Thursday, January 10, 2013

Arshiya International - zero 0 stock target and junk credit rating

Arshiya International (cmp 78)- deserves zero 0 equity target and credit rating of junk.
...and things that seem simple macro /value buys can be bit complex as well . ;-)
Waterfall drops

Hmm been reading in past 2 days in news. Disgruntled employees of Arshiya ( who havent been paid their salaries since past months) have said this "" the promoters have misguided investors, stakeholders by painting a rosy picture so far, while the company is hollow - it is a mini Satyam."
So I thought why not go through balance sheet,cash flow & earnings to see how it compares with Satyam ?

One thing I cannot seem understand is when investing in a company that has debt, why do most people neglect a very basic & simple check ? That is compare if it has sufficient cash flows to repay the interest and debt. E.g if Arshiya `s total debt is 2500 crores, a conservative 7% interest rate would mean ,it would need a minimum of Rs .175 crores (2500 x 7%) in Cash flow from Operations ( before interest) to just pay the interest.
  • All info. taken from public sources; annual reports. I have done my diligence but please do your own diligence before relying checking the numbers.
  • All in Crores.
  • All no.s taken are Consolidated Results
  • For calculating ICR & DSCR ratios ( Interest coverage & Debt Service Ratios) - cash flow based no.s are used NOT from P&L. Refer " The power of using cash flow based ratios" from the Journal of Accountancy
  •  Cash from Operating Activity =CFO
  •  PAT= Profit After tax
  • Adj. CFO = Adjusted CFO = reported CFO minus cash interest paid. India accounting treats interest as Financing activity so reported CFO =pre interest
Summary of my findings
  • Earnings quality is very poor and seems as similar / as bad as Satyam i.e  very high reported earnings as per P&L / income statement) vs. low Cash Flow from Operations CFO.PAT / CFO ratio is very high & is not stable. To compare with how these ratios should look for a good company . across sectors,one can refer this earlier post of mine titled "Does your portfolio /Mutual fund has the next Satyam ?
  • I have used cash flow based Interest coverage ratios (ICR) Debt Service Coverage ratios DSCR( i.e NOT taken EBIT / Interest Expense as Interest coverage.  I have used Cash flow based CFO before interest / Interest paid as per cash flow
  • As compared to  minimum ICR & DSCR of 2x and 1.2x , Arshiya `s ratios 1.1-1.5x & 0.4x
  • In past 2.5 years Total debt has gone up ~4x to 2400 crores. 
  • In the same period, adjusted cash flow is down 71%.
Summary ( click to zoom the below table to see comments in last column )

 So what next?
My fundamental target ( for equity value) is 0 as it seems all assets are given as security to Banks.

FII `s hold 13%& DII `s hold 2%. Top shareholders holding >1% as on available data Sep 2012.

In my view,another ways to play this :- (1) either stay away or (2) for people with aggressive appetites - SHORT with stop loss ( in decreasing order of preference)
  1. Short similar players with high debt and such crappy earnings quality ratios.First one comes to my mind is L&T Larsen & Toubro (cmp 1547). In fact it`s ICR & DSCR are even worst than Arshiya. Past post (excel table) here  
( click to zoom)
Other plays - Short - Banks that given loans of 2500 crore loan to Arshiya ,Rating agencies like CARE.

Yes. There will always be people who will be trying to make a investment case/value buy based on things like bailouts, debt restructuring, ECB/dollar loan refinancing,QIP,OFS,rights issue,white knight, distressed debt investors.But its not my style to follow the `dash for trash` trade.
Ending quote by Warren Buffett
“The market, like the Lord*, helps those who help themselves. But unlike the Lord*, the market does not forgive those who know not what they do.” 

* I consider myself as agnostic / atheist  

Disclosure - No positions at the time of writing. Historically have been shorting L&T now & then.
P.S -Detailed calculation of above table of Arshiya


MurAtt said...

Anbd as our trading Lord says - Someone will ......

Well someone did ....


btw dunno why u r so bearish on LT. Can u give a proper case and email it to me in PDF ? U hv my mail id.


SaanpaurSeedi said...

@MurAtt Thanks for your comment.
I don`t have anything personal against L&T.
I just let the data shape my opinion/view.
Yes,detailed post on L&T in still in draft mode for past 6 months.Will let you know if & when I post it.

My only advise is there are over 5000 stocks listed in India. Why get emotional about 1 stock like L&T. In stocks, always better to safe then sorry.
Also even for investments,one should always have a trailing loss.
All the best.

Anonymous said...

what is your view on GEODESIC?

is also a same case. JUNK??

SaanpaurSeedi said...

@anon Have not checked it. Not tracking it. But I have noticed some traders in Twitter being very skeptical about GEODESIC - high receivables..things like that

Chandresh said...

Anonymous said...

Sirji, we are not dealing with laws of physics here ...

The company in context here is an example of early stage investing and not a maturing company , where you will run the quantitative checks and things will fall into place .
yes, the company is under distress which could have been managed better and i am not saying it has value now ..