.com/news/business/entered-b2c-seg-plan-36150m-investmentuae-plantshilpi-cable_7012081.html

Based on this news I decided to cash out most of my holdings as I had lost the conviction.

I want some seniors opinion on following questions

  1. Is it common for 2000 cr Mcap companies to take such 1000 cr debts for growth, From what i recollect Warren Buffet was against growth by piling on debt. Market is yet to react to this news.

  2. They are diversifying into B2C markets. Is it a good mode of growth to diversify into already crowded FMCG market from a Niche market that they were in?

  3. The growth in the books seems too good to be true ( sales have increased 20 times in 7 Years ). Are the Numbers only in the books and reality is something else? I have noticed that earlier the company was paying tax at 30% of profit but since 2014 its only paying 10%. Does this indicate any kind of fudging or its common for Tax rates to be decreased in such manner.

I am a Newbie on this forum hence may be mistakes in my post. Please be kind enough to guide me.

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Hi,

IMHO the company seems to be very proactive in building a robust model with focus on volumes and new segments.

With the new plant announced, it is not necessarily a bad thing to borrow debt to aid it, interesting thing is to see the Copper prices also which will allow the margins to be decent for some more time to come. I would give some more time to the management to test the consistency, logical decelaration if any.

Thanks

Disc - invested, keeping a close eye on quarterly numbers

this is incredibly hard to generalize. Typically debt = risk (from the equity holder’s point of view). To a certain extent, the risk/reward ratio is in favor of the equity holder, i.e. more risk (more debt) = more returns. But at some point, the risk starts to show it’s true nature. You’re not running the company (unless you’re an activist investor) so if you’re comfortable with the management taking this kind of risk keeping in mind the business parameters then there’s nothing wrong in continue to hold this.

As a case in point if your salary is 20L and a bank gives you 1Cr home loan is this good or bad? There’s no right answer. It will only be evident based on how the future unfolds. However it’s beyond doubt that a 1Cr loan is less risky than a 10Cr loan

Disc: No stake, and I personally dislike investing in companies which raise debt (but that’s me)

Thanks for the reply.

I have sold off my shares on this stock. I don’t think that company has continuous growth potential in their niche field. And their desicions seems to be highly complicated.

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Any highlights on continuous LC? Lost 34% of valuation in just 2 days.

Is this really related to the Warrants conversion issue as reported in the media? Out of 1.5 Crore warrants issued to promoter in Oct 2015, 80 lakh warrants seem to have been converted in March 2016. The promoter wants to convert the remaining 70 lakhs apparently now and this has lead to this mayhem? Bit hard to believe this is the reason. Interestingly though, Right after the promoter got his 80 lakh warrants converted in March 2016, the stock price has rallied almost non-stop from Rs.50 to Rs.220. Was there stock price manipulation or maybe cooked books or both? Hard to understand a drop from 220 to 130 levels with maybe further to go.

Disc: Just curious because the current P/E is 7.53 post price drop which makes it interesting value, provided there are no red flags.

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I scanned the thread from the first post to the last not in detail though. In the kesar terminal thread hiteshbhai mentions that one should be wary of companies who take on debt disproportionate to their size. We must learn to distrust companies who do that. Also I find no mention about the wide gap between profits and cash from operations. That is one important number that sometimes gets forgotten. Also continuous equity dilution. This pattern of debt low cash from ops and equity dilution should be enough to maintain distance

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@phreakv6 please rectify.

Reduce one zero from your crores figures. Total number of shares are a bit more than 11 crores. How come they issue 15 crores?

Source: http://www.business-standard.com/article/markets/shilpi-cable-tanks-20-on-heavy-volumes-117042600453_1.html

Sorry my bad. Changed it now. I think the conversion from million to crores got me.

Their company meeting got postponed twice … One of Independent Directors resigned… stock tanked 34 % … still no clarification from company

would be interesting to see surprises waiting for us once they indeed convene for company meeting and disclose the numbers.

At 119 today, the stock has tanked over 50% from the peak (around 250) just two weeks back. From recent memory even Divis and Welspun falls weren’t this bad. 5% circuits from here on should slow the fall a little bit until May starts.

Thanks Sowmay, now what does it mean?

Is it some normal court case or something serious, which investors need to be concerned about.

An overseas bank has wrote to National Company Law Tribunal to start bankruptcy proceedings against the company. NCLT will issue notice to Shilpi Mgmt for seeking clarification. This would be like a court case albeit a bit fast one.

Two Board meetings have got postponed. The management has explained that this is on warrant conversion issue and the meeting has been postponed due to quorum issues.

But with this bankruptcy claim, it looks like there is some deeper rot, which is yet to come out. I believe they are defaulting big time on loans & interest payments.

All this fast upmove from Rs. 50 to Rs. 250 reeks of manipulation now.

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This company showed up in my ‘Magic Formula’ screen during Aug-Sep 2015. Reading their annual report convinced me that these guys were not to be trusted. Never bought the stock and never regretted it even though it became a 4-5x multi-bagger from there.

I wasn’t so lucky with Welspun India though. I read the annual report after the purchase and I regretted the purchase immediately. I knew that the management was full of marketing BS. I have a rule to not sell any stock within a year and so I held on. It went up for a few months before the Egyptian Cotton issue happened. Finally, after a long year, I sold it for a 18% loss. Fortunately, it was a very small portion of my portfolio.

Lesson learnt: Always read the annual report. Management without ethics or competence is easy to spot here.

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