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.
Notes:
  • 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



6 comments:

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.

MurAtt

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...

http://stateofthemarket.net/2013/01/making-sense-of-lt-chart/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+StateOfTheMarket+%28State+of+the+Market%29

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 .
P.S.
yes, the company is under distress which could have been managed better and i am not saying it has value now ..