ValuePickr Forum

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

@vasuadiga thanks for sharing ur experience.

Could u pls help us with ur observations from AR about Shilpi and Welspun. This can help novice like me taking decisions bout future investments.

Looking forward to hear from you.

Let me give you an example from my recent AR studies instead. There’s a full thread on Intense Technologies on Valuepickr. Intense Technologies is another example of falling stock price as the stock dropped from nearly 250 to 130 recently. Nobody knows why it went up and came crashing down, but its still a value buy! I started wondering if I should buy it…picked up the annual report and read the first sentence from the MD. Here’s the excerpt:

Dear Stakeholder,
Digital Disruption is the status quo in 21st century:

  • World’s largest online transportation network company owns no taxi- Uber
  • Largest accommodation provider owns no real estate- Airbnb
  • Largest phone companies own no telco infra- Skype
  • World’s most valuable retailer has no inventory- Alibaba

A quick Google search showed that this is somebody else’s quote, not his original thought. He presents somebody else’s quote as his own observation. Watching some more videos of this MD showed me that he is probably ethical and a techie with in-depth knowledge of the enterprise product, but not leadership material. I felt he struggles to even complete sentences coherently. This stock may become a multi-bagger from here on, but I don’t like to go on long rides with incompetent management.

When reading ARs, I look for ethics from management. I always pay special attention to family members. How much are they being paid and for doing what? Look for related party transactions. Compare management compensation with peers in the industry. Read notes on ‘Other expenses’ and ‘Loans & Advances’. These are especially important for small cap companies. I also look for clarity from management. The management should focus on details of business and talk about their strategies. Not talk to too much about Brexit, economic macros, CSR initiatives etc. Too many phrases like “Dare to commit”, “Value through innovation”, “Inclusive Growth” etc. triggers my BS meters. Too much talk about company’s history and past achievements is also not good. Stock images in AR are another pet peeve.

I love this quote about leadership: Leadership is not about confidence, its about clarity.


Went through the whole thread today just to see if these negatives were discussed here. Looks like most of the boarders actually at some point in time sounded unconvinced saying this story seems too good to be true.

I believe one must look at the whole sector and check BS of market leaders in the segment to see ratios such as fixed asset turns, working cap/sales, operating margins, etc to see if the company under question is doing something extraordinary to post industry beating ratios.

Another metric which i find very useful is Du Pont analysis and its modified version i.e. breaking down roe as to see what actually is driving the roe.

ROE = PAT/Equity = PAT/Sales * Sales/Fixed Asset * Fixed Asset/Equity = Net Margins * Asset Turns * Fin. Leverage

In case of Shipli, Net Margins were more more or less consistent. Asset Turns for 2016 was 33, which is crazy. Market leaders in the sector score a max of 7. So this was a big red flag. Financial leverage was abysmally low.

Another thing which is strikingly negative is CFO
PAT = 7.5 CFO (for Fiscal 2016)
In 2015 CFO is -46 cr, whereas PAT was 160 cr.

This in itself is a very big red flag again.

Annual reports are important obviously for ‘serious’ investing! Though, in Shilpi’s case - One wasn’t required to go through the annual reports to figure out basic issues.

  • pledging and reasons for the same.
  • rising debt
  • equity dilution every year
  • ever bullish mgmt commentary
  • low fixed assets in comparison to other assets (here in 1:10 ratio)…especially for manufacturer,
  • rising working capital
  • abysmal operating cash flow.

All these are big red flags even individually…and here all these were present simultaneously.

Sometimes good topline and bottomline growth blinds the investors…Rather. one should look beyond mere numbers…what’s important is profitable positive operating cash flow growth with low receivables, and manageable working capital. Intangible assets are worthless on balance sheets.


You comparing Intense with Shilpi because Intense have had price correction as well? That’s very odd actually. Shilpi had its own set of problems. intense is a good turnaround in my opinion. It’s products are being used by industry leaders. It is yet to turnaround completely, and price correction is due to crazy valuation it attained (35 plus p/e), but is a good story. Yes, there are issues which are always there with turnarounds and microcaps, but still, balance sheet doesn’t have issues like that of Shilpi. Their problem is high receivables, which is understandable due to the reasons mentioned by the management. Also, management is bullish on business but isn’t committing anything rather than saying we will grow by leaps and bounds and stuff like that and giving crazy targets. There is a difference.

Disclaimer: Not invested in either

I am not comparing Intense and Shilpi businesses. I was only saying that Shilpi management is probably unethical and Intense management is probably incompetent. I hope you understand the difference.

Your analysis of Shilpi looks great, and I hope your assessment of Intense is correct too. I don’t judge businesses based on numbers alone. Besides, I am just not good at evaluating and judging businesses that are cash flow negative.


I am not comparing Intense and Shilpi businesses. I was only saying that Shilpi management is probably unethical and Intense management is probably incompetent. I hope you understand the difference.

Classic case of applying Hanlon’s razor.

‘Never attribute to malice that which can be adequately explained by neglect.’


This is a classic case where Buffet/Munger motto that value investing is about not losing your money. Shilpi Cable is something that would come up in all the screens and filters you run when looking for low value companies with apparently good numbers (ROI/growth). But the case for avoiding also becomes apparent soon (High % of Pledged shares, growing debt) that this is a likely high probability case of losing your money. It does not make sense to spend effort on a investment idea like this.

A Low PE stock is sometimes seemingly undervalued for a good reason. You may see it as a contrarian play and think about taking a punt on it. But there has to be some positive triggers on the Red flags (lowing or pledged shares, repaying of debt) or else you are just hoping for miracles.

This is based on just the initial reading of the numbers and not even going deeper into management actions etc. whcih will likely throw up few more warnings


Thank you for your insight, was considering investing in the company, until I read the entire story.

Can you please answer what should be the ideal Ratio between CFO and PAT?


Ideally, PAT and CFO should converge (match) over time (say, few years). In case of Shilpi, these numbers are poles apart. Even better metric is FCF, though for growing companies FCF is usually low as all profits are invested back into business to fuel growth. But in long run, as growth tends to slow down, company should generate good cash, which should be visible in the form of FCF.

Big difference between CFO and PAT is a red flag and must be delved into. It might be that there is some good reason for mismatch (huge inventory, as in case of Control Print), but ideally, good businesses are those which generate CASH!


Did some research on companies cash flow, a good indicative Ratio is Cash flow from operations/Operating Profit, which in ideal case, should be greater than 1. In Shilpi’s case it is less than .15. They have huge trade receivables, it’s like they are not collecting. Raises Red flag.

I dont think you can generalize like that. Shemaroo is a case in point. It has negative cash flows from ops yet nice profits. And its a good business to be in. I guess one must understand the business properly. Telecom has great cash flows but its not a good business to be in. So its the case with airlines as well and many such industries. However if a rival company is generating good cash flows and your company isnt then it definitely should borher you.


@bheeshma Shemaroo is a different animal; as in i find their reporting peculiar. They report their assets (rights) as inventory, while actually it should be intangible assets and investments to buy these rights should flow out from cash flow for investing. Similarly in income statement, it should not be under COGS but amortization of intangibles. Why they do it this way is something i do not understand, but this will always keep their CFO negative as essentially that CFO is a version of FCF.

In general, their is no good number to define to be clear; matching net profit and cfo is very very superficial. First and foremost, when you calculate CFO, always remember to deduct interest paid (which is reported under cash flow from financing). This is the better CFO to look at.

Analyzing CFO: Start with FFO (funds from operations), start deducting taxes, cash taxes, change in trade working capital (trade receivables, inventory and trade payables), deduct other working capital changes (loans and advances etc) and further line item for other changes.

Typically, your FFO should track clean EBITDA (i.e. when you calculate EBITDA excluding any other income from asset sales etc); now you need to track individual line items; i.e. interest paid vs interest expense in IS; taxes paid vs tax expense in IS; changes in working capital. Tie this change in working capital to change in receivable cycle; and see if this is increasing. decreasing and check if this cash cycle and indivisual components are inline with industry peers or not.

Also check for change in other working capital line items (especially loans and advances), many times these are extended to related parties (check related party transactions) and should be a red flag.

In general, a growing company will have cfo less than net profit, usually due to working capital requirement (even if the cash cycle stays constant). Looking for companies generating free cash flow is foolish (subset is usually very small) and usually companies operate in cycles. They might have a couple of years of heavy capex (trident, which has started repayment now; Reliance which is in last leg), followed by debt repayment.

On debt, when you look at it, do not look at debt on the basis of what is shown as short term/ long term debt. In India, non-fund limits are usually way high (LCs/ guarantees) which are essentially bankable instruments; discounted, money moved around. So be aware of that, although you will not be able to track that.

If only, it was simple as matching CFO and net profits, you wont need humans; a simple two line program would identify all the fraudulent companies.

Lastly on Shilpi, it was in metals business. Which is very different from any other processing business, as the input cost (copper) is very high and its more of a game of managing financing and taxes rather than adding value to products. The red flag is not debt (very low relative to scale), but the fact that they had high payables; all of which would have been backed by LCs or BGs; in metal market, nobody extends clean credit for 90 to 120 days. However, at the other end, I am not sure what they were doing with their receivables; which again was at c.120 days. Could be they were selling on long dated usance LCs, discounting the money and diverting it elsewhere or selling on open credit and their customer refused to pay (unlikely they would be supplying to somebody on open credit a very high quantity).

I am sure looking at the numbers, its not the plain vanilla debt they would have difficulty in paying (cash loans from banks); but in honoring and paying banks the LC amounts; as the cash loans are far low relative to overall scale of the Company.


Very good check list of red flags.

Great Post Narender.

My own observation after reading number of financial statements is that by simply removing the interest portion paid number given in cash flow statement (not P&L) gives a very close number to actual CFO as rest of the changes are already accounted in Indian cash flow statement (changes like actual tax paid and change in working capital). Yes some companies try to be too cute by including income from sale of assets in CFO. Regarding loans and advances being used for related parties is a good check of understanding the quality of management and gets automatically incorporated in cash flow statement

On tracking LC/BG isn’t high interest rate on the loan itself an indicator that the actual liabilities is much more than the amount of borrowings (short term+ long term debt) shown in balance sheet.

Similarly I guess the issuer of LC/BG will require other things like pledging of shares as a guarantee to giving out funds.

Lastly I think with Ind- AS coming, most of the off balance sheet liabilities will start coming in balance sheet so borrowing of many companies might suddenly increase this year and next year.

So may be we are not as clueless and helpless as many companies might think.

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Thanks Aman for kind words,

Not sure what you mean by removing interest portion! (I meant to subtract interest paid number which is provided in cash flow from financing, from reported CFO. This interest paid should actually be treated as CFO line item for analytical purposes). The reason is cash flow (without this adjustment) might look healthy, but would be barely enough to sustain interest payments; and actually a company might be borrowing money to pay interest.

On LC/BG, the costs are very low to decipher true sense. You might get BG at lets say 1.5% per annum. Assuming 100 cr BG, thats just a cost of 1.5 cr on IS. While underlying BG, I might be buying the material at 90 day credit at 12%, which would all flow from COGS. Instead, if i take cash loan, i will actually pay the real amount through COGS (actual cost of material purchased without interest), while the interest portion (entire 11-12%) would go as interest expense. While the actual interest expense remains low if buying under BG, thats essentially a kind of loan (as could be called in and bank would have to honour the commitment). Typically, metal market supply chain is played through these bank instruments as typical cash loans extended by banks are low, while non-fund limits are in multiple of that.

IND-AS will make things better, but i need to actually study what changes it will bring. So far, general reading of comparatives provided by companies to IND-GAAP reported results previously doesn’t indicate much changes in final reported numbers.

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2 Independent Directors, CFO, CS and Compliance officer-all have resigned from the company. What is happening?

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Clarification by Shilpi Cable:

They sounds positive.

ICRA have done a rating DOWNGRADE due to management non-cooperation. Do look up in ICRA website. Definite cause for concern.


My father was on a tour to Bhiwadi, Rajasthan recently. I had asked him to visit the Shilpi plant. It is non operational at the moment and staff has no idea whats going on with the company. Although, some of them did give a hint that the promoter has ran away. So, I suggest you guys to stay away from this company.


Even in the interview they sound evasive.