Monday, April 26, 2010

Company in stratosphere?

I was analyzing a particular company named Mcnally Bharat Engineering recently and found its valuations reaching stratosphere without any reasons. The company seems to have a very large order book of the size of INR 5000 Crore but the financials of the company are not at all anything to write home about. The company paid more than INR 48 Crore of interest in FY2008-09 and has already paid INR 34.58 Crore worth of interest in the last three quarters of this financial year. Surprisingly the company's total debt stood at around INR 150 Crore at the end of FY2009. I am unable to understand why the company should pay so much interest on so little debt. Most probably the working capital debt is very high since the balance sheet mentions current liabilities of INR 643.77 Crore and sundry debtors of INR 652.17 Crore. Till last year, the company's PBDIT (Profit Before Depreciation, Interest, and Tax) at INR 102.2 Crore was more than twice that of interest payment of 48.42 Crore. But in the last two quarters, it has fallen below the ratio of two. Generally, bonds of a company are good if this ratio is at least 4. And this is at a time when the company is having the best environment for its business. As mentioned in the Security Analysis Chapter VII, bonds of a company should be bought based on any one of the two things: the character of the company's business or the ability of the company to weather destruction in demand. This particular company does not fall in the first category since Capital Goods is a highly cyclical business. So the company must have a lot of margin of safety to pay its debt during recessions which is missing from the financials of the company. If the bonds of a company are not safe, how can an investor give INR 1125 Crore worth of valuation to its equity? I would provide an update to this analysis when there is an article in any of the online media community about default of this company. Stay away from this company!!!

The analyst must take possible future changes into account, but his primary aim is not so much to profit from them, as to guard against them. - Benjamin Graham
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1 comment:

Siddharth Shukla said...

Hi chinmay,
Interesting analysis, the moment i read the post i was reminded of Prof Aswath Damodaran's excellent post on Stock Vs Flow accounting . This looks like a classic case of the company hiding its debt by paying it off at the end of the FY . Hence the disproportionate interest/book debt. This could have been easily detected if only we had quarterly Balance sheets in India.So clearly Mcnally seems to be employing short term debt throughout the year and paying it off cleverly in March/Apr to make the B/S lok clean.

Also i have started a new blog with an analysis on one of your holdings IMPAL, would appreciate feedback :

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