Source:- Dr. Vijay Malik’s Blog…
Zenith Fibres Limited
trading at PE < 10,
price to sales < 1
zero debt company,
pays full tax,
10y CAGR of sales,profit, eps are 9,11 and 15 respectively.
NPM over the years is between 6-8%,
cCFO is 80% of cPAT,
consistent dividend payer at 20% payout.
10y ROE is 15% and
10y ROCE is around 20%.
Mgmt seems decent - no scandals, pay is nominal, mgmt seems
bullish on prospects from 2014 annual report
no govt restrictions as far as i could see
Zenith Fibres Limited has been growing its sales consistently
at a moderate pace of about 10-15% year on year since last 10 years (FY2006-15).
However, the profitability margins of Zenith Fibres Limited have been
fluctuating over the years. Operating profit margins (OPM) have been varying
from 8-13% and net profit margins (NPM) have been fluctuating from 5-9% over
the years. Profitability margins have been displaying a typical cyclical
Such fluctuating margins are characteristic of companies,
which have low bargaining power with their customers. In such businesses,
companies find it difficult to pass on the increase in raw material costs to
their customers quickly and thus take a hit on their profitability margins.
As mentioned by the management in FY2014 annual report, the
company’s product, polypropylene (PP) is facing competition from polyester
“Polypropylene fibre industry was not growing at the same
rate as Polyester fibre because many sectors where PP should be used is
replaced by Polyester because of lower prices”
However, the company seems to be positive about prospects of
Polypropylene as it feels that polypropylene is irreplaceable in certain
sector. The management states in FY2015 annual report:
“Certain novel uses have been found in some sectors where
use of PP fibre cannot be replaced and this augurs well for PP fibre industry
and it should definitely reflect in the growth in the future”
Zenith Fibres Limited has been paying taxes at 34-36% rate,
which is equal to the standard corporate tax rate in India. This is a good
Over the years, Zenith Fibres Limited has been
reflecting improved utilization of fixed assets. Net fixed assets turnover (NFAT) has
been improving from 4.48 in FY2007 to 11.77 in FY2015.
Inventory turnover ratio as well as receivables days have
been showing cyclical pattern in their movement over last 10 years.
Inventory turnover has varied from 16.2 in FY2007 to 10.9 in
FY2010, then increasing to 16.2 in FY2012, again falling to 11.7 in FY2014 and
then improving to 13.5 in FY2015. Similarly, receivables days have also been
showing cyclical movement between 23 days to 37 days over the years.
Such kind of cyclical movement in working capital is noticed
when the company as well as its customers are both impacted by similar low
bargaining power with their respective clients in the entire supply chain.
Customers delay payments to suppliers at times of low margins characterized by
high commodity prices and receivables days increase whereas in times of low
commodity prices, the working capital situation improves over the entire supply
If we notice the financial performance of Zenith Fibres Limited
over the years, then we would notice that it has not been able to covert its
profits into cash flow from operations over the years. Zenith Fibres Limited has PAT
for last 10 years (FY2006-15) of INR 32 cr. whereas the CFO over the similar
period is INR 25 cr.
However, the fact of money getting stock in working capital
has not had any deteriorating impact on the balance sheet of Zenith
Fibres Limited as the company has not been done any capacity expansion in last 10 years. All the capex that has been done by Zenith Fibres Limited seems
to be maintenance capex to run the existing plant at Vadodara, Gujarat
During FY2006-15, Zenith Fibres Limited realized total
CFO of INR 25 cr. and out of it Zenith Fibres Limited had to spend INR
6 cr. into capital expenditure, thereby releasing free cash flow (FCF) of INR 19
cr. as surplus for shareholders out of which it distributed INR 7 cr. as
dividend to shareholders (including dividend distribution tax). The balance surplus
cash flow of about INR 12 cr. can be witnessed as part of cash &
investments of Zenith Fibres Limited, which stand at about INR 20 cr. at the end
This ability to generate free cash flow (FCF) after meeting the
limited capex has ensured that Zenith Fibres Limited is a debt free company. The
same finding gets reiterated when we analyse the Self-Sustainable Growth Rate (SSGR)
for Zenith Fibres Limited.
Self-Sustainable Growth Rate (SSGR) of Zenith Fibres
Limited is about 30-40%. As mentioned in the article on Self-Sustainable
Growth Rate, SSGR does not factor in working capital changes. However, we can
estimate whether funds are being tied up in working capital by comparing cPAT
Analysis of SSGR indicates that if Zenith Fibres Limited can
manage its working capital management and operating efficiency properly, then
it can grow continuously at about 30-40% growth rate without creating
additional debt burden on the balance sheet. As Zenith Fibres Limited has been growing
at a rate of 10-15%, it has been able to manage its grow story without
leveraging its balance sheet.
Zenith Fibres Limited has been paying regular dividend to
its shareholders. Company has been increasing its dividend payout with
increasing profits. It amounts to sharing the fruits of growth with
shareholders. These are signs of a shareholders’ friendly management.
Zenith Fibres Limited seems a professionally run company, as the
founder Rungta family does not hold executive position in the company. Entire
senior management seems to consist of professionals.
Shri S.S. Iyer CEO, Shri K.D Sharma CFO, Shri Shailesh
Pandey COO and Shri Praveen Bukyalkar CMO seem unrelated to promoters Rungta family.Mr. Amitabha Ghosh, a retired Governor of Reserve Bank of
India, is part of the board of directors.Zenith Fibres Limited is the first company that I have analysed
where the percentage increase in salaries of employees: 11.20% is higher than
that of key management people (KMP): 5.62%
Zenith Fibres Limited faced the loss of a key resource in
FY2015, when the founder chairman of the company Mr. Ajay Kumar Rungta died in February
2015. However, the presence of his sons Mr. Rajeev Rungta (Age 54 years) Mr.
Sanjeev Rungta (current Chairman) on the board of Zenith Fibres Limited indicates
continued promoter guidance for the company.
The management of Zenith Fibres Limited seems
conservative as it did not go for rampant capex in the past and has generated
free cash flow, which it shared with shareholders as dividend. As a result the company
has seen tepid growth but with a strong balance sheet with nil debt.
The market capitalization of Zenith Fibres Limited has
increased by INR 33 cr. against retained earnings of INR 24 cr. over last 10
years (FY2006-15). Management has created a value of INR 1.38 for the shareholders
from every INR 1 of earnings retained & not distributed to shareholders.
Zenith Fibres Limited is currently available at a P/E ratio
of about 7.2, which offers a margin of
safety as described by Benjamin Graham in his book The Intelligent Investor.
of 7.2 is low, however considering no expansion in last 10 years, the
visibility of Zenith Fibres Limited growing at a fast pace of 20-25% & above
are limited, unless the company comes up with aggressive capex plans. Looking
at current state of moderate growth with low capex, the market,s apprehension in
assigning higher P/E ratio to Zenith Fibres Limited seems justified.
Fibres Limited appears to be a company growing at a moderate pace, with fluctuating
profitability margins & operating efficiency. It is run by a conservative
management which has not done rampant capacity expansion over last 10 years and
have met its capex requirements from its cash flow from operations and able to
generate free cash flows. Zenith Fibres Limited has a very healthy SSGR, which can
ensure that it can grow at current moderate rate without needing debt to fund
its growth, if it can manage its working capital efficiently.
However, in order to generate higher growth rates of 20-25% &
above and to generate significant wealth for shareholders, Zenith
Fibres Limited needs to expand capacity of its operations. An investor should
keep a track of the company to follow up on any capacity expansion plans it may
have in future.
These are my views about Zenith Fibres Limited. However,
you should do your own analysis before taking any investment related decision
Additionally, the investor should keep track of the future
performance of the company for signs of improvement or worsening as part of
their monitoring exercise. She may use the steps explained in the following
article for monitoring stocks in her portfolio.
Disc:- No Position…in watchlist…