DrVijayMalik Company Analyses Vol 11

www.drvijaymalik.
com
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Copyright © Dr Vijay Malik. All Rights Reserved.

www.drvijaymalik.com
Company Analyses (Vol. 11)
Live Examples of Company Analysis using “Peaceful Investing” Approach
By
Dr Vijay Malik
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Copyright © Dr Vijay Malik.
All rights reserved.
This e-book is a part of services of www.drvijaymalik.com
No part of this e-book may be reproduced, distributed, or transmitted in any form or by any means, including
photocopying, recording, or other electronic or mechanical methods, without the prior written permission
of Dr Vijay Malik.
Printed in the Republic of India
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Important: About the book

This book contains the analysis of different companies done by us on our website (www.drvijaymalik.com)
in response to the queries asked by multiple readers/investors.
These analysis articles contain our viewpoint about different companies arrived at by studying them using
our stock investing approach “Peaceful Investing”.
The opinions expressed in the articles are formed using the data available at the date of the analysis from
public sources. As the data of the company changes in future, our opinion also keeps on changing to factor
in the new developments.
Therefore, the opinions expressed in the articles remain valid only on their respective publishing dates and
would undergo changes in future as the companies keep evolving while moving ahead in their business life.
These analysis articles are written as one-off opinion snapshots at the date of the article. We do not plan to
have continuous coverage of these companies by updating the articles or the book after future quarterly or
annual results. Therefore, we would not update the articles or the book based on the future results declared
by the companies.
Therefore, we recommend that the book and the articles should be taken as an illustration of the practical
application of our stock analysis approach “Peaceful Investing” and NOT as a research report on the
companies mentioned here.
The articles and the book should be used by the readers to improve their understanding of our stock analysis
approach “Peaceful Investing” and NOT as an investment recommendation to buy or sell stocks of these
companies.
All the best for your investing journey!
Regards,
Dr Vijay Malik
Regd. with SEBI as a Research Analyst
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Table of Contents
IMPORTANT: ABOUT THE BOOK ............................................................................................................................ 4
1) RELAXO FOOTWEARS LTD .................................................................................................................................. 6
2) LINDE INDIA LTD .............................................................................................................................................. 52
3) DR REDDY’S LABORATORIES LTD ...................................................................................................................... 95
4) PROCTER & GAMBLE HYGIENE AND HEALTH CARE LTD .................................................................................. 128
5) ABBOTT INDIA LTD ......................................................................................................................................... 167
6) VARANIUM CLOUD LTD: HOW RETAIL INVESTORS CAN AVOID SUCH TRAPS ................................................. 188
7) SESHASAYEE PAPER AND BOARDS LTD .......................................................................................................... 220
8) RAMCO INDUSTRIES LTD ................................................................................................................................ 270
9) RUSHIL DECOR LTD ........................................................................................................................................ 318
10) WEBSOL ENERGY SYSTEM LTD ..................................................................................................................... 368
HOW TO USE SCREENER.IN "EXPORT TO EXCEL" TOOL ...................................................................................... 425
PREMIUM SERVICES ........................................................................................................................................... 450
DISCLAIMER & DISCLOSURES ............................................................................................................................. 466
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1) Relaxo Footwears Ltd

Relaxo Footwears Ltd is an Indian manufacturer of slippers, sandals and sports shoes.
Company website: Click Here
Financial data on Screener: Click Here
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Over the years, Relaxo Footwears Ltd did not have any subsidiary; therefore, it has always reported only
standalone financials.
We believe that while analysing any company, an investor should always look at the company as a whole
and focus on financials, which represent the business picture of the entire company including its
subsidiaries, joint ventures etc. Consolidated financials of a company present such a picture. Therefore, if
a company reports both standalone as well as consolidated financials, then in such a case, it is advised that
the investor should prefer the analysis of the consolidated financials of the company, whenever they are
present.
Further advised reading: Standalone vs Consolidated Financials: A Complete Guide
In the case of Relaxo Footwears Ltd, as until now, the company has reported only standalone financials;
therefore, we have used the standalone financials in the analysis.
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Financial and Business Analysis of Relaxo Footwears Ltd:

In the last 10 years, Relaxo Footwears Ltd has increased its sales from ₹1,180 cr in FY2014 to ₹2,783 cr in
FY2023 at an annualized growth of 10%. Sales of the company have further increased to ₹2,900 cr in the
12 months ended September 30, 2023, i.e. during Oct. 2022-Sept. 2023.
The profit margins of the company have fluctuated significantly over the years. Relaxo Footwears Ltd had
an operating profit margin (OPM) of 13% in FY2014, which increased to 16% in FY2018. The OPM, then,
declined to 14% in FY2019 to subsequently increase to 21% in FY2021. However, in the last two years,
the OPM of Relaxo Footwears Ltd has declined sharply to 12% in FY2023. In the 12 months ended
September 30, 2023, i.e. during Oct. 2022-Sept. 2023, it has reported an OPM of 13%.
The net profit margin (NPM) of the company has closely followed its operating profitability.
To understand the reasons for the growth of the business of the company over the years and reasons for
fluctuations in its profit margins, an investor needs to read the publicly available documents of the company
like annual reports from 1997 onwards, credit rating reports, as well as its corporate announcements.
After going through the above-mentioned documents, an investor notices the following key factors, which
influence the business of Relaxo Footwears Ltd. An investor needs to keep these factors in her mind while
she makes any predictions about the performance of the company.
1) Intense competition in the Indian footwear segment:
The footwear segment is highly competitive due to multiple reasons. First, manufacturing footwear does
not require a lot of capital; therefore, it has low entry barriers for new players. As a result, numerous small
players from unorganized segments are present in the sector.
Credit rating report by ICRA, December 2023, page 2:
The footwear industry is inherently competitive owing to the strong presence of the unorganised
sector. The industry does not have a capital-intensive manufacturing process and hence the entry
barriers of new players are low.
It is estimated that almost 60% of the footwear market is served by the unorganized sector.
FY2017 annual report, page 36:
At present, India’s footwear industry is quite fragmented with > 60% belonging to the
unorganised sector.
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Second, even within the organized sector, numerous players are competing strongly with each other. The
competition within the organized segment increased especially after FY2014 when many multinational
companies (MNCs) entered the Indian footwear segment.
India non-leather footwear industry also went through a transformation in FY 14 with entry of
international players
As a result, over the years, the competitive intensity in the footwear industry has been on the rise.
Credit rating report by ICRA, July 2022, page 1:
ratings, however, are constrained by intense competition due to aggressive expansion by the new
brands
Relaxo Footwears Ltd faces even higher competitive intensity because its business is predominantly in
North India, which has higher competition than other regional markets.
Conference call, November 2023, page 13:
Gaurav Dua:…45% coming from north zone, followed by east zone of 22%, then west 20% and
15% is south
Ramesh Kumar Dua:…North is little more competitive market than South and West.
Due to intense competition, during tough times with sharp increases in raw material prices, many players
go out of business.
During the year, industry was under tremendous pressure due to unprecedented increase in the
prices of Natural rubber, EVA and Fuel. Due to this many small manufacturers in unorganized
sector were not able to sustain in the market
Also read: How to do Business Analysis of a Company
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2) Very low pricing power of Relaxo Footwears Ltd due to its focus on low-
priced, mass-segment, commodity products with low customer loyalty:
The company is focusing on the mass consumption segment with low-priced products like slippers
(chappals), sandals etc. As per Relaxo Footwears Ltd, almost 85% of its products are for mass consumption.
Conference call, Nov. 2021, page 12:
Ramesh Kumar Dua: you should appreciate, we are serving masses and 85% business is for
masses. Only 15% are others.
As a result of its business focusing on low-priced, mass-consumption products, the average selling price
(ASP) of its products is ₹146/-. (Q2-FY2024 results, PPT, page 12).
In this market segment, the consumer is highly price conscious, which is also visible due to the presence of
>60% share of unorganized players. Moreover, basic products like slippers, sandals and even shoes are
almost commoditized at entry level. As a result, the customer is very quick to switch players/brands if it
saves her some money.
The company also highlighted this consumer behaviour in its FY2014 annual report.
85% of consumers are evaluating switching to competition brands and ~77% consumers believe
that offerings across leading players are not very differentiated.
As a result, very frequently, footwear manufacturers resort to price-based competition to gain market share.
Gaurav Dua: We have mentioned before that there are a lot of competitions, unorganized and
organized have entered in this category. So, we are seeing like lot of discounts are being offered
by unorganized and other players
In FY2019, Relaxo Footwears Ltd faced strong competition from lower prices offered by other players.
Therefore, it had to cut the prices of its products to fight and regain its market share.
Credit rating report by ICRA, August 2019, page 3:
In order to stave off competition and increase market share in the Hawai and Flite EVA slippers
segments, the company had to lower selling price in FY2019.
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Relaxo Footwears Ltd faced the challenges of low pricing power i.e. customers ignoring its products and
switching to competitors and unorganized players multiple times in the past.
In FY2022-FY2023, when raw material prices increased sharply and Relaxo Footwears Ltd had to increase
the prices of its products, then it realized that customers had stopped buying its products and were now
buying other cheaper products.
Conference call, Nov. 2022, pages 4 and 18:
Gaurav Dua:…what we are seeing the volume degrowth in Hawaii and EVA category. So that
clearly mentioned that the shelf has been taken by unorganized players.
Ramesh Kumar Dua: because of unaffordability of our article to the masses, they went
for cheaper alternative. So that started affecting our sales.
As the company started losing business to competitors in FY2023, it had to reduce its prices by 15%-20%
to gain its market share.
Conference call, Nov. 2022, pages 2, 4:
Sushil Batra:…This prompted the company to take an aggressive price correction in September
2022 to remain competitive in the current market.
Ramesh Kumar Dua: The price correction has been around 15% to 20%.
The company needs to hold on to its market share because if due to high prices, the mass consumer finds
its products unattractive, then she will opt for other manufacturers and the shopkeeper will remove Relaxo’s
products from the shelf. And once, its products are gone from the shelf, then the company loses any chance
to win the customer and do business.
Conference call, May 2022, page 18:
Ramesh Kumar Dua: It’s very important we have the market share; we cannot lose our shelf
space…Once we are always there and everything else will only then follow. If we lose our market
share, then what are we left with.
Therefore, an investor may appreciate the tough business position of Relaxo Footwears Ltd. It focuses on
mass consumers with low-priced products. The customer can easily replace its products with those of its
competitors without any significant loss of functionality. Therefore, whenever it increases prices, it faces a
loss of market share, which is a big problem because once it is out of the shelf space/customer’s mindshare,
then it loses the basic business premises.
Therefore, Relaxo Footwears Ltd has to be extremely cautious before it increases its prices.
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Conference call, May 2022, pages 4 and 17:
Gaurav Dua:…There’s a limit to pass on the price to the end consumer.
Ramesh Kumar Dua:…Ultimately our goal at the moment is to focus on our market share in the
market and keeping in view the article that we are in, which are meant for masses, lower rank of
society
As a result, on numerous occasions in the past, Relaxo Footwears Ltd had to absorb the impact of increasing
costs.
For example, in FY2022, the company had to take a hit on its profit margins and its OPM declined to 16%
from 21% in FY2021.
Ramesh Kumar Dua:…we are cautious while increasing our prices. So, we have been able
to absorb part of the raw material increase in cost.
When an investor reads old annual reports, then the low pricing power of Relaxo Footwears Ltd becomes
clear to her as the company had to repeatedly take a hit on its profit margins.
The decrease in the rate of operating profit is on account of steep increase in the price of raw
rubber during the later part of the financial year 2003-04.
During FY2011 and FY2012, when raw material prices increased, then the company could not pass it on
and as a result, took a hit on its profit margins.
Net Profit after Tax has decreased from ₹ 37.69 Crores to ₹ 26.71 Crores due to constant increase
in material cost during the year.
Due to the unprecedented price volatility during the major part of the year, the increased costs
could not be recovered to its fullest.
Similarly, during FY2019, the company’s profitability suffered as it faced difficulties in increasing the
prices of its products when its costs increased.

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Sushil Batra:…During the year, the margins were under pressure due to higher raw material
prices
The low pricing power of the company resulted in a decline in its profit margins both in FY2022 and
FY2023. In the last two years, the OPM of Relaxo Footwears Ltd has declined to 12% in FY2023 from
21% in FY2021.
your Company has absorbed a part of input cost to unburden the consumer
Conference call, May 2023, pages 2-3:
Sushil Batra:…Margins were affected primarily by the high pressure on raw materials
pricing during most of the year.
Over the years, illegal players have exploited the high price sensitivity of Relaxo’s target consumer segment
by introducing fake/pirated products in the markets. The company had to continuously face the problem of
pirated products.
RELAXO is also concerned about the adverse impact that counterfeit, spurious and low quality
products can have on credibility
Conference call, Sept. 2015, page 2:
Whenever we come across with pirated brands we take appropriate actions which includes police
raid
Pirated products are introduced in the market when criminals believe that the target consumer of the brand
will buy them if they are priced cheaper than the branded product. This price sensitivity of consumers also
limits the pricing power of Relaxo Footwears Ltd.
Also read: How to analyse New Companies in Unknown Industries?
3) Huge, compulsory advertising and promotional expenses of Relaxo

Footwears Ltd:
In the highly competitive footwear industry, where customer loyalty/stickiness is low and price-based
competition is the way to survive, Relaxo Footwears Ltd had to spend a significant amount of money on
advertisements, promotions, and discounts to be visible and appeal to customers.
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Over the years, the company has spent almost 10%-12% of its sales on direct advertisements, sales
promotions, and cash discounts (AP&D).
The below table shows the AP&D expenses of Relaxo Footwears Ltd over the last 28 years (FY1996 to
FY2023).
Please note that over the years, especially since FY2001, the company has been spending 9-12% of sales
on AP&D. The expense looks lower from FY2018 onwards because the company stopped showing cash
discounts as a separate item in its annual report.
Nevertheless, the company has communicated that it aims to spend about 8-9% of sales on advertisement
and promotion expenses.
Gaurav Dua:…about A&SP, we do around 8% to 9%, and we are maintaining this from last two,
three years, and we will try to maintain a similar pattern in this coming year also
Relaxo Footwears Ltd’s spending of 8-9% of sales on AP&D expenses is very high when compared to other
well-known footwear brands like Liberty Shoes (1.2%, page 127 of its FY2023 annual report) and Bata
India Ltd (2.5%, Page 210 of its FY23 Annual Report).
Moreover, high spending on advertisement and promotions has not given any special pricing power to
Relaxo Footwears Ltd. This is evident from the earlier discussion on the low pricing power of Relaxo
Footwears Ltd over its customers who constitute the extremely price-conscious mass consumer. When the
company raised its prices in FY2022 and FY2023, then its customers immediately shifted to other cheaper
products and Relaxo Footwears Ltd was forced to cut prices.
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Therefore, the high advertisement & promotional spending by Relaxo Footwears Ltd has become a
mandatory expense for gaining shelf space and customer mindshare to maintain its market share. This is
because if reduces its promotional expenses, then it will lose market share.
Relaxo Footwears Ltd has explained to its shareholders, the mandatory nature of its promotional expenses
on numerous occasions.
Ramesh Kumar Dua: The expenditure on brand building this year will be more than it was last
year, because for longer periods we cannot keep on saving on brand expenditure like
advertisements.
Ramesh Kumar Dua:…Last year we had some cut in marketing and administration expenses but
this year we have started these expenses and the brand-building again, we can’t keep it always on
the low.
The compulsion of Relaxo Footwears Ltd to keep spending on advertisement and promotions was one of
the key reasons for a decline in profit margins in FY2022.
Sushil Batra:…decline in EBITDA margin is mainly on account of increase in raw material prices
and normalization of selling, marketing and administrative expenses in FY22 as compared to
FY21.
Also read: How to do Financial Analysis of a Company
4) Economies of scale benefit from increased production capacity:
Relaxo Footwears Ltd started in 1984 as a purely marketing arm for Relaxo group and in FY1995 started
manufacturing slippers.
Credit rating report by ICRA, Dec. 2023, page 3:
It started as a marketing company for the Relaxo Group and subsequently started manufacturing
hawai slippers in 1995.
As per the earliest available annual report of FY1997 (page 23), it had a manufacturing capacity of 50,000
pairs of Hawaii slippers per day. At that time, its business primarily relied on purchasing footwear from
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promoter group companies and selling them. For example, in FY1997, it sold only 70.7 lac pairs of slippers
of its own manufacturing whereas it sold 166.9 lac pairs of footwear purchased from other parties.
However, over the years, Relaxo Footwears Ltd has continuously increased its production capacity and
currently, in August 2023, it reached a production capacity of 10.5 lac pairs of footwear per day.
Corporate announcement to BSE, August 7, 2023:
With this addition of 50,000 pairs per day, the Company’s total production capacity is 10.50 Lacs
pairs per day.
As a result of enhanced manufacturing capacity, Relaxo Footwears Ltd benefited from economies of scale
and could improve its profitability over the years.
The portfolio premiumisation, along with improvement in scale, led to the improvement in its margins over
the years.
Moreover, as the company manufactures almost 95% of the products that it sells; therefore, it is able to save
on costs, unlike other manufacturers who bear outsourcing costs.
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Ramesh Kumar Dua: Around 95% products sold are manufactured in house.
Even though Relaxo Footwears Ltd has increased its capacity significantly over the years to get scale
benefits; however, currently, it has to make a large amount of investment every year in moulds and other
maintenance expenditures, which is a continuous burden on its resources.
A large portion of this consistent annual capital expenditure (capex) is “moulds,” which it requires to create
new footwear designs every year. Due to changing consumer preferences, the footwear industry acts like
the fashion industry and every year, companies have to bring in new designs and phase out old ones.
Therefore, out of about 400 different kinds of footwear in the portfolio of Relaxo Footwears Ltd, it changes
almost 50% of it every year and to create new designs, it requires new moulds.
As per the company, it spends almost ₹25cr to ₹30 cr every year on moulds, which when added up to other
required capital expenditures adds to about ₹100 cr of capex every year for the company without any
increase in manufacturing capacity.
Sushil Batra: No, because every year it’s a very fast-moving article and we have to create new
designs. Lot of money goes in the mould side, around Rs. 25-30 crores, it’s a recurring CAPEX
every year we have to do…some back-end operation…other routine expenditure around IT that is
around Rs. 8-10 crores. So Rs. 100 crores almost in this year, it’s always there.
In fact, the credit rating agency, ICRA, has highlighted this mandatory annual capex of about ₹100 cr to
₹150 cr as one of the key constraints on the credit rating of Relaxo Footwears Ltd.
ratings are also constrained by significant outflows (~Rs. 100-150 crore) towards capex every
year, which though funded largely by internal accruals, keeps the company’s free cash flows under
check.
Advised reading: Credit Rating Reports: A Complete Guide for Stock Investors
Therefore, these outflows of ₹100-150 cr towards mandatory annual capex along with mandatory
advertisement and promotions expenditure of 8-9% of sales make the task of Relaxo Footwears Ltd to
maintain its market share a very cash-consuming one.
In addition, in its aspirations to become a low-cost producer via benefits of scale, the company has to
continuously keep expanding its manufacturing capacity. In Dec. 2023, the company purchased another
land parcel in Bhiwadi for ₹135 cr.
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Corporate announcement to BSE, Dec. 11, 2023:
announced the successful bid and acquisition of a Land Parcel admeasuring ~ 30

Acres in…Bhiwadi – II, (Rajasthan) which will be used for setting up Manufacturing facilities for
future needs…The acquisition is valued at approximately Rs. 135 crores
5) Strategic decisions, which proved suboptimal for Relaxo Footwears Ltd:
Over the years, the company has taken a few decisions, which have not produced desired results for the
company. Let us understand a few of them.
5.1) Exclusive brand outlets (EBOs):
Most footwear manufacturers just like other consumer brands sell their products via exclusive brand outlets
(EBOs) as well as multi-brand outlets (MBOs). Relaxo Footwears Ltd used to rely primarily on MBOs for
its sales; however, it also opened EBOs to promote its brand and gain market intelligence.
However, over the years, it realized that due to its low-priced products focused on highly price-conscious,
mass consumers, exclusive brand outlets are not becoming attractive profit centres for it.
In fact, it makes higher profit margins on its sales from MBOs via distributors than its EBOs even though
it saves on the distributor commission in EBOs. This is because, EBOs have other expenses like rent,
employees, interior designing etc., which are very expensive considering the low-priced, almost commodity
products of Relaxo Footwears Ltd.
Ankit Kedia:…is it fair to assume the margins in EBOs would be just near double digit and lower
than the company average?
Sushil Batra: Yes. It’s lower than company average, but I think the high single-digit margin
Due to the lower profitability of its EBOs, the company has realized that it can not treat EBOs as a separate
profit centre. Instead, it is treating them as cost-neutral marketing centres.
Sushil Batra:…we started opening the outlets as a marketing channel, display cum exhibition. It
is a cost neutral model and our objective of it is not as that of a business model like Bata, we have
a different consumer.
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Ramesh Kumar Dua: We are not very aggressive on it. Our purpose establishing all these EBOs
is to display and create awareness of our articles. Ultimately, multibranded outlets give us a
maximum sale.
Credit rating agency, ICRA has also highlighted that despite significant investment in its EBOs, Relaxo
Footwears Ltd is not able to generate sufficient returns on it.
Credit rating report by ICRA, June 2017, page 2:
Retail channel profitability has been weak despite significant investments
As a result, the company has stuck at about 400 EBOs, which are concentrated in North India. Due to the
poor profitability of its EBOs, it is not even considering opening EBOs in South India.
Conference call, Nov. 2020, pages 3 and 14:
Ramesh Kumar Dua:…so currently we have around 400 outlets, but that is enough to understand
the market. But if you want to go to south and west then it is a different thing commercially and
then it must make economic sense…so currently we do not have any plans to have such kind of
outlets in other parts of the country.
Therefore, due to the focus of Relaxo Footwears Ltd on low-priced, mass-market footwear, its investments
in the EBO segment could not make sufficient returns for its shareholders.
5.2) Online sales channel:
The company entered into the online sales channel; however, soon it realized that for the majority of its
products, which are low-priced, the online channel is economically unviable. This is primarily because of
shipping charges and returns, which add significantly to the cost of selling.
Ramesh Kumar Dua:…ultimately our articles are mostly priced around Rs. 125 to Rs. 150 – Rs.
200, these articles are unviable to be sold online.
In the online sales channel, Relaxo Footwears Ltd fears that it will lose control of the price of goods. The
company wishes to sell its goods at the same price across all the channels whether online or offline. The
company fears that if prices are different across channels, then people may start trading in its products by
buying from one channel and selling on other channels.
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Gaurav Dua: We try to keep same margins what we have online-offline and retail…we do not
want that goods flow from one channel to another because of prices. So, we keep it same.
However, the company realized that in the online channel, heavy discounts are prevalent leading to price
wars; therefore, it is difficult to keep the prices same across online and offline channels. As a result, now,
Relaxo Footwears Ltd is planning to start an exclusive product range for its online channel, which will not
compete with its offline channel.
Gaurav Dua:…going forward, we will have different portfolio, especially SMUs for e-
commerce and different products for the offline because we want to control the price, there is
sometimes a lot of price war. One channel give you more discount what we have heard in this Big
Billion Days
As, even after multiple years, the company has not yet found the right strategy for its products on the online
sales channel; therefore, it is not growing its online sales channel aggressively and over the last many years,
the share of online as well as new channel is about 10-12%.
6) Cost optimization steps taken by Relaxo Footwears Ltd:
Due to a lack of pricing power, to survive, the company has to become a very low producer of footwear.
Therefore, it has to continuously find methods of reducing operating costs.
Over the years, Relaxo Footwears Ltd has taken multiple steps like outsourcing its central distribution
centre (CDC).
Outsourced functioning of its Central Distribution Centre (CDC) in order to improve working
efficiency that is resulting high productivity
It introduced a bidding platform for its suppliers so that it can generate competition in them to get supplies
at the cheapest prices.
We increased our collaboration with key suppliers and focused on competitive bidding of prices.
Advised reading: How to study Annual Report of a Company
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To make its operations more efficient, the company continuously works on optimizing the number of
distributors. In FY2021, Relaxo Footwears Ltd increased the security deposit requirement from its
distributors to keep only serious distributors in the system.
Sushil Batra: We have increased the security amount from each distributor for new distributor as
well as the existing distributor, so just to bring more big and serious people in the business
By FY2022, the number of distributors of the company witnessed a significant decline, the company said
that it is focusing only on those distributors, which bring in at least a business of ₹10 lac every month. This
is because the business with smaller distributors is not economically viable.
Gaurav Dua:…distributors so less than Rs.10 lakh sales per month…the cost of reaching them
it was not viable. We are focusing on good number of distributors who are doing more than Rs.
10 lakhs per month…We have to cut the tail.
In addition, to cut costs after the Coronavirus pandemic, the company discontinued the engagements of
consultants and saved on consulting charges.
Ramesh Kumar Dua:…consulting that’s what we can say, that is the only item which we cut last
year, and we are not reinstating.
Also read: Operating Performance Analysis: A Simple & Complete Guide
7) Impact of regulatory policies on Relaxo Footwears Ltd:
Footwear manufacturing is one of the most labour-intensive sectors generating significant employment.
Therefore, govt. monitors the sector very closely and frequently interferes with policy directives.
Indian Footwear Industry is a labour intensive industry
Apart from regulations related to labour management, govt. routinely changes the taxes applicable to the
industry in response to the prevailing circumstances.
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For example, in FY2014, govt. reduced the excise duty on shoes priced between ₹500/- to ₹1,000/- to
support the industry.
government has already announced relaxation in the excise duty on footwear in the price range of
₹ 500 to ₹ 1000.
In 2017, when govt. implemented goods and services tax (GST), then a lot of money got stuck as input tax
credits and increased the working capital requirement of Relaxo Footwears Ltd.
Credit rating report by ICRA, Dec. 2017, page 1:
ratings, however, are constrained by the increase in working capital intensity of operations post
the rollout of Goods and Services tax (GST)
Thereafter, in FY2019, the govt. supported the footwear industry by reducing the GST rate for shoes priced
between ₹500 to ₹1,000. Also, the GST calculation was changed from MRP to the actual transaction price.
On 27th July 2018 the GST Council reduced tax rate from 18% to 5% for footwear ranging
between MRP ₹ 500 to ₹ 1000. Further on 1st January 2019 the incidence of tax was changed from
MRP to transactional value.
However, in FY2022, the govt. increased the GST on footwear priced below ₹1,000 from 5% to 12%, which
impacted the demand for footwear, which impacted the business of Relaxo Footwears Ltd.
Sushil Batra:… Revenue during the quarter was affected due to disruption caused by Omicron
variant of COVID, GST rate hike from 5% to 12% w.e.f. January ‘22 on footwear priced below
Rs. 1,000…EBITDA margin decreased mainly due to steep increase in raw material prices
and extra support provided to trade towards GST rate differential on inventory.
Apart from changing indirect taxes like excise duty, GST etc. the govt. has also supported the footwear
sector by levying duties on the import of footwear. In the 2020 budget, to support the footwear sector, the
govt. increased import duty on import of finished footwear from 25% to 35% and on parts to make footwear
from 15% to 20%. (Source: Budget 2020: Govt hikes customs duty on toys, furniture,
footwear products: Financial Express)
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Recently, Govt. has implemented BIS standards (Bureau of Indian Standards) for the footwear industry,
with an implementation date of January 1, 2024 (Source: From Jan 1, local footwear mfgs to
come under BIS lens: Times of India)
Currently, footwear manufacturers are protesting against BIS implementation as it will increase their
production costs (Source: BIS norms: Footwear industry protests nationwide:
BusinessLine).
Going ahead, an investor needs to closely monitor the regulatory developments related to the footwear
industry and check whether Relaxo Footwears Ltd is able to handle its impact successfully.
The tax payout ratio of the company has been in line with the standard corporate tax rate applicable in India.
Until FY2019, the company reported an income tax payout ratio of above 30% except in FY2015 when it
reported a ratio of 28% as it received tax benefits due to its capital expenditure.
Lower effective tax rate due to tax benefits arising out of strategic investments in plant &
machinery
From FY2020, the tax payout ratio of Relaxo Footwears Ltd has declined to 22%-25% in line with the new
corporate income tax rate implemented by the govt.
Recommended reading: How to do Financial Analysis of a Company
Operating Efficiency Analysis of Relaxo Footwears Ltd:
a) Net fixed asset turnover (NFAT) of Relaxo Footwears Ltd:
The net fixed asset turnover (NFAT) of Relaxo Footwears Ltd in the past years (FY2013-21) has declined
from 3.4 in FY2015 to 2.6 in FY2023. The decline in NFAT is primarily caused by the inability of the
company to grow sales (volume) of its footwear in line with its increase in manufacturing capacity.
In recent years, the number of pairs of footwear sold by the company has been declining in FY2022 and
FY2023. In FY2021, Relaxo Footwears Ltd sold 19.1 cr pairs of footwear, which declined to 17.5 cr in
FY2022 and 17.1 cr in FY2023.
Q2-FY2024 results PPT, Nov. 2023, page 17:
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Due to the declining sale of pairs of footwear, the capacity utilization of the company has declined to 50-
55%.
Sushil Batra:…last year being a tough year, so that utilization was around 50% – 55% at
company level.
Going ahead, an investor should keep a close watch on the capacity utilization levels of the company to
assess if it is able to efficiently utilize its plants.
Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors
b) Inventory turnover ratio of Relaxo Footwears Ltd:
The inventory turnover ratio (ITR) of the company has declined from 7.0 in FY2015 to 4.5 in FY2023. A
declining ITR indicates that the efficiency of the company in the utilization of its inventory has declined
over the years.
If an investor compares its total inventory and cost of goods sold, then it comes out that the company has
to keep almost 5-6 months of cost of goods as inventory with itself.
One of the reasons for such a high inventory requirement is that due to the large size of manufacturing
operations, Relaxo Footwears Ltd is not able to source its key raw material from the local market. This is
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because, first, no supplier in the local market can meet its demand and two, its orders will sharply increase
the price of raw material in the local market.
Ramesh Kumar Dua: We cannot depend upon local sources. Otherwise, our factory will not be
able to run. Local source, availability is only meant for small manufactures. If we go to the market,
the rate will get out of control because of the local market, because our 1,000 tonnes, nobody can
match.
As a result, the company has to rely on imports to meet its raw material requirement, which makes its supply
chain very long. Therefore, it ends up with a large inventory either in transit or stored in its warehouse so
that its manufacturing operations are not interrupted.
Ramesh Kumar Dua:…we cannot be dependent at all on local sources. Our factory will come to
a halt. To have uninterrupted, no disruption, manufacturing process, we have to maintain this
sufficient inventory in the pipeline.
The company had to pay the price for a long supply chain with inbuilt long-term contracts in 2022-2023
when its cost of raw materials continued to be high even though the spot prices of raw materials in India
declined. As a result, local manufacturers who bought raw materials from Indian local markets could enjoy
the benefits of lower costs and their products became much cheaper than those of Relaxo Footwears Ltd.
This led to the target consumer segment of the company, being extremely price-sensitive, mass consumers
shifting away from its products to cheaper products of its competitors and Relaxo Footwears Ltd losing
market share to the unorganized sector.
Conference call, Nov. 2022, pages 3-4:
Ramesh Kumar Dua:…thing which we were getting at Rs.120 a kg, reached Rs.300 kg, and
then…it came down to Rs.160…our company has to maintain a long supply chain because
materials are imported, it has to be at least 6 months’ supply chain…local market becoming
cheaper than the international market at which we got…the local industry or other people who
are always sourcing the material from local sources, they became competitive…But as far as our
company is concerned, which has a long supply chain, we took our own time. Meanwhile, because
of unaffordability of our article to the masses, they went for cheaper alternative. So that
started affecting our sales.
Therefore, the long-supply arrangements of the company became a double-edged sword when its cost of
raw materials did not decline even though the prices in the Indian spot market had become cheaper. As a
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result, the company’s business suffered and it had to reduce prices by about 20-25% in Sept 2022, which
significantly impacted its profit margins as its OPM declined to 12% in FY2023 from 21% in FY2021.
The decline in sales volume of its footwear as well as the high cost of its raw materials led to a significant
increase in its inventory in FY2022 to ₹673 cr from ₹422 cr in FY2021.
Another issue that impacts the inventory of the company whenever it changes the prices of its products is
that price changes result in the same goods with multiple MRPs with the distributors and shopkeepers.
Therefore, they tend to liquidate earlier inventory before ordering new ones.
Ramesh Kumar Dua: Well, for the time being demand is being affected because people don’t
want to keep stock of those things. They just want to reduce their inventory in the pipeline because
there have been two price increases.
Therefore, whenever prices are updated, it takes about 3-6 months for the earlier inventory to go out of the
system and the new inventory to replace it. During this period, there is a low demand from distributors &
retailers, which leads to a build-up of inventory at the company level.
Gaurav Dua:…we have done multiple rounds of price cuts. So they had different types of MRPs,
distributors and retailers. But now all of them have been cleared. It took three to six months to
clear all the old MRP products.
Another factor leading to a large inventory for Relaxo Footwears Ltd is that it has all its manufacturing
plants located in North India in NCR and Haridwar whereas it sells its products across India. Therefore, at
any point in time, it has to keep a significant number of goods in the supply chain like in transit, in regional
warehouses and distribution centres to supply goods to distributors on time.
Going ahead, an investor should keep a close watch on the inventory position of the company to understand
whether it is able to improve the efficiency of its inventory utilization.
Further advised reading: Inventory Turnover Ratio: A Complete Guide
c) Analysis of receivables days of Relaxo Footwears Ltd:
Over the years, receivables days of Relaxo Footwears Ltd have increased from 19 days in FY2015 to 34
days in FY2023. It indicates that the company has to offer a longer credit period to its customers
(distributors and retailers) to stock its goods i.e. to give it shelf space.
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The footwear industry is highly competitive. In addition, the target customer segment of Relaxo Footwears
Ltd is highly price-conscious and does not hesitate to switch brands/manufacturers. Therefore, whenever
competition increases, then manufacturers have to incentivize distributors and retailers with longer credit
terms to stock their goods.
Relaxo Footwears Ltd has been facing such a situation for a long time in its operating history. For example,
in FY2001 when its receivables increased significantly, then it explained it because of a scheme that it had
run for distributors to increase sales.
The steep increase in the amount of Sundry Debtors in the current year are on account of heavy
year end sales arising due to expiration of distributors’ scheme in March
In recent years when Relaxo Footwears Ltd faced one of the toughest periods as customers shifted to other
players, then it faced challenges in receiving timely payments from distributors and retailers.
Gaurav Dua:…because of inflation their visits have been little reduced. So, that’s why what we
are seeing is that the payments are not coming from the distributor and from the retailers.
Going ahead, an investor must keep a close watch on the receivables position of the company.
Further advised reading: Receivable Days: A Complete Guide
When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from
operations (cCFO) of Relaxo Footwears Ltd for FY2014-23, then she notices that over the last 10 years
(FY2014-FY2023), the company has converted its profit into cash flow from operations.
Over FY2014-23, Relaxo Footwears Ltd reported a total net profit after tax (cPAT) of ₹1,650 cr. During
the same period, it reported cumulative cash flow from operations (cCFO) of ₹2,138 cr.
It is advised that investors should read the article on CFO calculation, which would help them understand
the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors
would also understand the situations when the companies would have their CFO higher than the PAT.
Further advised reading: Understanding Cash Flow from Operations (CFO)
Learning from the article on CFO will indicate to an investor that the cCFO of Relaxo Footwears Ltd is
higher than the cPAT due to the following factors:
• Depreciation expense of ₹744 cr (a non-cash expense) over FY2014-FY2023, which is deducted

while calculating PAT but is added back while calculating CFO.
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• Interest expense of ₹174 cr (a non-operating expense) over FY2014-FY2023, which is deducted

The Margin of Safety in the Business of Relaxo Footwears Ltd:
a) Self-Sustainable Growth Rate (SSGR):
Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential

of a Company
Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal
to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able
to fund its growth from its internal resources without the need of external sources of funds.
Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal
resources would not be sufficient to fund its growth aspirations. As a result, the company would have to
rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its
target growth.
An investor may calculate the SSGR using the following formula:
SSGR = NFAT * NPM * (1-DPR) – Dep
Where,
• SSGR = Self Sustainable Growth Rate in %

• Dep = Depreciation rate as a % of net fixed assets
• NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
• NPM = Net profit margin as % of sales
• DPR = Dividend paid as % of net profit after tax
(For systematic algebraic calculation of SSGR formula: Click Here)
Over the years, Relaxo Footwears Ltd had an SSGR of 13-14% barring the recent two years when it faced
a very tough situation when its SSGR declined to 10% in FY2022 and 5% in FY2023. In comparison, the
sales growth achieved by the company over the last 10 years (FY2014-23) is 10%. Therefore, the company
has managed to fund its growth from its own cash flows.
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As a result, over FY2014-2023, Relaxo Footwears Ltd did not require any additional infusion of funds from
either equity dilution or additional debt. On March 31, 2023, the company was debt-free from the
perspective of loans from lenders and the reported debt of ₹164 cr was primarily lease liabilities.
The investor gets the same conclusion when she analyses the free cash flow position of Relaxo Footwears
Ltd.
b) Free Cash Flow (FCF) Analysis of Relaxo Footwears Ltd:
While looking at the cash flow performance of Relaxo Footwears Ltd, an investor notices that during
FY2014-FY2023, it generated cash flow from operations of ₹2,138 cr. During the same period, it made a
capital expenditure of about ₹1,562 cr.
Therefore, during this period (FY2014-FY2023), Relaxo Footwears Ltd had a free cash flow (FCF) of ₹576
cr (=2,138 – 1,562).
In addition, during this period, the company had a non-operating income of ₹107 cr and an interest expense
of ₹174 cr. As a result, the company had a total free cash flow of ₹509 cr (= 576 + 107 – 174). Please note
that the capitalized interest is already factored in as a part of the capex deducted earlier.
Relaxo Footwears Ltd used its free cash flow for paying dividends of about ₹286 cr, repayment of debt and
has increased its cash & investment balance to ₹299 cr on March 31, 2023.
Going ahead, an investor should keep a close watch on the free cash flow generation by Relaxo Footwears
Ltd to understand whether the company continues to generate surplus cash from its business or its expenses
like advertisement & promotions and mandatory capital expenditures like moulds start consuming funds
more than what its business makes.
Further recommended reading: Free Cash Flow: A Complete Guide to Understanding

FCF
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Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin
of safety in the business model of any company.
Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The

Cornerstone of Stock Investing
Additional aspects of Relaxo Footwears Ltd:

On analysing Relaxo Footwears Ltd and after reading annual reports, its credit rating reports and other
public documents, an investor comes across certain other aspects of the company, which are important for
any investor to know while making an investment decision.
1) Management Succession of Relaxo Footwears Ltd:
Relaxo Footwears Ltd is promoted by the Dua family. Currently, multiple members across generations of
the promoter family are present in executive management positions both on the board of directors as well
as other senior positions.
From the senior generation, Mr Ramesh Kumar Dua (age 69 years) and Mr Mukand Lal Dua (age 74 years)
are working as the Managing Director and Whole-time Director respectively.
From the next generation, Mr Nikhil Dua s/o Mukand Lal Dua (age 47 years) and Mr Gaurav Dua s/o
Ramesh Kumar Dua (age 42 years) are also present on the board as whole-time directors.
In addition, Mr Ritesh Dua s/o Mukand Lal Dua (age 46 years, Executive Vice President – Finance), Mr
Rahul Dua s/o Ramesh Kumar Dua (age 35 years, Executive Vice President – Manufacturing) and Mr Nitin
Dua s/o Mukand Lal Dua (age 42 years, Executive Vice President – Retail) are also present in the company
at senior management levels.
The presence of younger family members in executive positions within the group, while the senior members
are still handling responsibilities, looks like good succession planning. This is because the young members
can learn about the fine nuances of the business under the guidance of senior members until the seniors
decide to retire.
However, in the light of 5 members of the next generation simultaneously working in the company, it might
be difficult for the senior promoters to meet the aspirations of each of them. Therefore, it remains to be seen
when the time comes for the senior promoters to hand over the leadership to the next generation, then how
they assign the responsibilities among the contenders.
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As of now, the promoters have said that they are working on a succession plan but have not finalized and
disclosed anything.
Mrs. Trivedi: Ramesh ji, my biggest concern is succession plan for Relaxo?
Ramesh Kumar Dua: That thing is in process. We are serious on it, but we can’t divulge beyond
anything now.
Therefore, an investor should a close watch on signs of succession planning and get in touch with the
company directly to understand it. She should be aware of signs that may indicate any dispute between
family members related to succession.
Further advised reading: How to do Management Analysis of Companies?
2) Related party transactions of Relaxo Footwears Ltd with its promoters:
2.1) Merger of Relaxo Rubber Private Limited with Relaxo Footwears Ltd:
In FY2019, the company merged two promoter-owned companies Relaxo Rubber Private Limited (RRPL)
and Marvel Polymers Private Limited with itself by issuing shares.
As per the share exchange ratio for the merger, each shareholder of Relaxo Rubber Pvt. Ltd received 3,124
shares of Relaxo Footwears Ltd for every 100 shares held by her in Relaxo Rubber Pvt. Ltd. ( Source:
page 8)
we consider that the exchange ratio of equity shares for the merger of RRPL with RFL should be
3,124 equity shares of RFL of INR 1/- each fully paid up for every 100 equity shares of RRPL of
INR 100/- each fully paid up.
Upon reading older annual reports, an investor notices that, until FY2015, Relaxo Footwears Ltd held 6,040
shares of Relaxo Rubber Private Limited as non-current investments. In fact, it had made this investment
long back in 1996-1997. (In FY2007, Relaxo Rubber Ltd changed its name to Relaxo Rubber Pvt. Ltd.)
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In FY2016, Relaxo Footwears Ltd sold its shares in Relaxo Rubber Pvt. Ltd.
The company had purchased these shares for ₹6 lac in FY1997 and sold them for ₹4.32 cr in FY2016 and
recognized a profit of ₹4.26 cr. on this sale as an exceptional item in its P&L statement (FY2016 annual
report, page 53).
It seems that the company sold these 6,040 shares to promoters because when in FY2019, Relaxo Footwears
Ltd merged with Relaxo Rubber Pvt. Ltd, then it declared that Relaxo Rubber Pvt. Ltd is a promoter entity.
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Moreover, the pre-merger shareholding pattern of Relaxo Rubber Pvt. Ltd indicated that all the
shareholding was held by the Dua family (Source: page 2).
Taking the share-exchange ratio into account, for the 6,040 shares of RRPL purchased by promoters from
Relaxo Footwears Ltd, they got 188,689 shares of Relaxo Footwears Ltd (= 3,124 * 6,040/100).
The shares in exchange for shareholding for the merger were issued by Relaxo Footwears Ltd on Feb. 2,
2019. (FY2019 annual report, page 13).
Company in its meeting held on 2nd February, 2019 has allotted 36,18,453 equity shares to the
shareholders of Marvel Polymers Private Limited and Relaxo Rubber Private Limited.
The date of issue of these shares, Feb 2, 2019, was a Saturday; therefore, if one considers the closing price
of the previous day, Feb 1, 2019 (₹745.55 on BSE), then it turns out to be a value of ₹14 cr (₹745.55 *
188,689 = ₹14.06 cr).
Therefore, it might seem like a case where the promoter purchased 6,040 shares of Relaxo Rubber Pvt. Ltd
from Relaxo Footwears Ltd for ₹4.32 cr in FY2016 and after 3 years, in FY2019, sold these shares back to
Relaxo Footwears Ltd for ₹14 cr.
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An investor may contact the company directly to understand, if, between FY2016 and FY2019, RRPL
purchased assets of about ₹45-50 cr without taking debt. This is because if RRPL had purchased additional
assets of ₹48 cr in this period, then the net asset value of 6,040 shares would have increased by about 10 cr
(48 * 6,040/29,040 = ₹10 cr).
Based on the above information, an investor may arrive at her own conclusion about this transaction.
2.2) Purchase of goods from related parties:
Over the years, the company has purchased footwear/goods from promoter group entities for trading/selling
them. At times, the size of these transactions has been significantly large. For example
• In FY2012, it purchased goods for ₹165 cr from promoter entities and in FY2013, it purchased
goods for ₹99 cr (FY2013 annual report, page 46).
• In FY2011, it purchased goods for ₹172 cr and in FY2010, it purchased goods for ₹134 cr (FY2011
annual report, page 50).
Similarly, it had been regularly making large purchases from related parties throughout its existence until
FY2013.
FY2014 onwards, these purchases seem to have stopped.
2.3) Unsecured loans taken from promoters and related parties:
In the past, Relaxo Footwears Ltd has also taken large unsecured loans from its promoters. For example, in
FY2015, the company took unsecured loans of ₹57 cr from related parties, which were ₹48 cr in FY2014.
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In FY2015, the company paid an interest of ₹5.63 cr and in FY2014, an interest of ₹5.19 cr on these loans.
(related party transactions section on page 66 of FY2015 annual report).
It indicates that promoters charged the company about 10-11% interest on these loans, which is more than
what they could have got if they had deposited these funds in fixed deposits with banks.
As per FY2015 annual report, page 53, the company had raised loans from foreign lenders even at a
competitive rate of 9.25%.
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Repayable in 16 quarterly installments with last payment due on 15th October, 2015
alongwith interest @ 9.25% per annum.
Relaxo Footwears Ltd repaid these loans in FY2016.
2.4) Taking properties on lease from related parties:
Apart from the purchase of goods and unsecured loans, the company has also taken properties on lease from
its promoters and pays rent to them.
In FY2023, the company paid a rent of ₹5.5 cr to its promoters, which was ₹4.76 cr in FY2014 (page 137
of FY2023 annual report).
The amount of annual rent payments used to be almost double until FY2018 (₹11.9 cr) and declined in
FY2019 (₹5.7 cr, page 104 of FY2019 annual report), when Relaxo Footwears Ltd merged two promoter-
owned entities, Marvel Polymers Private Limited and Relaxo Rubber Private Limited with itself.
The company issued 36,18,453 equity shares to the shareholders of Marvel Polymers Private Limited and
Relaxo Rubber Private Limited for this merger (FY2019 annual report, page 13).
Company in its meeting held on 2nd February, 2019 has allotted 36,18,453 equity shares to the
shareholders of Marvel Polymers Private Limited and Relaxo Rubber Private Limited.
As per the closing price of shares of Relaxo Footwears Ltd on the previous day, Feb 1, 2019 (₹745.55 on
BSE), the company paid a price of ₹269.77 cr for acquiring these two companies (3,618,453 * 745.33 =
₹269.77 cr).
As per page 76 of the FY2019 annual report, the company received gross assets of ₹153 cr on acquiring
these companies.
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While assessing the value of this merger, an investor may look at the factors like the company paid a value
of ₹267.77 cr to save on rental expenses of ₹6.2 cr per year. Or that the company paid a value of ₹267.77
cr to receive gross block/assets of about ₹153 cr.
In case, an investor needs any clarifications, then she may contact the company directly and make her own
opinion.
An investor should always be cautious while analyzing related party transactions between a publicly listed
company and its promoters & their entities. This is because such transactions, if are not done at market
prices, then have a scope of shifting economic benefits from the minority shareholders to the promoter e.g.
if purchases are done at a price higher than the market price, loans are taken at a higher interest rate than
the market rate, properties are leased at a rent higher than the market rate etc.
Also read: How Promoters benefit from Related Party Transactions
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3) Remuneration of promoters of Relaxo Footwears Ltd:
The data on promoters’ remuneration over the years indicates that the company has framed their
remunerations to fully utilize the legal limits put under the law. From FY2015 to FY2020 when the company
clearly disclosed the statutory limit on remuneration of executive directors, at times, Relaxo Footwears Ltd
paid out remunerations up to the last decimal point of the maximum limit.
For example, in FY2016, the statutory limit of remuneration of executive directors was ₹19.3137 cr and the
company paid out a remuneration of ₹19.3137 cr out of which more than 91% i.e. ₹17.5975 cr was taken
equally by the promoter brothers Mukund Dua and Ramesh Dua at ₹8.79875 cr each.
Similarly, in FY2017, the promoters maximized the remuneration up to the last decimal point of the
statutory limit of ₹20.0554 cr and the promoter brothers Mukund Dua and Ramesh Dua took home an
exactly equal remuneration of ₹9.1289 cr each.
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Similarly, for the other years in which Relaxo Footwears Ltd had to clearly state the statutory limit on
remuneration, the promoters have utilized almost the full limit.
• In FY2015, the company paid out ₹15.74 cr of remuneration out of ceiling of ₹15.89 cr (page 24
of FY2015 annual report)
Another thing to note is that every year, the promoter brothers Mukund Dua and Ramesh Dua have taken
exactly the same salary. For example, in FY2023, both the promoter brothers took home a remuneration of
₹9.7001 cr.
Similarly, among the members of the next generation, the elder 4 out of 5 members (Gaurav, Nikhil, Nitin
and Ritesh) have drawn exactly the same salary. In FY2023, all 4 of them took home a remuneration of
₹1.3176 cr each. Only the youngest of them, Rahul Dua, took home a slightly lesser remuneration of
₹1.1976 cr.
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The above data indicates that one, the promoters might intend to take as much money as remuneration as is
legally possible and two, the company pays remuneration to the promoters in terms of their age/stature and
inter-se relationship. The seniormost members are paid one slab of exactly equal remuneration, the
intermediate members are paid the next slab of exactly equal remuneration, and the youngest member is
paid slightly lower remuneration.
If the remuneration of multiple people is exactly the same, then such a structure might not represent
meritocracy because different people with different profiles add different values to the organization.
Also read: How to identify Promoters extracting Money via High Salaries
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4) Scope of improvement in internal controls and processes:
Over the years, some incidents indicate a scope for improvement in the internal controls and processes at
Relaxo Footwears Ltd.
4.1) Dispute over Sparx brand with Bata India Ltd:
In 2009, a leading footwear company, Bata India Ltd sued Relaxo Footwears Ltd claiming that it owned
the “Sparx” brand/trademark and that Relaxo had infringed its copyrights by launching footwear with the
Sparx brand. (Source: Bata drags Relaxo to court over brand infringement: Business
Standard, Dec 04, 2009)
“Relaxo has falsely claimed use of ‘Sparx’ trademark since April 2002,” said Bata in its petition,
alleging that it was already selling shoes under ‘Sparx’ mark in 26 countries including USA,
Malaysia, Thailand, Canada, China, Mexico.
In India, they have already registered their ‘Sparx’ trademark in November 1978.
The dispute was settled between Bata and Relaxo in FY2015 when Relaxo agreed to buy the trademark
from Bata India Ltd. (Source: Relaxo reaches settlement with Bata over ‘SPARX’
trademark: Economic Times, Aug 01, 2015)
“The company has executed a deed of settlement with Bata India for assignment of
trademark ‘SPARX’ in favour of Relaxo Footwears Ltd,” Relaxo Footwears said in a BSE filing.
As per the FY2016 annual report, page 59, Relaxo Footwears Ltd had to pay ₹66 cr to buy the Sparx brand
from Bata India Ltd, which it showed in the annual report as an addition to the trademarks under intangible
assets.
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An investor may think that Relaxo Footwears Ltd should have done more homework before launching the
Sparx brand and making it one of its flagship product ranges. It should have properly checked whether
anyone else is already using this brand or has its trademark in India. Such homework would have saved at
least ₹66 cr of shareholders’ money that it had to pay Bata India Ltd.
Also read: How to Identify if Management is Misallocating Capital
4.2) Fire incidences:
On multiple occasions, the plants of the company caught fire. First, in FY2001, the whole unit-II of the
company at Bahadurgarh was damaged in a fire leading to extensive loss of property.
operation of the Company during the year was affected due to a mishap of fire which gutted the
whole of Unit-ll situated at Bahadurgarh (Haryana) which caused the collapse of the building
structure and extensive damages to the plant & machinery.
Thereafter, in FY2009, the company had another fire incident in its Bhiwadi plant.
Gross Block & Net Block includes Assets of 1265.60 lacs and 756.76 lacs respectively destroyed
in fire at Bhiwadi Plant.
Recently, in the FY2023 annual report, on page 107, Relaxo Footwears Ltd disclosed “Insurance Claims
Receivable” of ₹30.5 cr; however, we are not able to find any other related detail in the annual report.
An investor may contact the company directly to know what these insurance claims pertain to and whether
there has been any other fire incident or mishap.
4.3) Noncompliance with statutory guidelines:
As per the FY2023 annual report, Relaxo Footwears Ltd did not comply with legal guidelines as it did not
maintain separate people as chairman of the company and the chairman of the Nomination and
Remuneration Committee (NRC) and did not file certain documents to the Registrar of Companies (RoC)
and stock exchanges in time. In addition, the chairman of its audit committee did not attend its AGM, which
was otherwise required under the law.
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The secretarial auditor of the company highlighted these events in its report in the FY2023 annual report
on page 25:
Company has generally complied with the provisions…except as mentioned below:
(i) The Chairman of Audit Committee has not attended the Annual General Meeting (“AGM”)
(ii) During the period April 01, 2022 to April 21, 2022, the Chairman of the Company and
Nomination and Remuneration Committee (“NRC”) was the same Director of the Company.
(iii) The Company has delayed/non filing of certain forms with Registrar of Companies.
(iv) The audio recordings of certain earning calls of the Company have been submitted by the
Company with the stock exchanges within twenty-four hours from the conclusion of such calls but
not before the next trading day from the conclusion of such calls.
4.4) Delays in spending money on corporate social responsibility (CSR):
Over the years, Relaxo Footwears Ltd has delayed spending its CSR obligations. For example,
• In FY2023, the company was required to spend ₹6.72 cr on CSR; however, it spent only ₹0.38 cr
on CSR (page 31 of FY2023 annual report)
• In FY2022, it needed to spend ₹6.45 cr on CSR; however, it did not spend anything on CSR in the
year (page 30 of FY2022 annual report)
• In FY2021, it was required to spend ₹5.43 cr on CSR; however, it did not spend anything on CSR
during the year (page 118 of FY2021 annual report)
4.5) Delays in interest payments:
On multiple occasions, the annual report of Relaxo Footwears Ltd contains amounts under “Interest
Accrued and Due” that indicate that the interest amount was due for payment on or before March 31 of the
year; however, it was not paid by the company.
For example, in FY2016 as well as in FY2015, the company reported interest accrued and due to ₹21 lac
and ₹10 lac respectively.
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Similarly, in FY2014, the company had interest accrued and due of ₹31 lac and in FY2013, ₹13 lac (FY2014
In FY2012, the company had interest accrued and due of ₹56 lac and in FY2011, ₹41 lac (FY2012 annual
report, page 38).
Similarly, in multiple other years, we find “interest accrued and due” on borrowing on the balance sheet
date. The amounts are usually small; less than ₹1 cr, which is not big to create a liquidity crunch for the
company. However, a delay in payment of these amounts may reflect laxness on the part of the people
responsible for making these payments.
Also read: Steps to Assess Management Quality before Buying Stocks
5) Data presented by Relaxo Footwears Ltd in its annual reports:
While reading the annual reports of Relaxo Footwears Ltd, at times, an investor comes across instances that
indicate that the investor needs to be cautious while analyzing the presented data.
For example, in the FY2005 annual report, the company stated that its promoters had provided guarantees
and collaterals of ₹39 cr in favour of the company.
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However, in the next year’s annual report (FY2006), while presenting the data of guarantees and collaterals
for the previous year (FY2005), the company stated that its promoters had given guarantees and collaterals
of ₹44.1 cr on its behalf.
An investor may contact the company directly to understand the reasons for such a discrepancy, whether it
is a typographical error or after releasing its FY2005 annual report, it realized that the data of guarantees
and collaterals published in the FY2005 report is not correct; so, it rectified the same in the FY2006 annual
report.
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In FY2007, in the cash flow from financing activities, Relaxo Footwears Ltd reported that it had an inflow
of ₹16.97 cr from long-term borrowing and it had outflows of ₹1.02 cr as dividends and ₹9.51 cr as interest
payments i.e. total outflows of ₹10.5 cr. As a result, from financing activities, it had a net inflow of ₹6.4 cr.
However, in the annual report, while presenting this net outflow, the company made an error and presented
it within parentheses ( ) showing an outflow.
In its older annual reports, until FY2002, the company classified financial expenses as an outflow under
cash flow from operating activities instead of the normal practice of putting financial expenses as an outflow
under financial activities.
In all the previously available annual reports, the company has shown financial expenses as an outflow
under operating activities. FY2001 (page 26 of the annual report), FY2000 (page 22 of the annual report),
FY1999 (page 30 of the annual report), and FY1997 (page 26 of the annual report).
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From FY2003 onwards, the company rectified this practice and started showing financial expenses as an
outflow under cash flow from financing activities (FY2003 annual report, page 30).
At times, Relaxo Footwears Ltd has shown reasonably large liabilities in its balance sheet; however, it has
not provided any details about what these liabilities pertain to. As a result, the investor does not get
sufficient information to arrive at any conclusion about such liabilities.
For example, in the FY2010 annual report, the company reported “Other Liabilities” of ₹25 cr about which
no further detail was provided in the annual report. Similar is the case with ₹13 cr of “Other Liabilities” for
FY2009.
The Margin of Safety in the market price of Relaxo Footwears Ltd:

Currently (January 11, 2024), Relaxo Footwears Ltd is available at a price-to-earnings (PE) ratio of about
114 based on consolidated earnings of the last 12 months (Oct. 2022 – Sept 2023). An investor would
appreciate that a PE ratio of 114 does not offer any margin of safety in the purchase price as described by
Benjamin Graham in his book The Intelligent Investor.
Moreover, we recommend that an investor read the following articles to assess the PE ratio to be paid for
any stock, which takes into account the strength of the business model of the company as well. The strength
in the business model of any company is measured by way of its self-sustainable growth rate and the free
cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, even a low PE ratio of the company’s
stock may be sign of a value trap where instead of being a bargain; the low valuation of the stock price may
represent the poor business dynamics of the company.
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• 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
• How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
• Hidden Risk of Investing in High P/E Stocks
Analysis Summary
Overall, Relaxo Footwears Ltd seems like a company that has made its space in a highly competitive, low-
priced footwear targeted at price-sensitive mass consumers. The company has created a demand for its
products by spending a significant amount of money on advertisements, brand-building and promotions.
As a result, the company has grown its sales by 10% year on year over the last 10 years (FY2014-FY2023).
However, the highly price-conscious target customer of Relaxo Footwears Ltd does not give it any pricing
power and quickly switches to other producers whenever the products of Relaxo become costlier or other
players offer goods cheaper. Therefore, despite having well-established brands, which required large
investments in celebrity endorsements, the only way Relaxo Footwears Ltd gain market share is by cutting
prices.
After spending 10-12% of its revenue on advertisement & promotions for more than a decade, the company
has realized that it can not increase prices even to the extent of maintaining its profit margins when its costs
increase. At such times, the company has to absorb the costs and take a hit on its profit margins because the
customer is simply not willing to pay a higher price for Relaxo’s products.
The company relies on multibrand outlets (MBOs) for most of its business who are quick to replace its
products on shelves with cheaper alternatives from competing brands or unorganized players if customers
switch their preferences. Losing shelf space/market share is the biggest fear for Relaxo because in low-
priced footwear “out of sight” is “out of mind”. It is rare for a consumer who goes to buy slippers in a shop
to come back empty-handed if Relaxo’s slippers are not available in that shop. She will simply buy slippers
of any alternative brand.
Due to low-priced products with low customer loyalty, the company is not able to establish exclusive brand
outlets (EBOs) and online channels as dominant profit centres.
Due to the lack of pricing power, Relaxo Footwears Ltd has to focus on lowering costs by way of economies
of scale. It has continuously increased its manufacturing capacity over the last 2 decades and has recently
bought another land parcel for future expansions. Even in the periods when it is not expanding capacity, it
has to spend significant money (₹100-150 cr) on equipment like moulds etc. to keep its products attractive
to customers.
Large manufacturing capacity has turned out to be a double-edged sword for Relaxo Footwears Ltd because
it to ensure uninterrupted operations of its plants, it can no longer rely on local Indian suppliers and has to
source from overseas players, which makes its supply chain long and costly. In addition, due to long
contracts, it can not benefit from lower spot prices in the Indian market, which puts it at a disadvantage to
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local unorganized players. This was the main reason for its loss of market share in FY2023 and the sharp
decline in its profit margins.
The company has entered into many transactions with promoters and other related parties. Once, promoters
seem to have bought shares from the company for ₹4.3 cr and after 3 years sold the same at about ₹14 cr to
the company via a merger transaction. The company has entered into other transactions like the purchase
of footwear, unsecured loans, and leasing properties on rent from promoters, which require due diligence.
Currently, two generations of the promoter family are working in the company. The company has been
paying remunerations almost up to the maximum permissible limit to promoters. In addition, promoters
seem to be drawing exactly equal remunerations as per their age and stature in the family.
Many incidences indicate that there is scope for improvement in internal controls and processes within the
company. It did not check properly intellectual rights around its brand “Sparx” before making it a flagship
product. As a result, it had to pay ₹66 cr to Bata India Ltd.
Going ahead, an investor should keep a close watch on its profit margins, sale volumes of its footwear,
advertising and capital expenditures. She should focus on its inventory levels, asset turnover and receivables
collection to see if it uses its assets efficiently. The investor should monitor its transactions with related
parties like promoter remuneration, rent payments etc.
The investor should keep a close watch on the succession planning of promoters to check for signs of any
dispute among family members over their roles and responsibilities.
Further advised reading: How to Monitor Stocks in your Portfolio
These are our views on Relaxo Footwears Ltd. However, investors should do their own analysis before
making any investment-related decisions about the company.
You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A
Step by Step Process of Finding Multibagger Stocks”
I hope it helps!
Regards,
Dr Vijay Malik
P.S.
• Subscribe to Dr Vijay Malik’s Recommended Stocks: Click here

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50 | P a g e

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2) Linde India Ltd

Linde India Ltd is a company of Linde-Praxair group in India making industrial gases like Oxygen, Argon,
Nitrogen etc. The company was previously known as BOC India Ltd.
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Until 2015, Linde India Ltd did not have any subsidiary, joint venture etc.; therefore, it used to report only
standalone financials. In 2016, it formed a joint venture (JV), Bellary Oxygen Company Private Limited
with Inox Air Products Private Ltd. As a result, from 2016 onwards, it started reporting both standalone as
well as consolidated financials.
In the latest results reported by the company for the quarter ended Dec. 31, 2023, it has reported two JVs
and three associates in its consolidated financials (Q3-FY2024 results, page 4).
Joint Ventures:
• Bellary Oxygen Company Private Limited

• Linde South Asia Services Private Limited
Associates:
• Avaada MHYavat Private Limited

• FP Solar Shakti Private Limited
• FPEL Surya Private Limited
a company reports both standalone as well as consolidated financials, then the investor should prefer the
analysis of the consolidated financials of the company.
As a result, while analysing the past financial performance of Linde India Ltd, we have analysed the
standalone financials of the company until 2015 and consolidated financials from 2016 onwards.
With this background, let us analyse the financial performance of Linde India Ltd.
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Financial and Business Analysis of Linde India Ltd:

In the last 10 years, Linde India Ltd has increased its sales from ₹1,428 cr in 2013 to ₹2,769 cr in 12 months
ended Dec. 2023 at an annualized growth of 7%.
The reported profit margins of the company have changed significantly over 2013-2023. Linde India Ltd
had an operating profit margin (OPM) of 18% in 2013, which declined to 15% in 2015 and 2018. From
2019, the reported OPM increased significantly and is currently in the range of 24-26%.
The financial picture of the company’s historical performance presents more insights if an investor extends
her analysis to the earliest available financial information from 1987 onwards present in its historical annual
reports available on the website of BSE Ltd.
In the below table, we have presented the data of sales, net profit before exceptional items, net profit margin
before exceptional items and the data of exceptional items each from for last 37 years (1987-2023) for
Linde India Ltd.
In the 37-year historical performance of Linde India Ltd, an investor comes across many periods where its
sales and profit margins declined significantly. The company reported a sharp decline in sales in 1992,
1995, 2001, 2007 and 2020. At times, the company even reported losses e.g. in 1998, 2000. On other
occasions, its profitability (net profit margin before exceptional items) declined sharply e.g. in 1990, 1995,
2001, 2007, and 2012 to 2018. Overall, its profit margins have fluctuated between 17% to losses of (20%).
To understand the reasons for such fluctuations in the business performance of Linde India Ltd over the
years, an investor needs to read the publicly available documents of the company like annual reports from
1997 onwards, credit rating reports, as well as its corporate announcements.
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influence the business of Linde India Ltd. An investor needs to keep these factors in mind while she makes
any predictions about the performance of the company.
1) Intense competition in the industrial gases business from multinational

companies (MNCs) as well as the unorganized segment:
Many large MNC players, numerous medium-sized domestic players, as well as a large number of small-
sized players from the unorganized sector, provide each other with intense competition for business in the
Indian industrial gases segment.
Credit rating report by CRISIL, July 2014:
Linde India faces significant competition from both the organised (other international
players present in the Indian market) and unorganised sectors.
Due to a large number of players, the Indian industrial gases business has continuously faced overcapacity
leading to players strongly competing with each other to keep their plants running. This was especially true
during the FY2012-FY2018 period when Linde India Ltd saw its net profit margin (NPM) before
extraordinary items significantly fall to the 0%-3% range.
The Gases business in India continues to be impacted by overcapacity in the market…which led
to lower plant loading with adverse impact on specific power.
There has been significant product oversupply in the markets with number of new ASUs coming
on-stream while demand continued to be weak.
over supply position in the markets resulted in significant under utilisation of installed capacities,
further impacting the financial performance.
The intensely competitive position of the industrial gas business in India has been a continuous issue for
players like Linde India Ltd. Even at the start of the current century, the company faced intense competition
from both large and small players.
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Indian economy has seen the entry of all the major international gas companies in the country and
presently the industry is organised around six big players with an all India presence, twelve
medium sized companies and about two hundred small scale regional players. The industry is
likely to see greater consolidation in future with increasing competitive pressure.
With two new bulk tonnage plants, our own at Jamshedpur and a competitor’s plant at Hospet,
having come on stream within six months of each other, the supply of industrial gases exceeded
demand substantially.
As a result, going ahead, the competitive intensity in the industry is expected to remain severe.
Also read: How to do Business Analysis of Chemical Companies
2) Non-differentiable, commodity products make the industrial gases market

extremely price sensitive. Linde India Ltd does not have pricing power over
its customers:
Linde India Ltd makes industrial gases like oxygen, nitrogen, argon etc., which are non-differentiable from
such gases produced by its competitors. Therefore, any customer can easily use gases produced by any
manufacturer as long as they meet the same purity and concentration specifications.
domestic industrial gases industry remains intensely competitive because of the commodity nature
of products.
The ability of customers to replace one supplier of gases with another without any significant impact on
business provides them with a higher negotiating power over industrial gas suppliers. This coupled with the
overcapacity in the gas segment and intense competition takes away pricing power from gas manufacturers.
As a result, industrial gas manufacturers face intense price-based competition where competitors tend to
undercut profit margins of each other.
Intense competition is observed…with a lot of overseas players willing to compromise on

margins for newer markets…Predatory pricing with compromising margins is dominating the
commercial discipline to load new capacity.
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The company has faced intense price-based competition continuously in the past as well. For example, in
2010, it intimated its shareholders about the pricing pressure due to overcapacity in the industry.
The gases market in India has witnessed significant addition to capacities by almost all gas
majors…As a result, the gases market which is already competitive, is expected to remain so
with ongoing pricing pressures
In 2003, the company highlighted the highly price-sensitive nature of the market.
The competitive scenario as well as large scale capacity additions over the last few years have
made the market extremely price sensitive
In FY1998 and FY2000, when the company reported losses, then it highlighted that depressed prices due
to competition has led to losses.
Additionally, competitive pressures have also severely depressed prices of the Company’s
products during the year adversely impacting the revenues for the year.
the state of heightened competition with the entry of other multinationals, the price of gases in the
merchant market could not be increased adequately and margins remained under severe pressure.
As a result, of intense price-based competition, the company could not pass on an increase in input costs
like power to its customers and had to take a hit on its profit margins. For example, in FY2007 and FY2012,
it mentioned that it could not recover increased costs from its customers.
power tariff in Maharashtra which increased by approximately 27% over last year’s rates,
also impacted the profitability as the entire cost increase could not be passed on to the customers.
The power cost increase in West India was quite significant and the sluggish market situation
made it difficult to fully recover such increased costs, thereby putting margins under pressure.
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The lack of pricing power of Linde India Ltd is visible in two other instances. First, in FY2003, when the
power cost of the company declined, then it had to immediately pass on the benefit to its customers leading
to lower prices and thereby a lower revenue, which was in sharp contrast to the case of an increase in power
prices, which it could not recover from its customers.
Gases and Related Products: The turnover, however, remained flat as the increase in volume was
neutralised by revenue de-escalation as a result of reduction in power rate by the power supplier
In FY2001, the company received a substantial demand of ₹52.4 cr from its power supplier, which the
company stated was substantially recoverable from its customers.
Company has received…demands…on account of fuel surcharge…amounting to Rs. 524

million with retrospective effect from 1995-96…a substantial part of the arrear power fuel
surcharge will become recoverable from its contracted customers by your Company.
However, in FY2002, the company intimated that it had to bear a loss of ₹13 cr as out of ₹52.4 cr, it could
only recover ₹39.4 cr from its customers, which indicated its lower pricing/negotiating power over its
customers and suppliers.
demands…amounting to Rs. 524,067 thousand…out of which Rs. 393,768 thousand is

recoverable from contracted customers…The net amount of Rs. 130,299 thousand…has been
charged as an extraordinary item
Therefore, an investor should always keep in mind that Linde India Ltd produces commodity products in
an intensely competitive market where its customers can easily replace products of one supplier from
another. As a result, it bears very low pricing power over its customers and faces intense price-based
competition from its peers, which has impacted its profit margins in the past even leading to losses.
Also read: Why We cannot always Trust What Management Claims
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3) Cyclical business of Linde India Ltd in industrial gases as well as project

engineering division:
The main business activity of Linde India Ltd is to produce & sell industrial gases to manufacturing
companies in its Gases & Related Products division and to create industrial gas plants for captive use by
manufacturing companies in its Project Engineering division.
Both these divisions primarily service customers in the steel & fabrication and automobile sectors.
Therefore, the business performance of Linde India Ltd is linked primarily to the prospects of steel, and
automobile sectors.
Moreover, both steel and automobile sectors are highly cyclical in nature, which in turn, brings cyclicity in
the business performance of Linde India Ltd with alternating boom and bust periods of performance.
steel and other metallurgical industries account for around two-third of its revenue from the gases
segment, leading to end-user industry concentration. The inherent cyclicality in this
segment exposes the company to sluggish growth during economic downturns
The business of the project engineering division (PED) is also highly dependent on the steel and oil refinery
sector, which are highly cyclical.
PED’s business is primarily driven by capacity expansion in steel and refinery segments.
As a result, whenever these sectors (steel, automobile, oil refining etc.) do well, then Linde India Ltd also
reports good performance e.g. in FY2023 when on a 12-month basis, the company reported a revenue
growth of about 18%.
growth in Gases revenue was driven by higher merchant liquid demand in line with economic
recovery, increase in gas consumption by steel sector…Our Project Engineering business
continues to perform strongly with healthy order book position supporting mainly steel, refineries,
and electronics sectors
Similarly, in FY2021, when Linde India Ltd reported a 43% increase in revenue, then apart from excessive
demand for medical oxygen due to the Covid pandemic, a strong recovery in the steel and oil refining
sectors played a huge role.
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growth in the Gases revenues during the year 2021 was mainly driven by liquid and compressed
medical oxygen…during the 2nd wave of Covid-19…growth in the Project Engineering business
was driven by…strong performance of the engineering business across steel and refinery
sectors…significant demand for gases from customers mainly Tata Steel, SAIL and Jindal
Stainless.
Similarly, in FY2014, when its major customers in the steel industry were not doing well due to the
economic downturn, Linde India Ltd reported poor performance with almost 0% profit margin.
Company recorded a subdued performance during the year under review, amidst weak economic
conditions and contraction of demand in most of the end user industry segments.
The company had faced similar headwinds leading to poor performance in FY2012 when its end user
consumer industries did not perform well.
FY2012 annual report, pages 11-12:
Company had to contend with significant headwinds, which among others included lower demand
from major customers, delay in major projects related to customer delays…demand landscape
from some of the major customers forced some of our tonnage plants to operate at lower than full
capacity
During FY1998 and FY2000 when the company reported losses, it was primarily due to a slowdown in the
sectors like steel and automobile.
slowdown began towards the end of 1996…Infrastructure industries like steel, automobiles,
petrochemicals, fabrication and metal working, etc. have borne the brunt of this recession. Since
your Company is essentially in the business of being a preferred vendor to the bulk of these
industries, it could not escape the beating
The loss of Rs 794 million in the 18 months period is the cumulative result of several
factors…given the sluggish growth in the steel fabrications, ship making and scrap cutting sectors,
which constitute the largest part of the Company’s customer base
As a result, an investor should always see the performance of Linde India Ltd as linked to the performance
and prospects of its key consumer industries of steel, automobile, electronics, oil refinery etc. She should
not get carried away by the good performance of the company during upcycles in these industries because
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when these industries undergo a downcycle, then the performance of Linde India Ltd would also be
impacted.
4) Attempts by Linde India Ltd to diversify its customers’ industry base:
Over the years, Linde India Ltd has taken multiple steps to reduce the impact of cyclicity due to the
concentration of its customers’ industries.
It attempted to find customers in industries other than steel and automobiles. In FY2012-FY2014, it won
customers in the cement and aluminium industries.
your Company was successful in converting a number of its gases application leads into business
with customers including wins in new sectors like cement and aluminium
During FY2017-FY2018, it won customers in the refineries sector, quick freezing application (food storage)
and tyre sector.
we have won our first major customer in the refinery sector…a key customer has invested in
our Instant Quick Freezing application, cryogenic freezing with liquid nitrogen, and we have
acquired our first nitrogen application for tyre curing
In FY2011, the company diversified into the production of CO2 by making an acquisition.
Company completed acquisition of a merchant CO2 business. This business has added CO2 as a
new product line and caters mainly to the beverage and engineering segments
In FY2021, it expanded its presence in the “Packaged Gas and Micro Bulk” market of Western India by
acquiring business from HPS Gases Ltd.
Company has acquired from HPS Gases Ltd., Vadodara its entire packaged gases business…The
aforesaid acquisition will help expand Linde’s presence in Packaged Gas and Micro Bulk market
in Western India.
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Linde India Ltd also started serving export orders in its project engineering division by contributing to
overseas projects undertaken by Linde group companies.
The Division is continuing its efforts to get orders in the overseas markets and has received an
order for a nitrogen plant from JGC Japan for their project in Indonesia and another order for a
merchant ASU for one of The Linde Group companies in Malaysia.
In the past, the company focused on diversifying its revenue base by selling oxygen concentrators and
nebulisers of Air-Sep of USA in India in FY2000 and FY2001.
As per the agreement with Air-Sep of USA, and following a good market response to the Oxygen
Concentrator, your Company has recently introduced Nebuliser to supplement its home care
equipment product range.
In FY2006, the company also diversified its business by re-entering welding equipment and medical
engineering services that it had exited in the past.
Some of our recent offerings include the re-entry into the welding equipment and Medical
Engineering Services
In FY2001, the company even proposed to enter into the LPG distribution business; however, it seems that
this initiative did not work out properly as the company never focused on it in the subsequent annual reports.
Company is also exploring the possibility of entering the LPG distribution business and is
currently in advanced stage of discussions with an oil major.
As per its latest disclosures, Linde India Ltd is planning to serve customers of the semiconductor segment
and is setting up a nitrous oxide plant.
For strengthening our presence in the semiconductor segment, the Company is setting up a high
purity Nitrous Oxide facility at its existing Hyderabad plant.
An investor needs to monitor how this initiative by Linde India Ltd turns out as previously the initiative by
the company in FY2008 to enter into the solar photovoltaic business did not turn out well for the company.
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In FY2008, the company made significant investments to enter into the solar photovoltaic business.
Company made strategic investments focusing on the solar photovoltaic business…also setting up
infrastructure for manufacturing, storing and pipeline distribution of high value electronic
gases in a Special Economic Zone in the State of Andhra Pradesh to customers in photovoltaic
space.
However, soon, in FY2011, this business witnessed a significant slowdown.
electronic gases business serving the solar photovoltaic industry witnessed a significant
slowdown as compared to last year.
In the next year, FY2012, the company suffered a significant setback when one of its major customers from
the solar photovoltaic industry shut down its business as its technology became unviable/uncompetitive. As
a result, Linde India Ltd had to write off its investments in the solar photovoltaic business.
one of the major electronic gases customer discontinued operations in view of their thin film
photovoltaic cell technology becoming uncompetitive…Company had to take a significant hit by
way of impairment of assets at the customer’s plant
Therefore, investors need to keep a close watch on the entry of the company into new industry segments.
5) Focus of Linde India Ltd on improving cost competitiveness:
As Linde India Ltd operates in a commoditised products business facing intense price-based competition;
therefore, the key way to increase profitability and earn a competitive advantage over its peers is to be the
lowest-cost producer of goods. As a result, over the years, Linde India Ltd has undertaken various measures
to enhance its cost efficiencies.
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5.1) Economies of scale:
Over the years, Linde India Ltd has created numerous plants for producing industrial gases, both for selling
gas in the open/merchant market as well as dedicated plants in customers’ premises with take-or-pay
arrangements.
Credit rating report by CRISIL, January 2017:
significant proportion of revenue in the gas segment comes from installation/tonnage, where the
company enters into long-term (15-20 years) take or pay contracts with customers, which
provide stable cash flow and profitability and prevent significant decline in revenues during
downturn.
Numerous large-sized tonnage plants as well as air separation units (ASUs) have helped the company in
lowering its cost of operations as the company can spread its fixed expenses over a larger production base.
Due to economies of scale arising out of this project, your Company would have the critical
advantage of a low-cost product source for meeting the merchant demand
As a result, the company significantly increased the size of its operations both by installing new gas plants
as well as acquiring plants from other companies. In FY2010, it acquired three plants of 1,050 TPD from
Tata Steel (FY2010 annual report, page 10). In FY2012, it acquired the gas business of Uttam Gases
(FY2012 annual report, page 13).
As the company’s scale of operations increased, it implemented steps like a new logistics organization for
economies of scale benefits.
setting up of a new logistics organisation focusing on customer service, fleet and asset
utilisation and achieving overall economies of scale in the supply chain.
In FY2010, the company commissioned a national scheduling centre for efficient utilization of its
transportation fleet from a common centre.
commissioning of the national scheduling centre and the fleet control room at Kolkata.
In the same year, it also operationalized a remote operating centre in Singapore, which helped it schedule
the production of gases in various plants for their most efficient utilization.
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to drive improved safety, efficiency and reliability in operations of the tonnage plants, the Group
had earlier set up Remote Operating Centre (ROC) in Singapore, which is already operational
and successful.
In addition, Linde India Ltd also undertook measures like removing low-capacity tankers from its
transportation fleet so that it may economically move more gas using higher-capacity tankers.
several measures to improve efficiency of the distribution function such as phasing out of low
capacity tankers, introduction of 7KL tankers with flow meter for medical supplies
Company continued its focus on improving efficiency of the distribution function by phasing out
of old 3 and 5 KL VITTs…improving delivered quantity per trip by about 9%, reducing product
loss in distribution by 10%
5.2) Reuse/shifting of plants from one location to another to extract

maximum value from these assets:
Over the years, Linde India Ltd has ensured that it derives maximum value from it manufacturing plants.
In FY2000-02 when its existing 120 tonnes per day (TPD) plant at Jamshedpur was lying unutilized because
it had installed a new, larger 1,290 TPD plant in 1998, then it refurbished the old plant and relocated it from
Jamshedpur to Dolvi in Maharashtra for Ispat Industries Ltd. Due to this reuse, the company could extract
more value from its plant.
relocation of the refurbished 120 tpd plant from Jamshedpur to Maharashtra for an attractive
medium term contract is another step in the right direction
successful commissioning of the Company’s idle 100 tpd plant at Dolvi which was relocated from
Jamshedpur
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Subsequently, in FY2014, Linde India Ltd relocated its other air separation unit (ASU) plant from Taloja
in Maharashtra to Dahej in Gujarat to extract maximum value from it.
PED is also engaged in dismantling and relocating the 110 tpd ASU from Taloja and its
commissioning at a new site at Dahej.
5.3) Closing down unviable plants, selling down business units and
properties to monetize idle assets:
Linde India Ltd closed down multiple manufacturing units that had become economically unviable to
operate. In some cases, it could revive the units after making significant changes in manpower etc. whereas
in a lot of cases, it sold the land, and plant & machinery.
For example, around FY2000, it closed multiple units in Kanpur, Guwahati, Asansol and Ghatkopar.
Over the past decade, BOC India has taken several steps to make itself a more focussed and lean
organisation…unviable units at Kanpur, Guwahati, Asansol and Ghatkopar (Mumbai) were
closed and where possible, idle assets were disposed off.
Out of these, the company revived the Asansol unit by getting rid of its surplus labour and reopening the
unit with reduced manpower.
The re-opened Asansol unit commenced production with reduced manning and has been able to
build-up production quickly to serve the local markets.
For the remaining units, it sold off the land/properties. Interestingly, over the years, Linde India Ltd has
disposed of so many assets that “exceptional items” from the sale of assets have become almost a regular
feature in its financial statements.
• FY1997: ₹1.1 cr from sale of land and factory at Kanpur, UP.

• FY1998: ₹30.7 cr from sale of Ohmeda healthcare business.
• FY2001: ₹15.5 cr from sale of Delhi factory
• FY2002: ₹10.6 cr from the sale of the property at Bandra, Mumbai
• FY2003: ₹13.5 cr from sale of property at Delhi
• FY2004: profit of ₹25.4 cr from sale of property at Ghatkopar, Mumbai
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• FY2005: profit of ₹3.5 cr from sale of the factory in Ranchi and a flat in Mumbai
• FY2006: ₹49 cr from sale of plant at Bangalore. In addition, flats in Chennai and Jamshedpur were
also sold.
• FY2007: ₹61 cr from the sale of the plant at Sanatnagar, Hyderabad and ₹24 cr from the sale of
land at Tondiarpet, Chennai.
• FY2008: ₹24.6 cr from sale residual interest in land and building in Hyderabad
• FY2011: sale of land in Joka, Kolkata
• FY2012: profit of ₹72 cr from sale of land at Vizag and Bangalore.
• FY2013: ₹50 cr from sale of land in Ahmedabad and profit of ₹4.3 cr from sale of right of use asset
in Kolkata
• FY2014: profit of ₹6.6 cr from sale of the right to use of flat in Kolkata
• FY2016: profit of ₹15.6 cr from sale of factory in Tarapur, Maharashtra.
• FY2019: ₹1,380 cr from sale of “South Region Divestment Business” as per directions of
Competition Commission of India (CCI) for the merger of Linde Group and Praxair Group.
• FY2020: ₹300 cr from sale of land and building of factory in Kolkata. In addition, ₹55 cr from the
sale of a stake in “Belloxy Divestment Business” to Inox Air Products Pvt. Ltd to meet CCI
requirements.
Over the last 37 years (1987-2023), the company reported a total exceptional profit of ₹1,092 cr, which is
comparable to net profit after tax and before exceptional items of ₹1,707 cr over this period.
5.4) Relieving excess employees via voluntary retirement schemes (VRS):
Over the years, Linde India Ltd did multiple rounds of VRS in many plants to reduce its manpower costs
and increase its operating efficiency.
For example, in the 1990s, the company removed almost 90% of its workforce.
In the process, during the decade, the workforce has come down from 5124 employees in 1990 to
660 in March this year.
Thereafter, in the slowdown of 2008-2009, the company froze all recruitment and focused on reducing
manpower using VRS.
to minimize the impact of the slow down on the Company’s business, your Company had to initiate
a freeze on recruitment and also launched a voluntary separation scheme
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Thereafter, in FY2015, the company again spent a significant amount to relieve employees via VRS.
incurred an amount of Rs.95 million towards a voluntary retirement scheme
5.5) Attempts to reduce power costs by Linde India Ltd:
The production of industrial gases is a very energy-intensive process. As a result, power and fuel cost is
one of the major input costs for Linde India Ltd.
As a result, over the years, the company has undertaken many steps to reduce its power cost.
In FY1998, the company replaced it Jamshedpur plant with a newer technology plant with almost 50%
specific power consumption than the older plant.
Jamshedpur 120 tonnes-per-day (tpd) plant was closed and an energy efficient 1290 tpd plant of
latest technology was commissioned… Specific power consumption of this plant is less than 50%
of the old plant.
The company streamlined its operations and focused on running its plants maximum during non-peak
energy tariff periods.
Operations of the Tonnage Plants at Taloja and Tarapur were optimized to have maximum benefit
of non-peak energy tariff.
By FY2016, the company started sourcing power from open access mechanism to benefit from lower spot
prices to reduce its power costs.
Alternative sourcing of power through open access mechanism resulted in reduction in power
cost, thereby making the gases business more competitive.
In the recent period, FY2023, the company has made significant investments in captive solar power to
reduce its power costs.
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The primary objective of these investments is to gain access to renewable power procurement
under a captive mechanism. By utilising this mechanism, we aim to secure renewable power
at lower tariffs, leading to significant cost savings for our operations.
5.6) Focus on reducing finance/interest costs:
Over the years, Linde India Ltd has expanded its capacity at a fast pace for which it had to raise a lot of
debt.
moderation in the company’s financial risk profile over the last 3 years on account of large debt
funded capital expenditure
High debt on the balance sheet of Linde India Ltd had continuously put pressure on its profit margins due
to high finance costs.
Over the years, the company has taken multiple steps to control its finance cost and improve its profit
margins like refinancing high-cost debt with low-cost debt.
In the early 2000s, the company refinanced a large portion of its debt and saved about ₹4-5 cr of interest
costs each year.
replacing high cost borrowings with lower cost debentures. In addition, better working capital
management and tighter controls have generated a savings of Rs. 53 million in interest cost over
the previous year
cost saving of approximately Rs.44 million has been achieved by way of a reduction in interest
charge as a result of substitution of high cost loans with lower cost borrowings.
In FY2004, it achieved further savings of ₹4.4 cr.
reduction in borrowings together with the continuing restructuring of high cost

borrowings resulted in a significant reduction of Rs. 44.32 million in interest charges.
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In 2007-2008, Linde Group acquired BOC Group and thereafter, Linde Group infused about ₹600 cr in
Linde India Ltd (then named BOC India Ltd), which the company used to repay its entire debt and became
a debt-free company leading to substantial interest cost savings.
During the year, the Company received a sum of Rs.5973 million from the promoter
Group…Company utilised a sum of Rs.2190 million towards repayment of its existing borrowings,
thus becoming a ‘zero debt’ company at present.
Thereafter, the company raised more debt including debt from its promoter Linde Group to expand its
manufacturing capacity. However, in 2020, when the company had to sell its southern region business to
comply with conditions put by CCI for approving the merger with Praxair group, then it used the sale
proceeds to repay its entire debt and reduce its interest cost.
steep reduction in the interest cost from Rs.862.50 million during 2019 to Rs. 62.43 million during
the year…result of repayment of all the outstanding borrowings from the proceeds of divestment
of South Region Divestment Business.
Therefore, even though the company had to raise debt to create manufacturing plants, it tried to reduce its
interest costs by repaying debt whenever it could raise cash from promoters or the sale of assets. These
steps helped in improving the profit margin of the company.
6) Regulatory/govt. policy risk faced by Linde India Ltd:
On numerous occasions, Linde India Ltd’s business was impacted by regulatory steps. For example, in
FY1997, it had to close down its factory in Delhi after the Hon. Supreme Court directed the closure of all
hazardous factories within Delhi.
businesses were adversely affected by the closure of your Company’s Delhi unit at Kirtinagar from
end November last year, following the Hon’ble Supreme Court’s order of 8 July 1996.
In FY2014, the pricing power of Linde India Ltd was impacted when govt. put a ceiling on the price of
medical oxygen and nitrous oxide gases as emergency drugs.

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Government of India, fixed a ceiling price for medical oxygen and nitrous oxide by classifying
them as emergency drugs.
However, it is not a case that all the regulatory interventions have impacted the company adversely. At
times, the company benefited as well. For example, in FY2000, the govt. exempted medical gases from
excise duty, which helped it compete with the unorganized sector.
Understanding the importance of medical gases, the Government of India has now exempted it
from levy of excise duty enabling your Company to compete aggressively with the unorganised
sector.
In FY2010, when govt. of India provided various incentives to industries to aid in recovery from the global
financial meltdown, and then Linde India Ltd benefited from the recovery of demand from its consumer
industries.
improvement over the previous year following consistent revival in the various end user
industry segments driven by fiscal stimulus packages put in place by the Government
In FY2016, to protect the domestic steel industry, govt. of India put in place policies like minimum import
price for steel. It reduced low-priced import competition for domestic steel producers, which in turn
increased demand for Linde India Ltd.
Minimum import price restriction put on import of steel, last year, has helped Indian steel industry
and thereby gas industry.
As discussed earlier, in FY2021, Linde India Ltd benefited significantly from the humungous demand for
medical oxygen due to the Covid pandemic. However, realizing the shortage of medical oxygen, govt.
mandated and supported pressure swing adsorption (PSA) oxygen-generating plants in hospitals, which
impacted the demand for medical oxygen produced by Linde India Ltd.
With impetus from government financing & NGO’s approx. 3,756 PSA plants are currently
operational in the country, impacting liquid medical oxygen sales.
Therefore, an investor should always keep a close watch on regulatory and policy developments related to
Linde India Ltd.
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7) FY2019’s sharp reduction in revenue and increase in profit margins:
In FY2019, the revenue of Linde India Ltd declined sharply by about 20% to ₹1,762 cr from ₹2,192 cr in
FY2018. At the same time, the operating profit margin (OPM) of the company increased sharply to 24% in
FY2019 from 15% in FY2018.
The main reason for such a sharp change in the reported financial performance of Linde India Ltd was the
adoption of Ind AS 115 on “Revenue from Contracts with Customers.” As a result of the new accounting
standard, that power & fuel cost for onsite plants, which was earlier a pass-through as per the contract with
customers and was included both in the revenue and in the power & fuel cost is now removed from the
revenue as well as power & fuel costs.
As a result, both the revenue as well as power & fuel costs declined by the amount of pass-through power
cost whereas the amount of profit stayed the same.
This changed treatment of power cost resulted in a decline in revenue by the amount of now-removed power
cost whereas the profit margin increased sharply due to the profit amount staying stable whereas the revenue
amount declined in the ratio calculation.
The actual gas revenue of the company during FY2019 net of this accounting impact had actually increased
by 3.1%.
decline of about 19.6% in the total revenue from operations is mainly on account of adoption
of Ind AS 115 on “Revenue from Contracts with Customers”…power and fuel cost in respect of
onsite plants, which in the previous year was disclosed gross has now been shown net of
sales related costs reimbursed by the customer. This has resulted in reduction in revenue and
a reduction of an equal amount in power and fuel cost to the tune of Rs.4,976.61 million…gases
revenue for the year 2019 without the adjustment as per Ind AS 115, however, recorded a growth
of about 3.1%.
This however, had a positive impact on the operating margin, though operating profit from the
gases business remained unaffected.
Therefore, an investor needs to keep in mind this change in accounting policy when assessing the sharp
reduction in revenue in FY2019 and the sharp increase in OPM from FY2019 onwards.
Going ahead, an investor should keep in mind the intense, price-based competition faced by Linde India
Ltd due to the commodity nature of its products and its low pricing power due to its customers being very
large steel players like Tata Steel, JSW Steel, SAIL etc. She should factor in the cyclical nature of its
business and acknowledge that in the past, periods of increasing profit margins have been followed by
periods of declining performance even leading to losses.
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Therefore, the investor should be cautious before she extrapolates any period of good performance of Linde
India Ltd in the future.
For many years, the tax payout ratio of Linde India Ltd had been in sharp variation than the prevailing
corporate tax rate in India.
For example, in FY2015, the company reported a profit before tax (PBT) of ₹1 cr; however, it reported a
profit after tax (PAT) of ₹23 cr. This was because, during the year, the company availed tax benefits on its
ASU plant in Kalinganagar, Odisha leading to benefits of about ₹25 cr.
During the year, your Company availed tax benefit…its Air Separation Units at Kalinganagar,
which has resulted in deferred tax release of Rs.253.26 million.
Similarly, in both FY2016 and FY2017, the company reported its PAT higher than PBT due to income tax
incentives and concessions.
In FY2019, the company reported a lower tax payout ratio of 28% because the profit on the sale of its
southern business attracted long-term capital gains, which was lower than the business income tax rate
In FY2023, the company reported a lower income tax rate of 13% because it decided to switch to a new
lower corporate tax rate, which led to a reduction in deferred tax liabilities and hence a lower tax payout
ratio.
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Company has elected to exercise the lower tax rate of 22% (effective rate of 25.168%) permitted
under the new tax rate regime…beginning 1 April 2022 resulting in lower tax expense and re-
measurement of deferred tax liabilities.
Operating Efficiency Analysis of Linde India Ltd:
a) Net fixed asset turnover (NFAT) of Linde India Ltd:
The net fixed asset turnover (NFAT) of Linde India Ltd in the past years (FY2013-23) has improved from
0.8 in FY2014 to 1.7 in FY2023. The improvement of NFAT in recent years FY2021 and FY2023 is due
to high medical oxygen demand during the Covid pandemic and due to the sharp recovery of the steel
industry post-pandemic. Nevertheless, the NFAT of the company at levels of 1 or below indicates that the
business of manufacturing industrial gases is very capital-intensive.
business of onsite sales is highly capital intensive, involving large capex, long gestation period,
and lengthy payback
The company also acknowledged the capital-intensive nature of its business to its shareholders in the
FY2010 annual report highlighting large investments in setting up ASUs and distribution assets.
The gases business is capital intensive by nature as it requires large investments in setting up of
air separation units. The supply chain in the gases business also requires significant investments in
the form of distribution assets and storage networks
Moreover, despite large capital investments, when technology changes, then the company has to write off
its assets leading to a loss of investments as the assets may not be put to any alternate use.
Company has provided for impairment losses of Rs. 64 million on certain fixed assets which due
to changing market and technology could not be put to any alternative use at present
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Similarly, in FY2012, the company had to write off ₹8.5 cr when a customer shut down its business and the
company could not reuse its assets for any other purpose.
The depreciation includes impairment provision of Rs. 84.52 million relating to assets at an
electronic gases customer’s site, arising from the discontinuance of their operations.
Recently, in FY2021 when the company sold its interest in the Bellary plant to JSW Steel Ltd, then it
recognized an impairment of about ₹19 cr on its investment.
The exceptional items also include impairment of Belloxy Investment (refer note 16) of Rs 189.74
million
As a result of the capital-intensive nature of the business, which also experienced multiple instances of
impairment, the asset turnover of Linde India Ltd had been low. Going ahead, an investor should keep a
close watch on the fixed asset turnover levels of the company to assess if it can efficiently utilize its plants.
b) Inventory turnover ratio of Linde India Ltd:
The inventory turnover ratio (ITR) of the company has improved from 20 in FY2014 to 43 in FY2023. An
increasing ITR indicates an improvement in the efficiency of the company in the utilization of its inventory.
Over the years, there have been only limited instances of inventory write-offs by Linde India Ltd. In
FY2000, the company provided for about ₹1.1 cr of obsolete inventory on its books.
Company has provided for…sIow/non-moving and obsolete inventories including adjustment for
net shortage of Rs 11,046 thousand
whether it can maintain the efficiency of its inventory utilization.
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c) Analysis of receivables days of Linde India Ltd:
Over the years, the receivables days of Linde India Ltd have decreased from 73 days in FY2014 to 52 days
in FY2023. It indicates that overall, the company has been able to collect its money from customers in time.
However, in the past, there have been instances where Linde India Ltd had to write off debts/receivables,
which it realized that it could no longer collect from its customers.
For example, in FY2000, it provided about ₹40 cr. in doubtful debt and other current assets.
considered it appropriate to provide Rs 402 million towards obsolete assets and unrecoverable
debts
Thereafter, almost every year, the company had to provide for about ₹5-7 cr of unrecoverable trade
receivables.
At one point in time, in FY2010-FY2011, it seems that the company faced challenges in the timely
collection of receivables because it had more than 35-40% of its trade receivables outstanding for more
than 6 months.
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The situation stayed the same over the years, as in FY2019, almost 36-38% of overall trade receivables
were overdue for at least 3 months or above.
As per the FY2023 annual report, page 171, on March 31, 2023, more than ₹21 cr of trade receivables were
overdue for more than 3 years for Linde India Ltd. This number was about ₹20 cr on December 31, 2021.
Going ahead, an investor must keep a close watch on the receivables position of the company to check if it
can collect its money on time from its customers.
operations (cCFO) of Linde India Ltd for FY2013-23, then she notices that over the last 10 years (FY2013-
FY2023), the company has converted its profit into cash flow from operations.
Over FY2013-23, Linde India Ltd reported a total net profit after tax (cPAT) of ₹2,091 cr. During the same
period, it reported cumulative cash flow from operations (cCFO) of ₹3,547 cr.
Learning from the article on CFO will indicate to an investor that the cCFO of Linde India Ltd is higher
than the cPAT due to the following factors:
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• Depreciation expense of ₹1,860 cr (a non-cash expense) over FY2013-FY2023, which is deducted

The Margin of Safety in the Business of Linde India Ltd:

of a Company
target growth.
Where,

Over the years, Linde India Ltd had an SSGR in negatives to a low level of 2-5%. In comparison, the sales
growth achieved by the company over the last 10 years (FY2013-23) is 9-10%. Therefore, the company has
grown beyond what its business model can sustain from inherent cash flows.
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As a result, over the years, Linde India Ltd had to rely on debt as well as equity dilution from its promoters
be it BOC Group or Linde Group.
For example, in 1997, it raised about ₹130 cr for the construction of a 1,290 TPD plant at Jamshedpur.
In FY2008, the company raised about ₹600 cr when Linde Group acquired BOC Group. The company used
this money to repay the debt it had raised to construct various plants in the past.
During the year, the Company received a sum of Rs.5973 million from the
promoter Group…Company utilised a sum of Rs.2190 million towards repayment of its existing
borrowings, thus becoming a ‘zero debt’ company at present.
Thereafter, Linde India Ltd, primarily relied on its holding company to raise debt to fund the construction
of its plants. For example in FY2012, it raised ₹555 cr from Linde AG for construction of projects for Tata
Steel at Kalinganagar and Asian Peroxide.
for financing the Tata Steel Kalinganagar project and Asian Peroxide’s project, the Company has
finalized funding arrangement of EUR 77.6 million (Rs. 5,553.83 million) by way of a new ECB
facility from the parent Company, Linde AG.
Linde India Ltd continued to raise debt from Linde group entities to meet its funding requirements. For
example, in FY2015, it raised ₹50 cr from Linde Engineering India Ltd as an inter-corporate loan.
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Company has also availed an inter corporate loan of Rs. 500 million from Linde Engineering
India Private Ltd.
Currently, the company has very low debt because CCI asked the company to sell its southern business and
the company used proceeds from this sale to repay its debt.
Credit rating report by CRISIL, February 2020:
Linde has divested assets in southern region at total consideration of Rs. 1380 crore, the proceeds
were utilized to prepay the debt to the tune of Rs. 866.8 crore.
Therefore, an investor should note that over the years, Linde India Ltd has grown its business beyond what
its internal cash flows could support. As a result, it had to rely on equity infusion as well as debt from its
promoters. The company could keep its debt position under control by using equity dilution and asset sales
to raise funds for debt repayment.
b) Free Cash Flow (FCF) Analysis of Linde India Ltd:
While looking at the cash flow performance of Linde India Ltd for the last 10 years (FY2013-FY2023), an
investor notices that it generated cash flow from operations of ₹3,547 cr. During the same period, it made
a capital expenditure of about ₹1,310 cr.
Therefore, during this period (FY2013-FY2023), Linde India Ltd had a free cash flow (FCF) of ₹2,237 cr
(=3,547 – 1,310).
In addition, during this period, the company had a non-operating income of ₹1,500 cr and an interest
expense of ₹703 cr. As a result, the company had a total free cash flow of ₹3,034 cr (= 2,237 + 1,500 –
703). Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.
Linde India Ltd used its free cash flow for debt repayments of about ₹1,503 cr, paying dividends of about
₹388 cr, and has increased its cash & investment balance by about ₹1,150 cr to ₹1,224 cr on March 31,
2023.
Going ahead, an investor should keep a close watch on the free cash flow generation by Linde India Ltd to
understand whether the company continues to generate surplus cash from its business.

FCF
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Additional aspects of Linde India Ltd:

On analysing Linde India Ltd and after reading annual reports, its credit rating reports and other public
documents, an investor comes across certain other aspects of the company, which are important for any
investor to know while making an investment decision.
1) Related party transaction of Linde India Ltd with its promoter group,
shareholders’ rejection and SEBI investigation:
Over the years, Linde India Ltd has entered into numerous transactions with its holding company as well
as other promoter group companies. These transactions vary from taking interest-bearing loans, sale of
goods, purchase of goods and services from promoter entities etc.
When the company was a part of the BOC group, then the amount of related party transactions was moderate
and primarily included supervisory services ranging from about ₹5-10 cr each year. However, after the
takeover by Linde Group and post the merger with Praxair Group, the size of related party transactions of
Linde India Ltd with its promoter group companies has increased significantly.
In 2020, Linde India Ltd and Praxair India Pvt. Ltd formed a JV company (50:50), LSAS Services Private
Ltd. for handing over numerous administrative, sales & marketing, procurement and consulting functions
to the JV company.
Joint Venture Company will render Operation and Management Services to both the joint venture
partners for their respective functions including Procurement, SHEQ, Human Resources, Finance,
IT, Legal, Administration, Business Development, Onsite account management, Sales &
Marketing, Product Management on an arms’ length basis.
In FY2023, Linde India Ltd purchased goods/equipment of about ₹375 cr and availed services of about
₹222 cr from its promoter group entities. (FY2023 annual report, page 196).
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In FY2022, it purchased goods of about ₹214 cr and services of about ₹187 cr from related parties (FY2021
In the past, it spent large sums of money on buying capital goods from its holding company, Linde AG. For
example, in FY2012, it purchased fixed assets for about ₹558 cr from its related parties (FY2012 annual
report, page 72).
In the annual general meeting (AGM) held on June 24, 2021, shareholders rejected the company’s proposal
of entering into related party transactions with Praxair India Private Ltd. and Linde South Asia Services
Private Ltd. with 93.9486% of shareholders voting against the resolution. (Source: click here, page
10).
Result: The above resolution was not passed as the votes cast against the resolution were greater
than the votes cast in favour.
In FY2023, the company breached its pre-approved limit for related party transactions and the secretarial
auditor highlighted as non-compliance with regulations in its report dated May 26, 2023, page 5
(Source: click here).
value in case of two transactions were exceeded the pre-approved amounts and were ratified
subsequently by the Audi Committee.
Later, shareholders raised objections to the related party transactions being entered by the company with
promoter group entities and as a result, the Securities and Exchange Board of India (SEBI) started an
investigation into the matter and summoned the managing director (MD) and secretary of the company in
Oct. 2023 along with relevant information. Later on, in January 2024, SEBI also summoned independent
directors of the company. Now, the company has filed a writ petition in the Hon. Bombay High Court to
stop the investigation by SEBI (Source: click here, pages 2 and 9)
An investor should keep a close watch on the development related to the SEBI investigation as any adverse
outcome can have a significant impact on the company. She should also monitor all related party
transactions by Linde India Ltd with its promoter group entities. This is because related party transactions
provide an avenue for promoters to shift economic benefits from public shareholders to themselves by
selling goods or services to the company at prices higher than market prices or buying goods or services
from the company at prices lower than market prices.
It seems that the holding company of Linde India Ltd wishes to run it like a privately held company with
the freedom of deciding about the movement of money and material across promoter group companies. As
a result, in the past, twice, it came up with delisting proposals. Once in January 2011 (FY2010 annual
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report, page 14) and again in January 2019 (FY2018 annual report, page 13). However, on both occasions,
the delisting proposals failed and Linde India Ltd continues to be a publicly listed company.
2) Management Succession of Linde India Ltd:
Linde India Ltd is an Indian entity, which has seen multiple changes in its holding companies over the
years.
It was previously named BOC India Ltd and was a part of the BOC Group, UK. In 1999, Air Products and
Chemicals of USA and Air Liquide of France attempted to buy BOC Group UK; however, the takeover bid
failed as the Federal Trade Commission of USA did not grant its permission (FY2000 annual report, page
12-13).
In 2006, Linde AG acquired BOC group and in Feb. 2013, the name of the company was changed to Linde
India Ltd.
Thereafter, in 2017, Linde Group and Praxair Group did a merger of equals and as a result, Linde India Ltd
became an entity under the combined Linde-Praxair group.
The company is run by professional management where holding companies have provided leadership to the
company. In 2023, Mr M J Devine joined the company as its new chairman.
Therefore, over the years, holding companies have provided continuity in leadership and it does not depend
on any promoter family for succession planning.
3) Remuneration paid by Linde India Ltd to its managing director:
Linde India Ltd had paid remuneration to its managing director, which was more than legal limits. The
secretarial auditor of the company highlighted it in its report.
The remuneration paid to the Managing Director for financial year ended 31 December 2014 was
in excess of limits…Company is seeking the shareholders’ approval by way of a special resolution,
for waiver of such excess.
Subsequently, the company pointed out to its shareholders that there is no limit on the remuneration that it
can pay to its managing director as he is working in his professional capacity.
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Pursuant to para B of Section II of Part II of Schedule V of the Companies Act, 2013, no ceiling
limit is applicable to Mr Moloy Banerjee, Managing Director since he is functioning in a
professional capacity
An investor should always monitor the remuneration paid by the company to its senior management. This
is because, many times, professionals running the company tend to prioritise their interests by rewarding
themselves via higher remunerations whereas shareholders might suffer due to subdued performance of the
company.
Also read: Are professionally managed companies safer for shareholders?
4) Weakness in internal controls and processes of Linde India Ltd:
Certain instances indicate that internal controls and processes at Linde India Ltd have a scope for
improvement.
4.1) Fraud by employees on Linde India Ltd:
In FY2019, the company identified that some employees had committed fraud of about ₹3.6 cr on the
company.
The management of the Company has detected…misappropriation of Company’s fund, which was
committed by employees in connivance with some contractual employees and vendors. The amount
of misappropriation of funds involved in the fraud over last four years amounted to Rs 36
million approx.
Such fraud/misappropriation of funds indicates the requirement for strengthening of processes at the
company.
4.2) Non-compliance with legal requirements by Linde India Ltd:
On multiple occasions, Linde India Ltd failed to comply with statutory guidelines.
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In the FY2014 annual report, page 27, the secretarial auditor pointed out that the company did not comply
with legal limits while payment of salary to its MD. In addition, the auditor also pointed out that the
company was yet to finalize a whistleblower policy, remuneration policy and policy on related party
transactions. In addition, the company was yet to file a return for a change of 2% in the shares held by
promoters and top 10 shareholders.
As per the secretarial audit report dated May 26, 2023, the company exceeded the pre-approved limit on
transactions with related parties.
In addition, in FY2023, the company did not deposit TDS (tax deducted at source) to income tax authorities
on time.
Moreover, the statutory auditor of the company highlighted in the FY2023 annual report, page 146 that the
company did not provide it internal audit report for January 1, 2023, to March 31, 2023.
As per the FY2020 annual report, page 46, Linde India Ltd delayed the transfer of shares to the Investor
Education and Protection Fund Authority.
4.3) Presentation of data in the annual report by Linde India Ltd:
As mentioned earlier, the statutory auditor of the company in its report signed on May 23, 2023, which was
submitted by the company to stock exchanges on May 26, 2023 (Source: BSE), highlighted that the
company exceeded pre-approved limits for related party transactions in case of two transactions. However,
in the secretarial audit report included in the FY2023 annual report, pages 36-37, which was also signed by
the auditor on May 23, 2023, this observation is excluded.
An investor may approach the company directly to understand why the observation about exceeding the
limit of related party transactions, which was there in the audit report filed with stock exchanges was absent
in the audit report included in the annual report.
In multiple annual reports, while disclosing cash inflow from the sale of properties/land/factories in the
cash flow statement, Linde India Ltd has included both the overall cash inflow as well as tax outflow in the
section cash flows from investing activities.
For example, in FY2019 annual report, page 137, showed an inflow of ₹1,380 cr from the sale of assets
held for sale as well as the tax paid on this transaction, the outflow of ₹110 cr in the cash flows from
investing activities.
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Generally, all the tax payments are shown as outflow under cash flow from operating activities.
Shifting tax outflows from operating activities to investing activities increases the cash flow from operating
activities shown in the annual report.
Also read: How Companies Manipulate Cash Flow from Operating Activities
(CFO)
On some occasions, Linde India Ltd has disclosed significant amounts as “Miscellaneous Expenses” under
“Other Expenses” without providing details about what these expenses pertain to. For example, in FY2017,
miscellaneous expenses were about ₹79 cr, in FY2016, these were ₹93 cr, in FY2014, these were ₹76 cr
and in FY2013, these were ₹62 cr.
An investor may approach the company directly to get a further breakup of miscellaneous expenses.
Additionally, over the years, the company has changed its financial year multiple times, which forces an
investor to be extra attentive while analysing the year-on-year financial data of the company. For example,
the company presented 15-month results in FY2023, 9-month results in FY2007, and 18-month results in
FY2000, FY1994 and FY1989.
It is advised that an investor keeps it in mind while analysing the financial performance of Linde India Ltd.
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5) Project execution by Linde India Ltd:
Over the years, the company has executed numerous projects for its tonnage plants, and air separation units
(ASUs) as well as for other customers under its project engineering division, which indicates good
execution skills by the management.
For example, it executed a 1,290 TPD plant at Jamshedpur in 1998, which was completed three months
ahead of schedule.
the project was completed in 15 months, three months before schedule. The plant is designed to
meet the additional gases requirements of Tata Steel (TISCO)
In FY2004, it completed a new plant of 225 TDP at Jamshedpur before time and budgeted costs.
commissioned the 225 tonnes per day plant at Jamshedpur before time and significantly below
cost.
Some of the other major plants executed by the company include 855 TPD ASU at Bellary in Karnataka, a
1,260 TPD plant at Dolvi in Maharashtra, 1,800 TPD ASU at Bellary, 1,700 TPD ASU at Rourkela for
SAIL, 2,550 TPD ASU for Tata Steel at Jamshedpur, 418 TPD ASU for Jindal Stainless in Kalinganagar
in Odisha, 330 TPD merchant ASU in Taloja in Maharashtra, 2,000 TPD project in Indonesia for POSCO,
2,400 TPD ASU at Tata Steel in Kalinganagar etc.
Nevertheless, on many occasions, the plants run by the company faced operational challenges impacting
production.
For example, in FY2000, the Jamshedpur plant faced issues due to power equipment (FY2000 annual
report, page 14). The same plant again faced technical problems in April 2001 (FY2001 annual report, page
18). Once again, in FY2005, this plant faced a major breakdown.
the 1290 tonnes per day (tpd) plant at Jamshedpur could not be operated at full production
capacity in the month of August 2004 due to a major breakdown in the plant
Once again, in FY2007, this plant faced issues and was shut down for multiple weeks in Dec. 2006 and
May 2007.
FY2007 annual report, pages 18, 20:
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technical problems faced at the Company’s 1290 tpd air separation plant in Jamshedpur which
led to its shutdown for a period of 20 days during the month of December 2006
On the basis of…root cause analysis carried out by the global team of experts…Company has
taken a planned shutdown of the plant in the first week of May 2007 for major repairs,
In FY2010, the Taloja and Bellary plants of the company faced problems.
The plant outage in Taloja was caused by a transformer failure and the outage of the 1800 tonnes
per day plant at Bellary was caused due to failure of the Siemens main air compressor
In FY2011, another ASU in Jamshedpur faced challenges in operations and production was shut down
In FY2018, once again a large ASU in Jamshedpur faced a breakdown and production was hampered from
January 2018 until June 2018.
breakdown of certain critical equipment at a large air separation unit at a customer site in
Jamshedpur, which occurred in the third week of January 2018….the ASU operated at a turned
down capacity, which continued till the 1st week of June 2018
Going ahead, an investor should keep a close watch on the progress of the construction of its new projects
as well as the operations of its existing projects.
While assessing project dynamics, an investor should also keep in mind the contingent liability on the
company of Asset Restoration Obligation to dismantle the plant installed at the customer’s location after
the contract is over.
Asset Restoration cost:…amount that it may have to incur towards liabilities related to restoration
of soil and other related works, which are due upon the closure of certain of its onsite plants.
On March 31, 2023, the company estimated these liabilities at about ₹42 cr (FY2023 annual report, page
176).
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6) Certain decisions taken by the company:
In the past, the company has made some decisions, which demand the attention of investors.
For example, in FY1998, the company decided to pay rent for the next 20 years as an advance to the
counterparty.
Prepaid expenses in Schedule 9 include Rs 28,080 thousand towards rent adjustable over a period
of 20 years from April 1998
An investor would appreciate that it is uncommon for any entity to pay advance rent for 20 years for any
property especially due to two main reasons. First, if the company invests the amount of advance rent of 20
years and generates a return of about 5% on it, then it can easily pay the annual rent from the returns without
utilizing the corpus. Second, over 20 years, rental markets may change and rent might decrease as well like
during the 2000 and 2008 recessions.
In FY2007 (April 2006-March 2007), the company used short-term funds of ₹77 cr for long-term
investments and during April 2007-Dec. 2007 period, it used ₹216 cr of short-term funds for long-term
purposes. Such practices had the potential to generate cash flow mismatches for the company (FY2007
annual report, page 64 and April 2007-Dec. 2007 report, page 67).
In FY1998, the company acknowledged that its human resource practices had made a mistake as it did not
recruit enough managers, which now has led to a talent crunch hurting the company.
slowdown in recruitment of managers in the past has depleted the human resource capital of your
Company and your Board believes that the total implications of this depletion are only now
beginning to be felt.
Similarly, the company also showed inefficiency in utilizing its assets as at one point of time it had more
than 9,000 cylinders lying unused.
Since 1998 more than 9000 idle cylinders have been put into productive use.
Therefore, an investor should read between the lines to understand various decisions taken by the company
and their impact on its performance.
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The Margin of Safety in the market price of Linde India Ltd:

Currently (March 7, 2024), Linde India Ltd is available at a price-to-earnings (PE) ratio of about 113 based
on consolidated earnings of the last 12 months (January 2023 to December 2023). An investor would
appreciate that a PE ratio of 113 does not offer any margin of safety in the purchase price as described by
Benjamin Graham in his book The Intelligent Investor.
Analysis Summary
Overall, Linde India Ltd has grown its sales at a rate of about 9% over the last 10 years (FY2013-2023). Its
operating profit margins seem to have increased from about 15% until FY2018 to 25% from FY2019
onwards; however, it is due to the adoption of Ind AS 115, which excludes power costs reimbursable by
customers from revenues as well as expenses.
Linde India Ltd produces commodity gases and faces intense, price-based competition from many large
MNC players as well as other large domestic players and numerous small unorganized players. Its
customers are primarily very large steel companies, which do not give it a lot of pricing power. As a result,
the business of Linde India Ltd is impacted by the cyclical nature of its customer industries like steel,
automobile, oil & gas etc.
To reduce the impact of cyclicity, Linde India Ltd has attempted to diversify its business into cement,
aluminium, packaged merchant gas segment, healthcare etc. However, it faced challenges when its
investments for a photovoltaic customer had to be written off when the customer shut down its business.
Due to a lack of pricing power, in the business of industrial gases, a company has to be as cost-efficient as
possible. Therefore, Linde India Ltd has attempted to benefit from economies of scale by growing its
business size; both by organic and inorganic (acquisitions) route. The company has tried to make the best
use of its plants by refurbishing, relocating and reusing them in different customers’ premises one after
another.
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The company has shut down its economically unviable plants, selling them, monetizing idle properties,
relieving excess manpower via VRS and attempting to be as power efficient as possible because power cost
is the major input cost.
Linde India Ltd faces regulatory challenges as its and its customers’ operations are considered hazardous
and impact the environment. As a result, it continuously invests in technologically advanced machinery and
at times, it had to write off its old machinery that could not be put to any alternate use.
The business of Linde India Ltd is highly capital intensive and it continuously needs to raise debt as well
as equity to fund its growth plans. As a result, after every few years, it ends up laden with significant debt.
Over the years, it has kept its financial position under control by refinancing high-cost debt with low-cost
ones, repaying debt by raising money from its promoting companies and using money from asset sales.
The company faces issues in the collection of money from customers as at times, overdue receivables form
a large part of its overall debtors. At times, the company had to write off significant sums of money as non-
collectible.
It seems that the MNC holding companies of Linde India Ltd want to run it like a private company with the
freedom to move resources between their group companies. As a result, twice, they attempted to delist the
company; however, each time, they failed. As a result, Linde India Ltd stayed publicly listed.
However, the holding companies have engaged in large-sized related party transactions with Linde India
Ltd, which, at times, have exceeded approved limits. As a result, shareholders have objected to these large
related party transactions by the company and rejected a board resolution on related party transactions by
the company.
Currently, the stock market regulator, SEBI, is investigating the company for its related party transactions
and has summoned its MD, secretary and independent directors. The investigation is still going on. The
company has approached the Hon. Bombay High Court with a writ petition to stop the investigation by
SEBI in this matter.
In the past, Linde India Ltd has given excessive remuneration to its managing director, which was pointed
out by its auditors.
Some instances like fraud by employees who misappropriated funds from the company, non-compliance
with legal requirements, data presentation in its annual reports etc. indicate that the company has a scope
for improvement in its internal controls and processes.
The company has displayed very good project execution by installing numerous large plants over the years,
many of which were completed ahead of time and at lower than the budgeted costs. However, during
operations, some of these plants have faced numerous issues like breakdowns and technical issues.
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At times, the company has made decisions, which seem intriguing like paying 20 years’ worth of rent in
advance to counterparties and slowing down recruitment of managers to the extent that it impacted the
company’s performance. At times, it let a large amount of its distribution and storage assets lie unutilized,
which impacted its business performance.
Going ahead, an investor should keep in mind the cyclical nature of its business, which along with low
pricing power and intense, price-based competition may lead to any period of strong profit performance to
proceed into lower margins. In the past, during downcycles, the company even reported losses. Therefore,
the investor should not extrapolate any period of good performance into the future and should be cautious.
Apart from movement in its profit margins, the investor should monitor the progress of its projects under
execution, debt levels, and timely collection of its receivables. She should keep track of all the regulatory
developments including the investigation by SEBI and proceedings in the Bombay HC.
These are our views on Linde India Ltd. However, investors should do their own analysis before making
any investment-related decisions about the company.
I hope it helps!
Regards,
Dr Vijay Malik
P.S.

Workshop Videos
Analysis Excel
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3) Dr Reddy’s Laboratories Ltd

Dr Reddy’s Laboratories Ltd (DRL) is a leading Indian pharmaceutical company with global operations
across North America, Europe, Russia, South America and the rest of the world. DRL has products in
generics, active pharmaceutical ingredients (APIs), custom products, biosimilars etc. It focuses on
therapeutic areas like the central nervous system, gastrointestinal, oncology, cardiovascular etc.
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Dr Reddy’s Laboratories Ltd has investments in various subsidiaries both within India and abroad as well
as investments in many joint ventures, associate companies etc. As a result, Dr Reddy’s Laboratories Ltd
reports both standalone as well as consolidated financials.
On March 31, 2024, the company had 50 subsidiaries, one associate company, two joint ventures and two
trusts/foundations that are included in its consolidated results. (Q4-FY2024 results announcement, page 2).
As a result, while analysing the past financial performance of Dr Reddy’s Laboratories Ltd, we have
analysed its consolidated financials.
Further recommended reading: Standalone vs Consolidated Financials: A Complete

Guide
With this background, let us analyse the financial performance of Dr Reddy’s Laboratories Ltd.
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Financial and Business Analysis of Dr Reddy’s Laboratories Ltd:

In the last 10 years (FY2015-FY2024), the sales of Dr Reddy’s Laboratories Ltd have increased at 7% year
on year, from ₹15,023 cr in FY2015 to ₹28,011 cr in FY2024. During this period, the sales of the company
have increased almost consistently, year on year except in FY2017 when sales declined by 9% to ₹14,196
cr from ₹15,568 cr in FY2016.
However, over the years, the operating profit margin (OPM) of Dr Reddy’s Laboratories Ltd has seen large
fluctuations between 14% to 28%. The OPM was 23% in FY2015, which continuously declined year-on-
year to 16% in FY2018. The OPM then increased to 21% in FY2019; however, declined sharply to 14% in
FY2020. OPM recovered to 20% in FY2021, then declined to 17% in FY2022 and thereafter, has recovered
to an all-time high of 28% in FY2024.
The net profit margin (NPM) of Dr Reddy’s Laboratories Ltd has shown similar fluctuations from 7% to
20% during the last 10 years (FY2015-FY2024).
If an investor extends the horizon of her analysis to the maximum duration of data availability for DRL i.e.
for the last 34 years from FY1990 to FY2024, then she notices that even though the sales of the company
have grown rather consistently except for a few years like FY2005, FY2008 and FY2017; it NPM has
always fluctuated.
The below table showing the financial performance of DRL from FY1990 to FY2024 shows that the NPM
of the company declined sharply in FY1997, FY1999, FY2003-FY2005, FY2008-FY2009, and FY2016-
FY2018. The company even reported deep losses (₹516 cr) in FY2009.
To understand the reasons for the business growth of DRL along with such fluctuating profit margins, an
investor needs to read the publicly available documents of the company like its annual reports from FY1999
onwards, conference call transcripts, credit rating reports by ICRA and its corporate announcements
submitted to stock exchanges.
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In addition, an investor should also read the following article on conducting business analysis of
pharmaceutical companies: How to do Business Analysis of Pharmaceutical
Companies
The above-mentioned documents show that the following key factors have influenced the business of Dr
Reddy’s Laboratories Ltd, which are critical to understand for any investor.
1) Extensive spending on research & development (R&D) leading to

exclusive selling opportunities in large markets like USA:
DRL has been spending about 8-10% of its sales on R&D every year. At times, the R&D spend has even
exceeded 15% of revenue like in FY2017 when it spent 15.18% on R&D.
As a result of substantial R&D spending, DRL has a large portfolio of drugs that it can sell both as API and
formulations (ready-to-consume drugs) in highly regulated markets like the USA, Canada, Western Europe
etc.
As per ICRA, in FY2024, USA formed 47% of its overall revenues. Moreover, every year, the company is
doing more global filings for its products.
Conference call transcript, Q4-FY2024 results, May 2024, page 8:
Erez Israeli: Total number of global filings for the year stands at 43, with 17 ANDAs and 2 NDAs
in the U.S.
As a result of its R&D, DRL is able to get approvals for exclusive sale of its generic products for 180 days
after the expiry of the patent, which, at times, has led to a substantial jump in its sales and profitability.
For example, in FY2002, when the company increased its sales by 60% from ₹1,001 cr in FY2001 to ₹1,662
cr in FY2002 along with a substantial jump in its NPM from 14% in FY2001 to 30% in FY2002, it was due
to its first win of exclusivity period for a drug called Fluoxetine.

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Your Company’s 58 per cent growth in sales in 2001-02 was very much due to the 180-days
exclusivity granted to its fluoxetine 40 mg capsules.
However, after the exclusivity period ends, numerous other generic players enter the market and the price
of the drug falls substantially resulting in a sharp decline in sales as well as profitability for manufacturers
Also read: How to do Business Analysis of Pharmaceutical Companies
Therefore, the very next year, in FY2003, the NPM of the company declined to 20% from 30% in FY2002
because the revenue from sales of Fluoxetine fell by almost 50%.
FY2003 annual report, pages 2 and 51:
The reasons for this significant decrease in profit after taxation was primarily due to a decline in
profits generated from sale of Flouxetine 40 mg during the year in US market.
Fluoxetine capsules 40mg revenues at Rs. 1,896 million as against Rs. 3,664 million in the
previous year, which included one-time marketing exclusivity revenues.
Therefore, the gain exclusivity period in the sale of drugs in one year and then loss of exclusivity in the
next year has been one of the reasons for fluctuating profit margins of DRL over the years.
In FY2007, DRL increased its sales to almost 2.5 times to ₹6,509 cr from ₹2,426 cr in FY2006 with a
doubling of NPM from 7% in FY2006 to 14% in FY2007, which was due to the launch of 4 drugs with
exclusivity periods of 180 days.
I remember FY2007 when, in a single year, we launched four exclusive 180-days products:
simvastatin, finasteride, ondansetron and fexofenadine.
Even in the later periods, the company has continued to win exclusivity periods for its drug launches in the
USA. For example, Olanzapine (FY2012), Finasteride (FY2013), Lenalidomide (FY2023) etc.
2) Out-licensing: selling out its products, marketing rights etc. to other

pharmaceutical companies to generate profits:
Right from the 1990s, Dr Reddy’s Laboratories Ltd has out-licensed its drugs to other companies for further
clinical development, commercialization/marketing etc. to generate money.
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In FY1998, for the first time, the company out-licensed one of the drugs developed by it, Balaglitazone
(DRF 2593), to Novo Nordisk (Denmark) for further clinical development and marketing and generated
profits.
insulin sensitizer molecule, DRF 2593, was licensed to Novo Nordisk of Denmark and is in clinical
development. Dr. Reddy’s Laboratories received…payments totalling Rs. 151.50 million…the
Company will continue to receive further milestone payments as DRF 2593
It is a different story that Novo Nordisk could not successfully develop this drug further and after 7 years,
returned it to DRL in FY2005.
…with the discontinuation of further development of DRF 4158 and DRF 2593 by our partners…
Nevertheless, DRL entered into an agreement with another company, Rheoscience for its development and
was progressing with its clinical trials even in FY2010.
Dr. Reddy’s and Rheoscience A/S have agreed to co-partner the development of balaglitazone
(DRF 2593)…which is expected to move to Phase III clinical trials.
Dr. Reddy’s and Rheoscience announced the first Phase III clinical trial of Balaglitazone (DRF
2593) with results of significant reduction in HbA1c (glycosylated haemoglobin) and improved
safety profile.
It shows the very prolonged nature of drug development. Nevertheless, subsequently, Dr Reddy’s
Laboratories Ltd has developed many products and sold/out-licensed them to other companies for
substantial gains.
For example, it sold some of its brands to other companies and earned a license fee of about ₹677 cr.
FY2023 annual report, page 338: (the numbers mentioned are in ₹ millions)
this primarily includes the following amounts: a) ₹2,640 from sale of certain non-core
dermotology brands in India to Eris Lifesciences Limited. b) ₹1,399 from sale of brands Styptovit-
E, Finast, Finast-T and Dynapres to Torrent Pharmaceuticals Limited and c) ₹902 from sale of
brands Z&D, Pedicloryl, Pecef and Ezinapi to J B Chemicals and Pharmaceuticals Limited
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In FY2020, the company earned ₹748 cr of license fee when it sold its US territory rights for ZEMBRACE®
SYMTOUCH® (sumatriptan injection) 3 mg and TOSYMRA® (sumatriptan nasal spray) 10 mg to another
company.
Definitive agreement with Upsher-Smith Laboratories…Company agreed to sell…its U.S. and

select territory rights for ZEMBRACE® SYMTOUCH®…and TOSYMRA®…received US$ 70
millions as upfront…and is entitled to receive up to US$ 40.5 millions…upon the achievement of
near term milestones…the Company recognised ₹7,486 (US$ 108.7 millions) as a license fee
In FY2022, it sold all rights of an anti-cancer drug for ₹295 cr and other large contingent milestone-linked
payments to another company.
definitive agreement with Citius Pharmaceuticals, Inc. (“Citius”) for the sale of all of its rights
relating to its anti-cancer agent E7777…Company received ₹ 2,951 (US$40 million)…entitled to
additional payments on achievement of milestones of up to US$40 million upon the CTCL
(cutaneous Tcell lymphoma) indication regulatory approval, up to US$70 million in milestone
payments upon additional indication regulatory approvals
In FY2018 and FY2019, DRL earned more than ₹300 cr by out-licensing its product for development and
marketing rights for others to another company.
Agreements with Encore Dermatology, Inc…for sale and assignment of US rights relating to three
of its dermatology brands…by 31 March 2019…Company recognised ₹1,807 as revenue
year ended 31 March 2018, the Company entered into an agreement with Encore for out-
licensing one of its products, DFD-06. The consideration for this arrangement consists of up
to ₹1,301 (US$ 20 million)
Therefore, as and when the company finds such opportunities to out-license its drugs/marketing rights, it
leads to a significant contribution to revenues.
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3) Acquisition of drugs/marketing rights/manufacturing plants/filings of

other companies:
Over the years, Dr Reddy’s Laboratories Ltd has entered into multiple such transactions to increase its
business size. For example, in FY2020, it bought a business segment from Wockhardh Ltd in India, Nepal,
Sri Lanka, Bhutan and Maldives markets along with a manufacturing plant for about ₹1,850 cr.
agreement with Wockhardt Limited In February 2020 ..to acquire select divisions of its branded
generics business in India and a few other international territories of Nepal, Sri Lanka, Bhutan
and Maldives for a consideration of ₹18,500…62 brands…manufacturing plant located in Baddi
In FY2016, it purchased US rights to a new drug from Xenoport at a valuation up to $490 mn (about ₹4,000
cr). Out of this, in FY2017, DRL paid about ₹330 cr.
Company is granted exclusive U.S. rights for the development and commercialization of Xeno
Port’s clinical stage oral new chemical entity…Company will pay a USD 47.5 million up-
front payment and an additional USD 2.5 million for the transfer of certain clinical trial
materials…up to USD 190 million upon…certain regulatory milestones…up to USD 250
million upon…certain commercial milestones, and royalty payments
In 2023, it acquired the US generic portfolio of Mayne Pharma, Australia for about $93 million (about ₹750
cr).
On 27 February 2023, the Company entered into an asset purchase agreement with Australia
based Mayne, to acquire its U.S. generic prescription product portfolio…The acquisition was
consummated on 6 April 2023…Company paid net consideration of US$ 93 million.
In FY2023, it also acquired the drug Cidmus from Novartis for ₹463 cr.
The acquisition of the cardiovascular brand and trademark Cidmus® in India from Novartis AG
for total consideration of ₹ 4,633 (U.S.$61).
Dr Reddy’s Laboratories Ltd has relied on acquisitions to grow its business for a long time. In fact, in
FY2006, it made the largest foreign acquisition by any Indian company until then when it bought Betapharm
Group of Germany for EUR 483 million (₹2,750 cr at then rate of about ₹57/EUR).
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Company completed the acquisition of the betapharm Group, Germany’s fourth largest Generics
pharmaceutical company for an all cash deal of €483 million– which, I am told is largest
international acquisition made by an Indian company up to date.
However, it is a different story that this debt-funded acquisition turned out to be a big mistake as we discuss
later in the article.
In FY2015, the company purchased a nicotine brand, Habitrol, replacement therapy transdermal patches
from Novartis for more than ₹500 cr.
Company…entered into an asset purchase agreement with Novartis Consumer Health Inc. to
acquire the title and rights to its Habitrol® brand…and to market the product in the United
States…The total purchase consideration was ₹ 5,097 (USD 80 million).
In FY2017, the company bought 8 ANDAs from Teva/Allergan for $350 million (about ₹2,380 cr at then
prevailing rate of ₹68/USD).
Acquired eight ANDAs from Teva/ Allergan across various dosage forms for US$ 350 million.
Additionally, over the years, apart from increasing the manufacturing capacity of its plants, DRL has
acquired plants and research units of multiple other companies across the world to both increase its
manufacturing size as well as to gain entry into those markets and their customers.
Currently, when DRL is generating surplus cash, the management has confirmed that the main use of its
surplus cash is to make acquisitions and grow its business size.
Conference call transcript, Q2-FY2024 results, Oct. 2023, page 11:
Erez Israeli:…primarily use it for inorganic activities, which can serve us both in the short-term,
like we did with Mayne as well as in the longer-term…Absolutely, this is the main use of the money
Moreover, the company is collaborating with large MNCs to form joint ventures e.g. the newly announced
JV with Nestle in 2024 in the nutraceuticals space where both DRL and Nestle will transfer their
nutraceutical products to the JV company for sale in the Indian market.
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4) Economies of scale from a large-sized backwards integrated business

model:
DRL’s key business segments, both generics and APIs, are commodity businesses where its product is non-
differentiable from its competitors. Therefore, manufacturers end up competing on price.
Conference call transcript, Q2-FY2010 results, Oct. 2009, pages 20, 21:
GV Prasad: This is a generics business we compete on price. And this is always been the case, it
will continue to be that…Certain products which are in short supply the price will go up and this
is basically a commodity business you have to compete on price and the situation continues.
As a result, DRL frequently faces intense price competition for its drugs, which leads to a decline in
profitability. For example, in FY2017, when the company saw a decline in its revenue, profits as well as
margins, then it was due to intense price-based competition in the US market.
new competitors launching some of our niche and high salience drugs and dramatically pushing
prices down; and the significant consolidation of our key US trade channels which gave the buyers
greater pricing power than before.
In any commodity business, it becomes essential that manufacturers try to become the lowest-cost producers
of goods. Therefore, over the years, DRL has tried to expand its manufacturing capacity to benefit from
scale benefits, both, by way of installing new plants as well as acquiring them from other players across the
world.
As per ICRA, currently, the company has 33 manufacturing and research units spread across India and
different parts of the world.
DRL has nine API manufacturing facilities, of which six are in India, one in Mexico, one in the US
and one in the UK. It also has 13 formulations manufacturing facilities in India, and one each in
the US and China. In addition, the company has one biologics facility in India and eight
technology development and R&D centres in India and overseas.
Additionally, Dr Reddy’s Laboratories Ltd’s backward-integrated business model where it manufactures

APIs, which are used in-house in the production of generic formulations, helps it in further cost reduction.
As per ICRA, it produces about 60% of its API requirements in-house.
Credit rating report by ICRA, December 2018, page 2:
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well-diversified business model supported by…backward integration in APIs. More of 60% of the
global generics segment sales are from its vertically integrated APIs.
Due to low-cost production in its plants, the company follows a strategy where it acquires companies in the
developed world and then shifts production of its drugs to India so that it can offer lower prices to its
customers there.
5) Running a pharmaceutical business means compulsory involvement in

litigations:
Patents are the biggest competitive advantage to innovative pharmaceutical companies that restrict entry of
competing generics players and allow the companies to make significant profits. As a result, such
companies face continuous litigations where generics companies file court cases to prove that the patents
are invalid.
On the contrary, innovative pharma companies also file court cases against generics players to block
launches of their low-priced drugs in the market.
As a result, most of the pharmaceutical companies including Dr Reddy’s Laboratories Ltd are continuously
involved in legal battles.
The outcome of these litigations is never certain and therefore, they might lead to large monetary gains
when successful or large monetary payouts when unsuccessful.
Over the years, Dr Reddy’s Laboratories Ltd has paid large amounts of money to other pharmaceutical
companies and also got significant sums when the litigation/settlement was in its favour.
For example, in FY2009, the company had to pay about ₹90 cr when a German court ruled in favour of the
patent owner, Eli Lilly for the drug Olanzapine.
Federal Court…maintain the olanzapine patent in favor of Eli Lilly, the innovator…Eli Lilly, as
part of the litigation has claimed damages from the Company…recorded a liability towards
the damage claim amounting to Rs. 916 under the head operating and other expenses
In FY2016, DRL had to pay ₹43 cr to Novartis for violating its patents and to seek permission for future
sales of its products.
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Company made a one-time payment to Novartis in exchange for a license to all relevant
patents…Pursuant to this agreement, the Company paid ₹ 430 (USD 6.5 million) to Novartis as a
settlement amount for past and future sales of the products
However, it’s not that always DRL had to pay under these settlements. In FY2023, the company won a
settlement and Indivior agreed to pay ₹563 cr to Dr Reddy’s Laboratories Ltd to settle the dispute.
FY2023 annual report, page 83
recognition of an income of ₹5,638 million from a settlement agreement with Indivior Inc, Indivior
UK Limited, and Aquestive Therapeutics Inc, resolving all claims between the parties relating to
the generic buprenorphine and naloxone sublingual film
Similarly, in FY2020, DRL received ₹345 cr from Celgene to settle the dispute.
amount of ₹ 3,457 (US$50 millions) received from Celgene pursuant to a settlement

agreement entered into in April 2019. The agreement effectively settles any claim the Company or
its affiliates may have had for…generic version of REVLIMID ® brand capsules (Lenalidomide)
Recommended reading: How to study Annual Report of a Company
6) Very high regulatory risk in the business of Dr Reddy’s Laboratories Ltd:
The pharmaceutical industry has a direct impact on the health and financial costs of the general population;
therefore, almost all govts. keep tight control on the quality and prices of drugs.
6.1) Strict inspection of manufacturing plants:
Every country has a drug regulator that inspects the plants where companies manufacture drugs for selling
in their country. From India, so many companies sell drugs in the USA that now, USFDA has a local office
in India from where it conducts frequent audits of companies’ manufacturing plants.
Such inspections are usually very stringent and at times, even plants of the best of the companies fail the
inspections.
Dr Reddy’s Laboratories Ltd failed USFDA inspection multiple times in the past where at times, it took
some years for it to clear all the observations and then resume selling to the US from these plants.
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USFDA inspected three of our plants…In November 2015, they sent a warning letter to your
Company.., this event and the remedial steps that followed have delayed launches of key products
and certain APIs which, in turn, significantly lowered incremental revenues
This had a significant impact on the company’s business as its revenue from the North America Generics
division declined by 16% in the next year, FY2017.
The company could not clear two of these plants even in FY2018 and its plans to launch more drugs in the
US market got delayed.
However for the other two plants, there is no change in status vis-a-vis the USFDA. Consequently,
launches of key molecules, injectables, as well as certain APIs from these sites have been delayed
It is not only the USFDA, which is strict in its assessment. In FY2018, one of the plants of DRL could not
clear the inspection from the German drug regulator. It took the company four months to clear all the
observations of the regulator and resume supplies from the plant to Germany, which impacted the business.
Germany audited your company’s formulation unit 2 (FTO-2) at Bachupally, Hyderabad

(Telangana). This resulted in the good manufacturing practices (GMP) compliance certificate not
being renewed in August, 2017…After a follow-up audit, the GMP non-compliance status was
withdrawn in January, 2018. However, stoppage in sale to Europe for four months led to lesser
revenue
In the case of the German audit, DRL could clear the shortcomings in a 4-month duration. However, in the
case of USFDA observations for its API plant at Srikakulam, issued in Nov. 2015, it could not clear them
in 4 years (Nov. 2019).
Credit rating report by ICRA, Nov. 2019:
The company is also yet to resolve the warning letter issued to its API plant at Srikakulam
in November 2015
Even in 2024, the company has received multiple observations from the USFDA after the inspection of its
plants.
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6.2) Pricing controls by govt on pharmaceutical drugs:
Almost every country controls the price of drugs in one way or another to lower the health costs for its
people. At times, govt. actions in this direction lead to a very drastic impact on companies.
For example, Dr Reddy’s Laboratories Ltd faced a shock in the German market after it bought Betapharm
Group for EUR 483 million (₹2,750 cr at then rate of about ₹57/EUR) in FY2006.
Until then, Germany used to be a branded generics market and Betapharm owned many well-known brands
of drugs. DRL had expected to earn higher revenue by increasing sales of these brands and to earn more
profits by manufacturing them at its low-cost plants in India.
However, the German govt. changed its pharmaceutical market to tender-based where insurance companies
(Sick Funds/AOK) started allocating tenders of drug supplies to lowest bidders, which in turn, eroded the
profitability and competitive advantages of Betapharm group.
As a result, over the next few years, Dr Reddy’s Laboratories Ltd lost all of its investment of ₹2,750 cr
done in Betapharm by way of write-offs and it had to put in more money to keep the company running.
• In FY2007, DRL wrote off ₹155 cr of intangible assets.

• In FY2008, it wrote off ₹236 cr of intangibles.
• In FY2009, DRL wrote off a massive ₹1,402 cr in goodwill and intangible assets impairment. This
was the reason for the loss of ₹516 cr reported by the company in FY2009.
German generics market is rapidly transiting to a lowest-price tender model…betapharm

intangibles for possible impairment…write-down of intangible assets amounting to Rs. 317 crore.
In addition, the betapharm goodwill on the balance sheet was also tested for impairment…charge
of Rs. 1,086 crore. In the aggregate…impairment charge was around Rs. 1,402 crore
• In FY2010, DRL wrote off an additional ₹847 cr of goodwill and intangibles. (FY2010 annual
report, page 3). Additionally, DRL incurred ₹91 cr as charges for employee termination at
Betapharm (FY2010 annual report, page 26)
• In FY2012, the company recognized a further impairment of ₹210 cr (FY2012 annual report, page
119).
Thereafter, in FY2014, after 8 years of investment in Betapharm group, the company got rid of it by
disposing of shares of Lacock Holding Ltd, the SPV using which it had invested in Betapharm. On such
disposal, it recognized a further loss of ₹16 cr.
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Company disposed its investment in Lacock Holdings Limited…to its wholly owned subsidiary Dr.
Reddy’s Laboratories SA, Switzerland. The aggregate loss on such disposal of investment
recorded under “Other expenses” is ₹166.
So, overall, from FY2006-FY2014, Dr Reddy’s Laboratories Ltd lost its entire initial investment of about
₹2,700 cr and about ₹1,500 cr of incremental investment done over these years to sustain Betapharm
operations.
• FY2007, it gave a loan of ₹101 cr to Lacock Holdings Ltd, which is the SPV using which DRL had
acquired Betapharm group (FY2007 annual report, page 107).
• FY2008, it invested a further ₹760 cr in Lacock Holdings Ltd (FY2008 annual report, page 104).
• In FY2009, it invested an additional about ₹470 cr (₹133 cr in equity and ₹335 cr as debt) in Lacock
(FY2009 annual report, pages 107 and 140).
• In FY2010, it invested ₹252 cr (FY2010 annual report, page 101)
This acquisition was primarily debt funded as DRL had taken about EUR 196 mn debt for it. Therefore, the
interest paid by the company on this debt is an additional loss to shareholders.
Conference call transcript, Q3-FY2009 results, page 22:
Umang Vohra: Yeah so we have 196 million Euros of debts which is the debt we took on account
of our acquisition at Betapharm.
So, overall, during FY2006-2014, shareholders of Dr Reddy’s Laboratories Ltd lost

more than ₹4,000 cr due to a regulatory change in Germany when the market
changed from branded generics to tender-based and the largest international
acquisition by any Indian company until then proved unsuccessful.
Betapharm was not the only acquisition on which DRL lost significant money
It is not only Germany that has resorted to high control of the pharmaceutical
industry. In the past, DRL was impacted when Russia took steps to control drug
prices by forcing doctors to prescribe trade/generic-generics (i.e. without the brand
name of the drug), banning meetings of doctors with representatives of
pharmaceutical companies and offering incentives to local manufacturing of drugs
for import substitution (FY2012 annual report, page 42, FY2013 annual report,
page 36).
Chinese govt. manages drug prices via an Essential Drug List (EDL) and a National Reimbursement Drug
List (NRDL). Pharmaceutical companies have to offer substantial discounts on drugs on these lists.
(FY2019 annual report, page 39)
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In India, govt. control prices of the National List of Essential Medicines (NLEM) via the Drug Prices
Control Order (DPCO) issued by the National Pharmaceutical Pricing Authority (NPPA). Over the years,
the company’s business has suffered whenever DPCO put price caps on its key drugs.
For example, in FY2017, when the revenue of DRL declined by about 10% from FY2016, the decrease in
prices of its key drugs due to the price cap under DPCO was one of the key reasons.
revenue growth was constrained by the notified decline of prices of a large number of drugs,
including your company’s leading brands, in the National List of Essential Medicines (NLEM)
issued by the National Pharmaceutical Pricing Authority (NPPA).
7) Geopolitical and foreign exchange risk faced by Dr Reddy’s Laboratories

Ltd:
The business operations of DRL are spread across numerous countries in the world. As a result, it is exposed
to political and socioeconomic changes in its target markets.
In the past, the company lost substantial money in Venezuela when, after the death of its president, Hugo
Chavez, the country faced a lot of social and economic instability.
As the crisis in Venezuela deepened, the country kept on devaluing its currency and increased controls on
the outflow of money from the country.
Signs of troubles in Venezuela’s economic position started to appear in FY2011 when it devalued the
preferential rate of forex conversion from 2.6 Venezuelan Bolivars (“VEB”) per US$ to 4.3 (FY2011 annual
report, page 148).
However, Dr Reddy’s Laboratories Ltd continued to increase its focus on Venezuela and grow its business
and investments there.
Venezuela has been the growth driver. We have stayed committed to the country despite its
economic difficulties…Consequently, we have enjoyed a revenue CAGR of 52% between FY2011
and FY2015. In FY2015, sales in Venezuela increased by 187% to become Dr. Reddy’s fourth
largest market.
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However, soon the reality caught up with the company and in the next year, FY2016, it suffered a write-off
of ₹500 cr on its investments in Venezuela when the country refused it outflow of money from the country.
continuing economic crisis in Venezuela led to a clampdown on foreign exchange outflows due to
which your Company received no approvals from the Venezuelan government to repatriate
amounts beyond US$ 4 million. The remaining Venezuelan net monetary assets were translated
using the DICOM rate resulting in a write-down of ₹ 5.09 billion.
And in the next year, FY2017, it chose to restrict its business in Venezuela.
we have consciously chosen to limit our business to supplying consignments only against
remittance of funds from Venezuela. Since such repatriations are minuscule, so too is the size of
our business.
Moreover, in FY2017, it wrote off a further ₹84 cr of its investments in Venezuela (FY2017 annual report,
page 143).
Apart from Venezuela, Dr Reddy’s Laboratories Ltd has faced a significant impact due to the devaluation
of the Russian currency (Ruble) due to issues there.
Revenues from Russia declined by 29% due to economic problems and the devaluation of the Ruble in
FY2016. (FY2016 annual report, page 3).
In FY2015, the revenue from Russia had declined 11% due to a sharp depreciation of Ruble (FY2015 annual
report, page 41).
In FY2021, the revenue from Russia declined by 6% due to the depreciation of Ruble (FY2021 annual
report, page 43).
Over the years, the company has experienced significant losses on account of adverse foreign exchange
movements. For example, it had forex losses of ₹138 cr in FY2015, ₹78 cr in FY2012, ₹63 cr in FY2009
and ₹53 cr in FY2005.
Over the years, the tax payout ratio of Dr Reddy’s Laboratories Ltd has been below the standard corporate
tax rate in India. Key reasons for the same are significant earnings from foreign countries that have different
tax rates than India, tax incentives available to the company on its R&D expenses, manufacturing in states
that offer incentives etc.
Until FY2023, the company had a lot of tax incentives, minimum alternate tax (MAT) credits etc. Therefore,
it was continuing with the old corporate tax regime. However, from FY2024, the company has opted for
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the new corporate tax regime of lower taxes. (Conference call transcript, Q4-FY2024 results, May 2024,
page 5).
Operating Efficiency Analysis of Dr Reddy’s Laboratories Ltd:
a) Net fixed asset turnover (NFAT) of Dr Reddy’s Laboratories Ltd:
Over the years, the NFAT of the company had stayed between 2.1 and 2.8. A rangebound asset turnover
indicates that the company has maintained its asset utilization efficiency.
Going ahead, an investor should monitor the NFAT of Dr Reddy’s Laboratories Ltd to understand whether
it continues to efficiently utilize its assets.
b) Inventory turnover ratio (ITR) of Dr Reddy’s Laboratories Ltd:
Over the years, the ITR of Dr Reddy’s Laboratories Ltd has declined from 6.1 in FY2016 to 4.5 in FY2022.
In FY2024, the ITR has recovered to 5.0. However, the inventory management efficiency of the company
has gone down over the years.
The company’s operations are working capital intensive as it has to maintain a large amount of inventory
at its plants, under transportation on ships in the sea trade, and warehouses near customers so that it can
supply goods on short notice to the customers.
Moreover, for cases like 180-day exclusivity sales, the demand for the drugs shoots up on launch and falls
down drastically after the end of exclusivity as other competitors enter the market. In such cases, the
company faces significant inventory refunds/chargebacks (Conference call transcript, Q3-FY2007 results,
January 2007, pages 18-19).
Over the years, Dr Reddy’s Laboratories Ltd has faced significant inventory write-downs and refunds. For
example, in FY2023, it faced an inventory write-down of ₹486 cr and had refund liabilities of about ₹460
cr. The same figures for FY2022 were ₹458 cr and ₹440 cr respectively. (FY2023 annual report, pages 297
and 3440).
Therefore, having a long supply chain from India and spreading across the world costs the company about
₹900cr – ₹1,000 cr every year in inventory write-downs and refunds.
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However, maintaining high inventory across the system is compulsory for Dr Reddy’s Laboratories Ltd
because any delay in supplying drugs to the customer will lead the customers to source them from any of
its competitors. The company faced a loss of business due to a delay in supply in FY2010 when it voluntarily
recalled some of its products and could not meet demand on time. During this period, customers started
buying from its competitors, which hurt its business.
Conference call transcript, Q3-FY2010 results, January 2010, page 4:
Umang Vohra: In September this fiscal, one lot each of four of our products were voluntarily
recalled by us. This caused a temporary slow-down of production resulting in diversification of
supply sources by few of our customers. As a result, our base business revenues have been flat for
this quarter
Going ahead, an investor should monitor the inventory position of Dr Reddy’s Laboratories Ltd to assess
whether it is able to manage its inventory efficiently.
c) Analysis of receivables days of Dr Reddy’s Laboratories Ltd:
Over the years, the receivables days of Dr Reddy’s Laboratories Ltd have ranged from 94 days to 103 days.
The year-on-year change in receivables days also depends on the mix of export and domestic sales in the
overall revenue. The company has to give a higher credit period (about 180 days) in export sales in
comparison to a lower credit period (about 90 days) in domestic sales.
The credit period extended on export sales is 180 days and 90 days for domestic sales.
Going ahead, an investor should watch the trend of receivables days of Dr Reddy’s Laboratories Ltd to
assess whether it continues to collect its receivables on time.
Further recommended reading: Receivable Days: A Complete Guide
operations (cCFO) of Dr Reddy’s Laboratories Ltd for FY2015-FY2024, then she notices that over the
years (FY2015-FY2024), the company has converted its profit into cash flow from operations.
Over FY2015-24, Dr Reddy’s Laboratories Ltd reported a total net profit after tax (cPAT) of ₹24,901 cr.
During the same period, it reported cumulative cash flow from operations (cCFO) of ₹32,400 cr.
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would also understand the situations when the companies would have their CFO higher than PAT.
Further recommended reading: Understanding Cash Flow from Operations (CFO)
Learning from the article on CFO will show an investor that the following factors led to a higher cCFO
compared to cPAT:
• Depreciation expense of ₹11,215 cr (a non-cash expense) over FY2015-FY2024, which is deducted

• Interest expense of ₹1,027 cr (a non-operating expense) over FY2015-FY2024, which is deducted
Going ahead, an investor should keep a close watch on the working capital position of Dr Reddy’s
Laboratories Ltd.
The Margin of Safety in the Business of Dr Reddy’s Laboratories

Ltd:

of a Company
target growth.
Where,
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An investor would notice that over the years, Dr Reddy’s Laboratories Ltd had reported an SSGR of 13-
23% whereas, over the last 10 years (FY2014-FY2022), it has grown its sales at a rate of 7% year on year.
As a result, the company has grown its sales within the levels that its business profits can sustain.
Therefore, in the last 10 years (FY2015-FY2024), Dr Reddy’s Laboratories Ltd has kept its debt under
check. DRL had a debt of ₹4,314 cr in FY2015, which declined to ₹2,002 cr in FY2024.
The investor gets the same conclusion when she analyses the free cash flow position of Dr Reddy’s
Laboratories Ltd.
b) Free Cash Flow (FCF) Analysis of Dr Reddy’s Laboratories Ltd:
While looking at the cash flow performance of Dr Reddy’s Laboratories Ltd, an investor notices that during
FY2015-FY2024, it generated cash flow from operations of ₹32,400 cr. During the same period, it did a
capital expenditure of about ₹16,394 cr.
Therefore, during this period (FY2015-FY2024), Dr Reddy’s Laboratories Ltd had a free cash flow (FCF)
of ₹16,006 cr (=32,400 – 16,394).
expense of ₹1,027 cr. As a result, the company had a total free cash flow of ₹19,682 cr (= 16,006 + 4,703
– 1,027). Please note that the capitalized interest is already factored in as a part of the capex deducted
earlier.
Dr Reddy’s Laboratories Ltd has used its surplus cash to reduce its debt, pay dividends to shareholders
(₹4,342 cr excluding dividend distribution tax), buy back of shares in FY2017 (₹1,569 cr) and increase its
cash & investments. On March 31, 2024, the company has cash & investments of about ₹6,658 cr.
An investor would see that in the last 10 years (FY2015-2024), DRL has been a highly cash surplus
company. However, in the previous decades, it had faced significant cash shortfalls to fund its R&D
expenses and acquisitions.
As a result, previously, it had to raise equity by diluting its equity capital on a frequent basis.
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Initially, the company came out with a GDR (Global Depository Receipts) issue of $48 million in FY1995
(FY2000 annual report, page 11) i.e. about ₹150 cr assuming then prevailing rate of about ₹32/$.
Thereafter, in FY2002, it raised $132.78 million by issuing American Depository Shares (ADS) (FY2001
annual report, page 60) i.e. about ₹625 cr assuming then prevailing rate of ₹47/$.
The company used these funds to repay its high-cost debt. However, in FY2006, it did the acquisition of
Betapharm, Germany, which increased its debt sharply.
Therefore, in FY2007, it again diluted its equity and raised money by ADR (American Depository Receipts)
issue of ₹1,000 cr.
Other than these equity issuances, the company also found novel ways of raising funds where it got
investments from funds like ICICI Venture, Citi etc. for its R&D activities. In FY2005, ICICI Venture
agreed to fund $56 million (about ₹250 cr assuming then prevailing rate of ₹44/$) (FY2005 annual report,
page 3).
Thereafter, in FY2006, it entered into another agreement with ICICI Venture and Citigroup Venture where
they agreed to fund $45 million (about ₹200 cr assuming then prevailing rate of ₹45/$) for its R&D activities
Going ahead, an investor should keep a close watch on the free cash flow generation by Dr Reddy’s
Laboratories Ltd to understand whether the company continues to generate surplus cash from its business
and how it utilizes the same.

FCF

Additional aspects of Dr Reddy’s Laboratories Ltd:

On analysing Dr Reddy’s Laboratories Ltd and after reading annual reports, credit rating reports and other
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1) Management Succession of Dr Reddy’s Laboratories Ltd:
Dr Reddy’s Laboratories Ltd was established by Dr. K Anji Reddy who left this world in 2013. Currently,
his son, Mr K Satish Reddy (aged 56 years) is the chairman and his son-in-law, Mr G V Prasad (aged 63
years) is the Co-Chairman & MD of the company.
Due to the presence of the next generation, there was a seamless transition of leadership from the founder
promoter to the next generation.
The presence of a well-thought-out management succession plan is essential in the case of promoter-run
businesses as it provides for a smooth transition of leadership over the generations and provides continuity
in the business operations of any company.
2) Related party transactions of Dr Reddy’s Laboratories Ltd with its

promoters:
Over the years, DRL has entered into a few transactions with its promoter group entities, which had the
potential to transfer economic benefits from public shareholders to promoters.
For example, in FY2001, DRL merged one of its group companies, Cheminor Drugs Ltd (CDL) with itself.
CDL was primarily run by Mr G V Prasad, the son-in-law of Dr K Anji Reddy. As per the then media
articles, the merger share-swap ratio favoured the shareholders of CDL over the shareholders of DRL.
(Source: Dr Reddy’s Cheminor merger: A pharma wedding finalized)
Dr. Reddy’s Holdings (DRH), currently holds 25.40% in DRL and 35.34 % in Cheminor…Dr. Anji
Reddy and his immediate family members hold 1.76% in DRL and 13.42% in CDL…The merger
ratio too seems to be slightly weighted in favour of the Cheminor
On other occasions, DRL purchased land from its promoter group entities.
For example, in FY2004, DRL purchased a company named Dr Reddys Bio-Sciences Ltd. (DRBSL) for
₹27 cr, which had a land parcel with some dispute.
On 9 July 2003, the group acquired 100% equity stake in DRBSL for a consideration of Rs.
277,463 thousands. A part of consideration amounting to Rs. 26,075 thousands was withheld on
account of boundary dispute on a portion of land.
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During FY2008-FY2010, when DRL was expanding its manufacturing capacity by installing more
manufacturing plants, then it purchased land from its promoter group company, Dr Reddy’s Holdings
Limited for ₹144 cr.
In FY2014, the company purchased assets for ₹126 cr from another related party company, Ecologic
Chemicals Limited.
Company entered into an asset purchase agreement with Ecologic Chemicals Limited
(“Ecologic”), where in two directors of the Company have equity interests. The Company has
paid ₹ 1,264 excluding taxes and duties for purchase of fixed and current assets.
Other than these large asset purchase transactions, on a regular basis, Dr Reddy’s Laboratories Ltd enters
into sales and purchase transactions for goods and services with related parties.
For example, it had sales and purchase transactions worth hundreds of crores of rupees with A R Life
Sciences Pvt. Ltd.
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An investor would appreciate that all these related party transactions between the company and promoter
group entities have the potential of shifting economic benefits from public shareholders to promoters if the
listed company buys goods and services from promoters at a price higher than fair market price or sells
them to promoters at a price lower than fair market price.
3) Numerous write-offs undertaken by Dr Reddy’s Laboratories Ltd on its

acquisitions:
As discussed above, DRL lost/had to write off more than ₹4,000 cr on its acquisition of Betapharm in
Germany; however, that was not the only time when it lost/wrote off substantial money on an acquisition
In FY2020, the company wrote off/impaired ₹1,675 cr, which were primarily the investments done to
acquire drugs from Teva Pharmaceutical, Israel. It wrote off ₹1,113 cr out of ₹1,426 cr spent to acquire the
generic version of the drug “Nuvaring” and ₹355 cr from the acquisition cost of Tobramycin, Ramelteon,
and Imiquimod, all from Teva Pharmaceutical.
net profits were adversely impacted in FY2020 due to the Rs. 1,676.7 crore of impairment…Of
this, Rs 1,113.7 crore pertained to gNuvaring– the ANDA of which was acquired from TEVA for
Rs. 14.26 billion in FY2016. DRL had also taken an impairment charge of Rs 355.1 crore on three
product related intangibles acquired from TEVA in August 2016 (viz., Ramelteon, Tobramycin and
Imiquimod).
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Whatever remaining value was remaining out of gNuvaring acquisition from Teva, was impaired in the
next year, FY2021, when DRL took another hit of write-off/impairment of ₹854 cr.
In FY2021, there has been an impairment charge of ₹ 8,542 million which pertains to charges
of…₹ 3,180 million for…generic equivalent to Nuvaring…₹ 1,587 million for the product
Saxagliptin/Metformin…₹ 3,291 million for the product Xeglyze…₹ 484 million on other products
It looks like the sellers of Betapharm group as well as the above drugs exited at a perfect time by selling
them to Dr Reddy’s Laboratories Ltd.
Nevertheless, the series of large impairments continued in FY2022 when DRL took another hit of ₹930 cr.
In FY2022, DRL recognised an impairment of Rs. 930.4 crore towards product related intangibles
and Shreveport subsidiary related assets, which moderated the net margin to an extent.
In the next year, FY2023, another acquisition proved wrong for Dr Reddy’s Laboratories Ltd. In the
previous year, FY2022, it had acquired Nimbus Health GmbH in Germany, which dealt in medical
cannabis. The company had paid an upfront amount of ₹33 cr and there were further performance and
milestone-linked payments to be done in the future. (FY2022 annual report, page 323)
However, in the very next year, in FY2023, DRL had to write off its investment in Nimbus Health GmbH.
In FY2023, the company wrote off a total of about ₹70 cr out of which ₹27 cr was on account of Nimbus
Health GmBH i.e. more than 80% of investment in Nimbus was written off within a year. (FY2023 annual
report, pages 83, 322).
Therefore, Dr Reddy’s Laboratories Ltd very frequently has lost substantial sums of money on its
acquisitions. However, apart from these, over the years, DRL has undertaken many other ventures where it
lost capital.
At one time, it even manufactured automotive halogen lamps; however, it led to a loss of capital for
shareholders.
In FY1997, DRL started manufacturing automotive halogen lamps via its wholly-owned subsidiary,
Compact Electric Limited (CEL). (FY1997 annual report, page 32).
However, right from the start, CEL faced challenges of low demand, high competition from low-priced
lamps, and cheaper imports from China, Taiwan and Korea (FY1998 annual report, page 60).
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CEL reported losses year after year and DRL had to impair its investment, write off loans given to CEL
(₹2.6 cr) and finally sell the company at a loss in FY2004 (51% stake) and FY2005 (remaining 49% stake)
resulting in loss of about ₹6.5 cr (FY2005 annual report, page 94)
Similarly, in FY1998, DRL entered into the diagnostics business and started production of “sophisticated
diagnostic kits” and “ELISA-based products” (FY1997 annual report, page 16). In FY1999, it launched the
pregnancy detection kit “Velocit”.
However, within a few years, in FY2003, the company decided to close down the diagnostic division as it
was not fitting in its overall strategy and it wrote off its investment of about ₹5 cr (FY2003 annual report,
pages 45, 50, 162). Finally, DRL sold off the SPV created for its diagnostics business Pathnet (India) Private
Limited in FY2006 (FY2006 annual report, page 145).
Recently, in FY2024, DRL started an e-commerce venture, “Celevida Wellness”. However, soon enough,
it closed down this direct-to-consumer website (Conference call transcript, Q4-FY2024 results, May 2024,
page 7).
In FY2010, it wrote off ₹32 cr invested in its subsidiary in Spain, Reddy Pharma Iberia (FY2010 annual
report, page 103). In FY2014, the company wrote off further investment of ₹24.5 cr in this subsidiary
In FY2011, the company wrote off about ₹50 cr of its investment in its Brazilian subsidiary, Dr Reddy’s
Farmaceutica Do Brasil Ltda (FY2011 annual report, page 107). In FY2015, DRL fully wrote off its
investments of ₹102 cr in Brazilian (₹46 cr) and Spanish (₹56 cr) subsidiaries (FY2015 annual report, page
129). However, the company reentered Brazil in FY2018.
APR LLC: the company started investing money in APR LLC, which was developing an API, in FY2004
and over the years, invested about ₹40 cr (₹2 cr Class B equity and 38 cr debt) (FY2011 annual report, page
175). Class A equity was owned by two individuals whose identity was not disclosed in the annual reports
by DRL.
By FY2011, the entire investment of DRL in APR LLC was written down to zero due to losses incurred by
APR. However, still, in FY2012, the company paid a further ₹14 cr to take over entire assets, rights etc.
(FY2012 annual report, page 184). Effectively DRL gave an exit to the two individuals (Class A
shareholders) by paying ₹14 cr when it had already lost its entire investment of ₹40 cr until then.
In FY2016, DRL invested ₹66 cr in a company DRL Impex Limited and wrote it off fully, within the same
year. (FY2016 annual report, page 126).
In FY2019, the company invested ₹36 cr in Reddy Antilles N.V., Netherlands and wrote it off in the same
year. (FY2019 annual report, page 137). DRL liquidated this subsidiary in FY2020 by writing off
everything (FY2020 annual report, page 138).

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4) Loss of money in equity shares:
Dr Reddy’s Laboratories Ltd lost money in equity instruments, especially twice.
In FY2020, it lost ₹240 cr in the shares of CURIS, INC as instead of cash, it accepted shares of Curis for
its collaboration agreement for R&D and commercialization of oncology drugs (FY2020 annual report,
page 276).
In FY2015, when the company entered into a collaboration agreement with Curis, then it accepted shares
of Curis, which gave it a 16.6% stake in the company. At that time, the market value of these stocks was
₹145 cr, which were listed on NASDAQ (FY2015 annual report, page 219).
Thereafter, as per the agreement, in FY2017, when DRL was to receive a payment of $24.5 million, then it
chose to accept 10.28 million shares of Curis instead of cash payment. The market value of these shares
was about ₹124 cr. (FY2017 annual report, page 239).
So, instead of taking cash, the company accepted shares of Curis as consideration and lost ₹240 cr in
FY2020 when the price of these shares declined.
This was not the only time when DRL lost money by taking exposure to equity markets. Previously, in the
1990s, when it had raised money through the GDR issue, then, instead of keeping the money in a bank
account/deposits, it chose to invest the money in the share market.
In FY1997, when the company needed to use this money, the share market was down and it lost nearly ₹10
cr by selling those shares at a loss.
When we made the GDR issue a couple of years ago, the inflow did not go immediately into asset
creation. We made financial investments instead – a mistake…The financial markets nosedived in
1996-97 and since we needed to fund our working capital requirements, we thought it best to sell
the investments. The resulting loss was written off from the profit and loss account
Going ahead, an investor should monitor whether the company takes unnecessary risks in stock markets
with its investments.
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5) Contingent liabilities of Dr Reddy’s Laboratories Ltd:
DRL has been facing a few investigations and litigations for a long time where it has even deposited part
of the penalty amount on the court’s insistence while its appeals are going on. An investor needs to keep a
close watch on the outcome of these litigations.
Since the 1990s, DRL has been involved in litigation with the National Pharmaceutical Pricing Authority
(“NPPA”) over the price of its drug, Norfloxacin. NPPA has put a penalty of ₹28.5 cr on DRL in FY2006
for overcharging for Norfloxacin. The appeal by DRL against the demand is currently going on.
Similarly, there is another demand by NPPA of ₹77 cr raised in FY2017 for overcharging of cardiovascular
and anti-diabetic drugs, which is also under appeal.
In the USA, two former employees (whistleblowers) of the company complained to the U.S. Department
of Justice (the “DOJ”) that the company has not done child-resistant packaging for some of its drugs. As
DOJ started its investigation, the company entered into a settlement agreement with DOJ by paying ₹32 cr
($5 mn). However, the whistleblowers have filed an appeal against the settlement, which is currently going
on.
In FY2020, DRL voluntarily recalled its Ranitidine medication from the USA as it contained a carcinogen,
NDMA. Thereafter, thousands of cases were filed against the company in the USA, which are still ongoing.
There are numerous cases going on against the company in the USA on the allegations that it did the price-
fixing of drugs with its competitors and also divided the market geography in collusion with other
companies, which was alleged to be anti-competitive practices.
There are a few litigations against the company by its former overseas partners alleging that it did not meet
the terms of the contract e.g. in Switzerland by Hatchtech Pty Limited, for which it had to pay $46.25
million (about ₹340 cr).
Currently, the company is facing an investigation by the Securities and Exchange Commission (“SEC”),
USA for allegations that the company paid improper money (?bribes) to doctors in Ukraine to sell its
products.
Additionally, there are a few cases where US govt. authorities claim that DRL did not file the correct data
to them and instead filed misleading data. In one such case, DRL agreed to pay $9 million on complaints
of the Public Employees’ Retirement System of Mississippi. In another case, DRL agreed to pay $12.9
million to the State of Texas. Currently, many other such cases are going on.
In India, DRL is facing cases against the pollution of land in Medak district against the Telangana State
Pollution Control Board (“TSPCB”). Similarly, it is facing cases of water and air pollution in areas of its
manufacturing plants.
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The Margin of Safety in the market price of Dr Reddy’s

Laboratories Ltd:
Currently (June 17, 2024), Dr Reddy’s Laboratories Ltd is available at a price-to-earnings (PE) ratio of
about 18.2 based on consolidated earnings of FY2024.
We recommend that an investor read the following articles to assess the PE ratio to be paid for any stock,
which considers the strength of the business model of the company as well. The strength in the business
model of any company is measured by way of its self-sustainable growth rate and the free cash flow
generating the ability of the company.
stock may be a sign of a value trap where instead of being a bargain; the low valuation of the stock price
may represent the poor business dynamics of the company.
Analysis Summary
Overall, Dr Reddy’s Laboratories Ltd seems a company that has worked hard on its research capabilities
and has made its place in the global pharmaceutical world. Due to its significant R&D investments, it has
become a big player in the largest pharmaceutical market of the world, the USA, which has led its sales to
grow more than 1,000 times from FY1990.
During the initial years, when the company’s scale of operations was small, then it raised money through
debt, equity dilution, funding partnerships to keep its high R&D spending and acquisitions to grow its
market size. Nevertheless, in the last 10 years, the company’s scale of operations has grown big and it is
able to produce a lot of surplus cash that it has used to do buybacks, pay dividends and make acquisitions.
The company has collaborated with many large overseas pharmaceutical companies to develop drugs,
marketing and distribution. The increased scale of operations has helped the company to be low-cost in the
commoditized business of generics and APIs and offer greater value to customers.
Nevertheless, the company has faced numerous litigations on its growth path. In some, it lost and had to
pay others whereas in a few and gained significant money from opposite parties.
Its business is highly regulated and at times, changes in govt. policies have led to significant losses to its
business e.g. in Germany (₹4,000 cr write-offs of Betapharm acquisition) and Venezuela (about ₹700 cr
write-offs). At times, it lost business when foreign regulators did not provide approval to its plants.
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Dr Reddy’s Laboratories Ltd’s business is working capital intensive as it has to keep a lot of inventory in
its global supply chain to meet customers’ demand on short notice and it has to provide a longer credit
period to overseas customers. Nowadays, every year, it loses almost ₹900-1000 cr in inventory write-offs
and refund obligations.
Over the years, the company has entered into a few related party transactions with its promoter-group
entities like acquiring land, sales & purchases of goods and services, buying/merging companies etc. which
provide opportunities to shift economic value from public shareholders to promoters.
Over the years, the company has done numerous impairments/write-offs of investments with almost ₹800-
1,500 cr annual write-offs on its recent drug acquisitions. In the past, it lost money by taking exposure to
equity markets and even by investing the GDR money into stocks.
The company faces numerous litigations in India and abroad including the USA, with govt. authorities and
private parties, where it might have to pay substantial money to settle the charges. An investor needs to
closely monitor the outcome of such litigations.
Going ahead, an investor should keep a close watch on the regulatory developments in the pharmaceutical
markets served by DRL, and the resolution of observations raised by USFDA on its plants.
Further recommended reading: How to Monitor Stocks in your Portfolio
These are our views on Dr Reddy’s Laboratories Ltd. However, investors should do their own analysis
before making any investment-related decisions about the company.
I hope it helps!
Regards,
Dr Vijay Malik
P.S.

Workshop Videos
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Analysis Excel
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4) Procter & Gamble Hygiene and Health Care Ltd

Procter & Gamble Hygiene and Health Care Ltd (PGHH) is a part of the Procter & Gamble (P&G) group,
USA. The company sells female hygiene products (Whisper sanitary pads), healthcare (Vicks) and men’s
grooming products (Old Spice) in India.
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Procter & Gamble Hygiene and Health Care Ltd does not have any subsidiaries or joint ventures; therefore,
it reports only standalone financials.
We believe that while analyzing any company, an investor should always look at the company as a whole
and focus on financials, representing the entire company’s business picture including its subsidiaries, joint
ventures, etc. Consolidated financials of a company present such a picture. Therefore, if a company reports
both standalone and consolidated financials, then in such a case, it is advised that the investor should prefer
the analysis of the consolidated financials of the company, whenever they are present.
Until now, PGHH has reported only standalone financials; therefore, we have used the standalone financials
in the analysis.
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Financial and Business Analysis of Procter & Gamble Hygiene and

Health Care Ltd:
In the last 10 years, Procter & Gamble Hygiene and Health Care Ltd has increased its sales at an annual
growth rate of 7% from ₹2,051 cr in FY2014 to ₹3,918 cr in FY2023. Further, sales of PGHH have
increased to ₹4,007 in 12 months ended Dec. 2023.
Over the last 10 years (FY2014-2023), the operating profit margin (OPM) of PGHH has fluctuated
significantly between 20% and 29%. The net profit margin (NPM) of the company has followed the trend
of its OPM and has varied from 14% to 19% during FY2014-FY2023.
In the below table, we have presented the data of sales, net profits and net profit margin (NPM) for the last
33 years (1991-2023) for Procter & Gamble Hygiene and Health Care Ltd.
In the 33-year historical performance of Procter & Gamble Hygiene and Health Care Ltd, an investor comes
across many periods where its sales declined e.g. FY1995, FY2001, FY2006, FY2007 and FY2016. On
many occasions, its net profit margins deteriorated even to the extent of net losses e.g. FY1992-FY1993.
During FY2003-FY2004, FY2007, FY2011-FY2013, FY2018-FY2020 and FY2022 are some of the
periods when PGHH suffered a significant decline in its profit margins.
To understand the reasons for such fluctuations in the business performance of Procter & Gamble Hygiene
and Health Care Ltd over the years, an investor needs to read the publicly available documents of the
company like annual reports from 1997 onwards, management interactions, presentations as well as
corporate announcements.
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influence the business of Procter & Gamble Hygiene and Health Care Ltd. An investor needs to keep these
factors in mind while she makes any predictions about the performance of the company.
1) Intense competition faced by PGHH in each of the product categories:
Procter & Gamble Hygiene and Health Care Ltd faces strong competition for each of its product segments:
Whisper (sanitary pads), Vicks (healthcare) and Old Spice (men’s grooming).
In the case of Whisper, it faces competition from financially strong MNC players like Johnson & Johnson
(Stayfree, Carefree), Kimberly Clark (Kotex), Unicharm (Sofy) and SCA Hygiene (Libresse). Other than
these MNCs, Indian players Mankind Pharma (Don’t Worry), Emami (She Comfort), Carmesi, Nua Woman
etc. are also present in the market.
Whisper continues to be the market leader despite stiff competition from other category players.
In the healthcare (cough and cold) category, PGHH’s brand (Vicks) faces competition from Reckitt
Benckiser (Strepsils), Dabur (Honitus), Halls, Himalaya (Koflet), etc.
At times, despite the well-established brand name and years of goodwill, sales of Vicks suffered due to
competition.
The cold tablets category witnessed intense competitive activity this year, due to which sales of
VICKS Action 500+ suffered…
In the men’s grooming segment, the company’s brand (Old Spice) faces competition from numerous players
like Unilever (Axe), Vini Cosmetics (Fogg), Raymonds (Park Avenue), Nivea etc.
Over FY2016-FY2019, sales of Old Spice brand declined sharply as competition beat it in getting
customers’ wallet share. The intensity of competition was so severe that Procter & Gamble Hygiene and
Health Care Ltd decided to pause further investments in the Old Spice brand.
Old Spice de-grew 15% on sales in the Financial Year 2015-16. It was a conscious choice to hold
back investments and review the right business model…there have been multiple new brand/form
launches
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Procter & Gamble Hygiene and Health Care Ltd acknowledged the high competitive intensity in its business
during its analyst meeting in Sept 2023.
Transcript of analyst meet by PGHH, September 2023, page 5:
Success in our highly competitive industry also requires agility
The company also acknowledged that over the years, the competitive intensity in the business has increased
as new players are entering the business.
How has competitive landscape changed over the last 5 years?…Yes, the competitive landscape
has evolved, and more competition has entered the category.
Apart from branded, organized players, PGHH also faces competition from unorganized players who form
about 5% of the market.
Unorganized segment is around 5% of the overall market share
Other than the competition from organized and unorganized players, Procter & Gamble Hygiene and Health
Care Ltd also faces the challenge of counterfeit, fake, lookalike products in the market. At one point in
time, fake, lookalike products impacted more than 50% of sales of Vicks Action 500.
There were close to 60 look-alike brands of various VICKS products in the market. Research
conducted by ORG and ACNielsen indicated that the pass-off products were impacting our Health
Care business upto 10% and in the case of VICKS Action 500 upto 54%.
On an overall basis, such fake, lookalike products impacted its business by 10%.
Such brands impacted our business up to 10%
An investor should keep track of initiatives undertaken by PGHH to counter competition including the
threat of pirated, fake, lookalike products.
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2) Pricing power of Procter & Gamble Hygiene and Health Care Ltd:
Due to severe competition in all the product categories from financially strong MNC and Indian players,
PGHH’s pricing power is limited.
For example, during FY2022 when raw material/commodity prices increased in post-covid recovery as well
as the sharp increase in the cost of sea trade, Procter & Gamble Hygiene and Health Care Ltd faced a big
hit on its profit margins as it could not pass on the increase in input costs without fearing loss of sales.
Transcript of annual general meeting (AGM), November 2022, page 5:
we are able to maintain a healthy net margin of 15pc despite an unprecedented

headwind…commodity inflation ranging from 35% to 84% and…impacted us by 40% of our
profits.
The company acknowledged that its price increase to customers was much lower than the increase of 40%-
80% in its input costs which led to a decline in profit margins.
on our key commodities we’re seeing between 40%-80% of commodity pricing. Our consumer
pricing is not in that range. It is much, much lower
The company told its shareholders in its 2023 AGM that it has to take the affordability of products to its
customers into account whenever it thinks about increasing prices even if it means that during periods of
sharp input price increases, it has to take a hit on its profit margins. If the company increases prices in line
with input price increases, then the customer may stop using its products and start using competitors’
products.
We have been balancing the need for pricing with consumer affordability in periods of steep
commodity up charges
In fact, in the past whenever the company decided to grow its business sharply, then it had to do so by
cutting its prices and compromising on profitability.
For example, during FY2011-FY2014, when PGHH nearly doubled its sales in 4 years from ₹1,037 cr in
FY2010 to ₹2,051 cr in FY2014, then it had to aggressively cut down prices and its NPM fell from 20% in
FY2010 to 12% in FY2013. The price cuts started in FY2011.
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In order to reach more consumers with our product offering, by addressing their biggest barrier
of affordability, Whisper Choice was priced down.
During FY2015 to FY2017, the company decided to focus on its profitability. It could improve its NPM
from 15% in FY2015 to 19% in FY2017; however, during this period, the company did not have any sales
growth as its sales declined marginally to ₹2,320 cr in FY2017 from ₹2,334 cr in FY2015.
Therefore, in the absence of pricing power, Procter & Gamble Hygiene and Health Care Ltd has to choose
between growth or profitability.
During FY2017-FY2019, when it grew its sales from ₹2,320 cr in FY2017 to ₹2,947 cr in FY2019, then its
net profit margin (NPM) declined from 19% in FY2017 to 14% in FY2020.
Low pricing power in the hands of PGHH is not a new challenge for the company. In FY2002, the company
realized that it is not able to grow its exports and as a result, due to its inability to reach a large scale of
production, its exports were becoming economically unviable as it was not able to beat competitors’ pricing.
Exports mainly of VICKS VapoRub to ASEAN, Australia and Japan remained stable…lack of
growth in exports is pushing cost per unit to a level which is becoming uncompetitive.
Whenever the company faced adverse taxation changes like an increase in excise duty, then the company
could not pass it on to the customers and as a result, its profit margins declined.
For example, in FY2011, when govt. increased excise duty, then it led to a decline in the profit margins of
Procter & Gamble Hygiene and Health Care Ltd.
While the sales have grown…(PBT) and…(PAT) have decreased…This is primarily due to
increased investments in marketing initiatives, higher commodity prices and impact of higher
excise duty for nine months.
Moreover, sales of Vicks are highly dependent on the monsoon and winter seasons. When the monsoon is
good, then purchasing power in the rural areas increases and when winter is severe, many people catch cold
and thereby sales of Vicks increase.
This unprecedented performance benefited from good monsoons, which not only increased rural
purchasing power but also increased demand for cold relief remedies.
This business is also heavily dependant on good monsoon and winter seasons.
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Also read: How to do Business Analysis of FMCG Companies
3) Compulsion of high advertisement spending for maintaining and growing

the business:
In the business of Procter & Gamble Hygiene and Health Care Ltd (PGHH), it is compulsory to
continuously do advertisements and be present in the mind space of the customer. In one of the annual
reports, PGHH clearly said that it is advertisements that lead to the consumption of its products and without
advertisements, it cannot be an effective seller.
Advertising drives FMCG consumption. And TV is the lifeblood of FMCG

Communication. Without TV Advertising we are nowhere as effective.
This is understandable because when a customer is faced with numerous choices of competing products,
all with acceptable quality and from financially strong players, then companies need to continuously remind
the customer about their product/brand so that she remembers it while making the next purchase.
Continuous advertisement is compulsory because the customer can easily replace the product of one
company with another without any significant loss of functionality.
For example, during FY2011, PGHH faced a low demand for Vicks Action 500 because other generic
products were providing a better value proposition to the customers. In response to declining sales, PGHH
had to increase advertising spending on Vicks Action 500 and then it could recover its demand.
Vicks Action-500 faced aggressive competitive challenge from generics during the Financial
Year. During the second half of the Financial Year, your Company invested in superior advertising
support for the product. This helped to recover demand for the product
However, due to aggressive advertisement spending in FY2011, the company definitely increased its sales
by 14% from ₹914 cr in FY2010 to ₹1,037 in FY2011, but, its net profit margin during the year declined
to 15% from 20% in FY2010.
As a result, it is usually seen that when companies need to grow their business, then they need to focus on
aggressive marketing by spending a lot more money than usual. On the contrary, if they cut down on
advertisement expenses, then their growth rate slows down.
In the below table, we have analyzed the advertisement, promotions and incentives expenses of Procter &
Gamble Hygiene and Health Care Ltd over the last 28 years (FY1996-FY2023) and presented them
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alongside sales growth of each year and the net profit margin (NPM) of the year to see the impact of
advertisement spending on sales growth and profitability.
In the above table, an investor would find many periods where aggressive advertisement spending led to
fast sales growth.
For example, in FY2006-FY2015 when PGHH sharply increased its advertisement spending from 8% of
sales in FY2006 to 18% of sales in FY2010 and continued it at about 14% until FY2015. During this period,
sales of PGHH increased almost four times from ₹597 cr in FY2006 to ₹2,334 cr in FY2015. However,
during this period, the profit margin of the company declined from 23% in FY2006 to 15% in FY2015 and
touched a low of 12% in FY2013.
Please note that in the above table despite high advertisement expenses in FY2006 and FY2007, the sales
seem to have declined. However, this decline is due to the transfer of detergent contract-manufacturing
business by PGHH to another Indian P&G subsidiary, Procter & Gamble Home Products Pvt. Ltd (PGHP).
Contract manufacturing of detergents for PGHP used to be a significant revenue source for PGHH. As a
result, during FY2006-FY2007, the sales of PGHH declined.
overall sales decreased 17%, this was primarily due to divestment of the detergent contract
manufacturing business during the year.
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current year’s sales does not include the divested detergent contract manufacturing
business whereas the previous base period had part (Rs. 92.4 crores) sale of this discontinued
business.
Thereafter, when to focus on profitability, in FY2016-FY2017, Procter & Gamble Hygiene and Health Care
Ltd (PGHH) cut down on advertisement spending from 14% in FY2015 to 9% in FY2016 and FY2017
each, then it definitely increased its net profit margin from 15% in FY2015 to 19% in FY2017. However,
its sales declined from ₹2,334 cr in FY2015 to ₹2,320 cr in FY2017.
Thereafter, the next year, in FY2018, the company changed tracks and attempted to regain sales growth. It
achieved sales growth by spending more money on advertisement; however, its profitability suffered.
Profit After Tax (PAT) was ₹375 crores, down 13% versus year ago largely behind increased
investments on product innovations and advertising.
The relationship between advertisement spending and sales growth is very old for PGHH. In FY1998, when
the company’s sales grew by 14%, then it intimated to its shareholders that it was due to aggressive
advertisement spending as it faced strong competition.
Competitive response in our business was keen during the year which resulted in higher
promotional and advertising expenditure. The total advertising and promotional expenses grew
from 7% of sales to 9%-.
In FY2003, the company increased its advertisement spending. It achieved higher sales growth, but its profit
margins declined from the previous year.
net profits after tax decreased…a 12% fall…primarily due to a one-time provision of
taxes…marketing investment…involving preseason advertising on VICKS and a large-scale
sampling of the newly launched WHISPER Maxi Extra Long
In FY2013, when PGHH relaunched the Old Spice brand, then in the initial period, it spent a lot of money
on its advertising and as a result, the Old Spice brand witnessed good sales growth.
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…Old Spice into your Company, Financial Year 2013-14 was a strong year for the brand, with
business results exceeding management expectations. This was behind our strong marketing
efforts and investments in advertising and distribution expansion.
Recently, in FY2021, the company increased its advertisement spending sharply to 15% of sales from 11%
of sales in FY2020. As a result, in FY2021, sales of PGHH grew by 19%.
In FY2023, when Procter & Gamble Hygiene and Health Care Ltd tried to control its advertisement
spending, its sales growth slowed down to almost zero.
Please note that in recent years, after the adoption of new Indian Accounting Standards (IndAS),
advertisement expenses seem lower because trade discounts, which earlier used to appear as a separate
expense are now netted from the sales. In the past, PGHH used to spend about 6% of sales (FY2014 and
FY2015) on trade discounts/incentives.
Revenue is measured net of trade discounts, rebates and various types of Marketing and
Distribution Activities such as incentives and promotions.
Therefore, an investor would appreciate that high sales promotion/advertisement spending is a compulsory
expense for PGHH and any attempt to reduce it immediately leads to a slowdown of growth.
4) Cost efficiency/productivity improvement by Procter & Gamble Hygiene

and Health Care Ltd:
We discussed earlier that PGHH does not have strong pricing power over its customers due to intense
competition from financially strong players with equally good products. As a result, it has to keep its prices
competitive otherwise the customer will switch to other manufacturers.
In addition to the low pricing power, PGHH has to compulsorily spend a large amount of money on
advertisements to sustain and grow its business.
In such a tough business environment, PGHH has to rely on cost competitiveness to improve its profit
margins.
Over the years, the company has taken multiple such steps.
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4.1) Getting rid of less profitable products:
Over the years, Procter & Gamble Hygiene and Health Care Ltd (PGHH) has removed many products from
its portfolio, which did not perform well.
For example, in the past, PGHH removed Mediker, Clearasil and Old Spice brands from its portfolio as
they were not doing good and their sales were declining.
Company has decided to focus all its financial and other resources in growing the WHISPER and
the VICKS…there are limited resources now directed towards brands such as OLD SPICE,
CLEARASIL and MEDIKER…sales of CLEARASIL and OLD SPICE during the year declined by
13%.
The company entered into an agreement with Marico Industries Ltd to sell off the Mediker brand and give
distribution of Clearasil and Old Spice.
Company divested MEDIKER anti-lice shampoo business to Marico Industries Limited for Rs. 10
crores…arrangement with Marico Industries Limited for distribution of CLEARASIL and OLD
SPICE.
Later on, in FY2003, Procter & Gamble Hygiene and Health Care Ltd licensed Old Spice to Meneses
Cosmetics P. Ltd. for 10 years.
Company licensed the OLD SPICE trademark and business to Menezes Cosmetics Private Ltd.,
Goa, for a period of ten years to manufacture, sell, distribute and market OLD SPICE products in
India, Sri Lanka and Bangladesh.
In addition, multiple times, before launching any product on a mass scale, the company test-launched it in
limited markets and when it did not meet the expectations, then withdrew it to prevent further losses.
For example, in FY1998, it withdrew two variants of Vicks when they did not meet expectations.
test market results for both VICKS VITAMIN-C and VICKS SUPER BALM were not
encouraging they are being withdrawn from the test market.
Similarly, in FY2001, it withdrew Tampax tampons when it did not do well in test markets.
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During the year TAMPAX tampons’ test market launch in Chennai and Madurai
was discontinued due to lower-than-expected consumer response.
In FY1997, the company intimated to its shareholders that its export sales had declined because it phased
out less profitable products.
Higher import tariffs, strict regulatory environment in Sri Lanka & Bangladesh and phasing out
of low profitability products have resulted in lower exports
4.2) Continuous focus on rationalizing the workforce by offering voluntary

retirement scheme (VRS):
Over the years, Procter & Gamble Hygiene and Health Care Ltd had continuously tried to reduce its
workforce and rely more on outsourcing/contract work.
During the initial part of available annual reports, during 10 years (FY1998 to FY2008), it reduced its
employee strength by almost two-thirds from 725 in FY1998 (page 4 of FY1998 annual report) to 250 in
FY2008 (page 6 of FY2008 annual report).
Company offered a VRS to approximately 60 employees by re-engineering our work processes
Even later on, the company continued to offer VRS to its employees.
Salaries and Wages includes ₹463 Lakhs (Previous year: ₹ Nil) towards expenditure on Voluntary
Retirement Scheme.
Salaries and Wages includes ₹58 lakhs (Previous year: ₹302 lakhs) for expenditure on Voluntary
Retirement Scheme.
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4.3) Optimizations in the manufacturing plants and processes:
Over the years, Procter & Gamble Hygiene and Health Care Ltd (PGHH) took many steps to improve its
manufacturing activities and save costs.
Recently, in FY2022, PGHH changed the nature of its arrangement with another Indian P&G company,
Procter & Gamble Home Products Pvt. Ltd (PGHP). Earlier, PGHH used the services of PGHP as a toll
manufacturer meaning PGHH used to procure raw material and give it to PGHP who in turn converted it
into finished goods that PGHH bought to sell in the market. In this arrangement, PGHH had the ownership
of raw materials/inventory.
Now, PGHH has changed the nature of this arrangement with PGHP to contract manufacturing i.e. PGHP
will buy raw material itself, convert it into finished goods and then sell these to PGHH. Now, the ownership
of inventory stays with PGHP.
Apparently, due to a change in the nature of the contract, PGHH is able to save about ₹10 cr every year.
In the year 2021-22, the Company had replaced the earlier Toll Manufacturing arrangement with
a Contract Manufacturing arrangement for abovementioned sourcing of sanitary napkin products,
in order to benefit from certain incremental pre-tax savings (~ ₹ 10 Crores per year)
Previously, when PGHH used to contract-manufacture shampoos for PGHP, then in FY1999, it decided to
stop that business because the change in formulation of the shampoo required a lot of new investment,
which was not making financial sense.
The manufacturing arrangement which your Company has with Procter & Gamble Home Products
Limited (PGHP) for shampoo manufacture will be terminated…since there has been a change in
the formulation of the product…This change…would necessitate a very high investment in capital
which we believe is not advisable.
On other occasions also, PGHH had taken multiple such steps to save on costs. For example, in FY2002, it
consolidated its manufacturing operations in Goa from two plants to one plant as it saved on operational
costs.
manufacturing operations at Honda, Goa were consolidated into the factory at Kundaim, Goa.
This will significantly reduce operational costs and improve efficiencies. As a result, VICKS
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VapoRub (for domestic sales) and WHISPER Feminine Hygiene products are now manufactured
at one location.
In FY2003, when exports of Procter & Gamble Hygiene and Health Care Ltd started losing competitive
advantage due to smaller scale, then it outsourced manufacturing of export products to achieve cost
efficiencies.
During the year, we have outsourced manufacturing of export products to a third party with a view
to achieve cost efficiencies and stay competitive
4.4) Other measures to improve efficiency:
Additionally, PGHH took steps to improve its advertisement spending and distribution functions to save on
costs.
Now the company has changed its approach from channel-specific to an integrated media approach as it
proved more resource-efficient.
Transcript of analyst meeting, September 2023, page 5:
We have moved away from media planning in silos (TV, digital, ecommerce separately) to an
Integrated Media Approach, where an algorithm powered with latest trends and historical
data…helps us achieve the maximum reach at the lowest cost
Similarly, the company improved its supply chain and distribution processes and could use its resources
more efficiently leading to quick movement of goods, and cost savings.
we are leveraging analytics to optimize total distance travelled and reduce number of touches by
the product, while improving our speed and reliability to market. This has led to 35% faster
speed to market, and reduction of around 6 million Kms
According to Procter & Gamble Hygiene and Health Care Ltd, due to its productivity improvement
initiatives, in FY2023, it could save ₹105 cr.
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Specifically last year, through our productivity interventions, this company achieved savings of
over Rs. 105 crores.
Also read: Operating Performance Analysis: A Simple & Complete Guide
5) Regulatory risk faced by Procter & Gamble Hygiene and Health Care Ltd:
Most of Vicks products of PGHH are effective medications for cough, cold, flu etc.; however, they are
considered safe to consume without medical prescription. Therefore, consumers can buy Vicks products
over the counter (OTC) from shops without doctor’s advice.
However, there have been times when govt. decided that the drug content of Vicks must be sold only after
a doctor’s prescription, which affected its sales.
government changed the regulations and mandated that dextro-methorphan hydrobromide

the active ingredient of VICKS Formula 44 Cough Syrup can only be sold under a doctor’s
prescription and not Over The Counter (OTC) as it earlier was…Sales of VICKS Formula 44, in
the meantime, continue to be adversely affected.
Therefore, an investor should closely monitor regulatory developments related to Vicks products as any
restriction to sell these products over-the-counter can have a serious impact on PGHH sales.
In the last 10 years (FY2014-2023), the tax payout ratio of Procter & Gamble Hygiene and Health Care Ltd
has largely been in line with the standard corporate tax rate in India except in FY2023 (19%), which was
due to a reversal of tax provision undertaken by the company as it received a favourable judgement in
another similar case.
Q1-FY2024 results, page 2:
During the previous year ended June 2023, the Company reversed tax provisions amounting to
Rs. 5,844 lakhs in respect of past Income Tax Litigations…based on a favourable ruling…in a
similar case
This reversal of the provision of income tax was the main reason for a sharp increase in PAT in FY2023 to
₹678 cr from ₹576 cr in FY2022.
In the past, PGHH has benefited from income tax incentives as it based its manufacturing plants in Goa and
Baddi, Himachal Pradesh when govts. gave perks for promoting manufacturing in these locations.
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Growth of 24% in profit after tax is the result of a lower tax rate applicable to the new Health
Care plant at Goa.
to take advantage of available tax benefits, we are setting up two new plants to manufacture
healthcare products at Baddi, Himachal Pradesh.
Tax incentives for Goa plant ended in FY2002 and the company witnessed an increase in tax payouts.
Profit After Tax at Rs.77 crores (Rs.82.7 crores in previous year) declined by 7% despite a 5%
increase in Profit Before Tax because our plants in Goa started passing out from the full tax
holiday period.
Now, the period of tax incentives for these plants is over and PGHH pays taxes at the standard corporate
tax rate of India. From FY2020 onwards, the company has opted for the new corporate tax regime.
The tax rate used for 2019-20 is the corporate tax rate of 25.168%.
Operating Efficiency Analysis of Procter & Gamble Hygiene and

Health Care Ltd:
a) Net fixed asset turnover (NFAT) of Procter & Gamble Hygiene and Health
Care Ltd:
The net fixed asset turnover (NFAT) of Procter & Gamble Hygiene and Health Care Ltd (PGHH) in the
past has improved from 8.5 in FY2015 to 23.5 in FY2023. The improvement of NFAT indicates that the
company has improved its efficiency of asset utilization.
Nevertheless, an asset turnover ratio of 23.5 indicates that the company is using an asset-light approach to
manufacturing by relying more on outsourcing its production. For example, it relies on procuring goods
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from another Indian P&G subsidiary, Procter & Gamble Home Products Pvt. Ltd (PGHP) where it recently
changed the contract from toll manufacturing to contract manufacturing.
Going ahead, an investor should keep a close watch on the fixed asset turnover levels of the company to
assess if it continues to efficiently utilize its plants.
b) Inventory turnover ratio of Procter & Gamble Hygiene and Health Care Ltd:
Over the years (FY2014-23), the inventory turnover ratio (ITR) of the company has been in the range of
about 15-19. An ITR of 15 and above indicates that the company utilizes its supply chain very efficiently
so that only a minimal amount of inventory is there in the system.
In recent years, ITR seems to have improved from 15.7 in FY2021 to 17.3 in FY2023, primarily due to a
change in outsourcing arrangement between PGHH and PGHP from toll manufacturing to contract
manufacturing.
In toll manufacturing, PGHH used to buy and provide raw materials to PGHP for conversion into finished
goods. So, the raw material used to be on the books of PGHH. Whereas in contract manufacturing, PGHP
purchases raw material and converts it into finished goods; thereby, removing the raw material from the
books of PGHH and leading to improvement in the inventory position of PGHH.
In the past, PGHH has consistently written off inventory for about 7-10 cr every year, which might be
probably due to products expired off the shelf or damages during transportation etc. For example, in FY2020
and FY2021, it wrote off inventory worth ₹11.8 cr and ₹10.7 cr respectively.
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whether it can maintain the efficiency of its inventory utilization.
c) Analysis of receivables days of Procter & Gamble Hygiene and Health Care
Ltd:
Over the years, the receivables days of Procter & Gamble Hygiene and Health Care Ltd have stayed in the
range of 16-21 days. In FY2023, it reported receivables days of 19 days.
Stable receivables days over the years indicate that PGHH has collected its money from its customers on
time.
Going ahead, an investor should continue to monitor the receivables position of the company to check if it
continues to collect its money on time from its customers.
operations (cCFO) of Procter & Gamble Hygiene and Health Care Ltd for FY2014-23, then she notices that
over the last 10 years (FY2014-FY2023), the company has converted its profit into cash flow from
operations.
Over FY2014-23, Procter & Gamble Hygiene and Health Care Ltd reported a total net profit after tax
(cPAT) of ₹4,636 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of
₹5,123 cr.
Learning from the article on CFO will indicate to an investor that the cCFO of Procter & Gamble Hygiene
and Health Care Ltd is higher than the cPAT due to the following factors:

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The Margin of Safety in the Business of Procter & Gamble Hygiene

and Health Care Ltd:

of a Company
target growth.
Where,

Over most of the years, Procter & Gamble Hygiene and Health Care Ltd had an SSGR in negatives.
However, the company is able to sustain its growth rate of 7% over the last 10 years (FY2014-23) without
any debt.
The answer lies in the fact that the SSGR of PGHH is not negative due to a capital-intensive business model
with low-profit margins. On the contrary, its business model is very asset-light with NFAT exceeding 20
and good profit margins. Its SSGR is low/negative because, over the years, PGHH has given large dividend
payouts to distribute its surplus cash to shareholders.
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Over the years, the dividend payout ratio of PGHH has been very high and has exceeded 100% at times
indicating that it distributed cash accumulated over the years to its shareholders. The following is the
dividend payout ratio of PGHH for FY2017 to FY2023 sequentially: 292%, 35%, 68%, 79%, 157%,
90% and 89%.
Due to its asset-light business, PGHH was able to maintain its sales growth well within its internal cash
flows and was accumulating surplus cash; therefore, it paid out dividends liberally including large special
dividends.
An investor arrives at the same conclusion when she analyses the free cash flow position of the company.
b) Free Cash Flow (FCF) Analysis of Procter & Gamble Hygiene and Health
Care Ltd:
While looking at the cash flow performance of Procter & Gamble Hygiene and Health Care Ltd for the last
10 years (FY2014-FY2023), an investor notices that it generated cash flow from operations of ₹5,123 cr.
During the same period, it made a capital expenditure of about ₹328 cr.
Therefore, during this period (FY2014-FY2023), Procter & Gamble Hygiene and Health Care Ltd had a
free cash flow (FCF) of ₹4,795 cr (=5,123 – 328).
of ₹73 cr. As a result, the company had a total free cash flow of ₹5,219 cr (= 4,795 + 498 – 73). Please note
Procter & Gamble Hygiene and Health Care Ltd used its free cash flow for paying dividends of about
₹4,466 cr and has increased its cash & investment balance by about ₹709 cr from ₹269 cr in FY2014 to
₹978 cr in FY2023.
Going ahead, an investor should keep a close watch on the free cash flow generation by Procter & Gamble
Hygiene and Health Care Ltd to understand whether the company continues to generate surplus cash from
its business.

FCF

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Additional aspects of Procter & Gamble Hygiene and Health Care

Ltd:
On analysing Procter & Gamble Hygiene and Health Care Ltd and after reading annual reports, its credit
rating reports and other public documents, an investor comes across certain other aspects of the company,
which are important for any investor to know while making an investment decision.
1) Related party transactions of Procter & Gamble Hygiene and Health Care
Ltd:
PGHH is one of the group companies of P&G group, USA. Overall, P&G group has four companies in
India, three are listed and one is unlisted:
• Procter & Gamble Hygiene and Health Care Ltd (PGHH, listed)
• Procter & Gamble Home Products Pvt. Ltd (PGHP, unlisted)
• Gillette India Ltd (Listed) and
• Procter & Gamble Health Ltd (PGHL, listed, previously Merck Limited)
Out of these, the first three, PGHH, PGHP and Gillette are in the FMCG domain and the fourth one PGHL
is in the pharmaceutical business.
On analyzing, an investor notices that P&G group runs its Indian FMCG companies as one single strategic
unit with the same management running three companies: PGHH, PGHP and Gillette. Currently, the
managing director of PGHH, Mr L. V. Vaidyanathan is also the MD of Gillette and also serves the unlisted
entity, PGHP.
As per the FY2023 annual report, the three FMCG companies, PGHH, Gillette and PGHP share his
remuneration cost in proportion to their sales.
Mr. L. V. Vaidyanathan is paid by the Company and portion of the remuneration is cross charged
to P&G Group Companies, Gillette India Limited and Procter & Gamble Home Products Private
Limited in proportion to their respective Net Outside Sales.
In the past, managing directors, Mr S Khosla and Mr Madhusudan Gopalan also looked after all three
FMCG companies.
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The re-appointment of Mr. Khosla as the Managing Director of the Company is notwithstanding
the fact that he has been re-appointed as the Managing Director of Procter & Gamble Home
Products Limited and Gillette India Limited
Mr. Madhusudan Gopalan is paid by the Company and portion of the remuneration is cross
charged to Gillette India Limited and Procter & Gamble Home Products Private Limited in
proportion to their respective Net Outside Sales
All the P&G group companies share common infrastructure for services like IT, accounting, secretarial,
purchasing systems etc. and divide expenses among each other as “Business Process Outsourcing
Expenses”.
Transcript of AGM, November 2022, page 31:
Business Process Outsourcing Expenses…These are the cost of shared services that your
company uses but which are incurred centrally… Information
Technology Services, Accounting Services, Purchasing Systems, Secretarial Services and so on.
When the management of P&G looks at all the FMCG companies as one single pool of resources like three
departments of a single company, then it keeps moving brands, manufacturing activities, money etc. from
one company to another.
Let us see some of the instances of such transfer of assets/resources from PGHH to other companies P&G
group.
1.1) Loans given by PGHH to other P&G companies, using it like a bank:
Over the years, P&G Group has used Procter & Gamble Hygiene and Health Care Ltd as a bank due to its
surplus cash-generating ability.
As per the latest data, on Dec. 31, 2023, it has given about ₹350 cr. to P&G affiliate companies. As per the
cash flow statement disclosed by PGHH with its Q2-FY2024 results, during the last 6 months, it gave ₹700
cr to its affiliate companies and received ₹350 cr back indicating that ₹350 cr is outstanding.
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In the past, P&G group companies have taken substantial sums of money from PGHH whenever they
needed it. For example, in FY2014, as per the related party transactions section of the annual report, P&G
group companies took loans of more than ₹2,200 cr from PGHH.
Out of these, loans of ₹1,911 cr were taken by Procter & Gamble Home Products Private Limited (PGHP),
which is the unlisted, wholly-owned subsidiary of P&G group.
1.2) Transfer of brands, manufacturing plants etc. from one group company
to another:
Initially, Procter & Gamble Hygiene and Health Care Ltd used to sell detergents as well (currently, P&G
has Ariel and Tide brands of detergents). However, in FY1993, PGHH sold its detergent brands to the
unlisted FMCG company of P&G group, Procter & Gamble Home Products (PGHP).
(Source: IndiaInfoline)
During the year 1993, P&G had divested the Detergents business to Procter & Gamble Home
Products.
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However, PGHH continued to manufacture detergents at its Mandideep plant in Madhya Pradesh for PGHP.
At one point in time, contract manufacturing of detergents for PGHP was one of the largest revenue sources
for PGHH.
In FY2005, the soaps and detergents segment, which included contract manufacturing of detergents for
PGHP constituted about 45% (₹331 cr) of its overall sales (₹738 cr).
All the P&G FMCG companies share the same sales network and they share their expenses. So, it is the
same salesperson who goes to the distributor and retailers to sell the detergent whether it is marketed by
PGHH or PGHP. So, irrespective of the entity, the work of the selling channel is the same.
Therefore, such transactions of transferring marketing rights from one group entity to another are usually
ways to transfer different steps of value addition to the desired entity. In this case, if the marketing of
detergents was a higher value-adding activity than manufacturing them, then by shifting brands to PGHP
and keeping manufacturing in PGHH, the P&G management might have ensured that PGHH is left with
only low-margin contract manufacturing part and high-margin marketing part goes to unlisted PGHP.
In FY2006, P&G group transferred the Mandideep plant, which manufactured detergents, from PGHH to
PGHP; effectively removing the detergent business from PGHH.
Effective October 1, 2005 your Company has transferred non-core detergent manufacturing
business to Procter & Gamble Home Products Limited… this transfer though will impact the top-
line by over Rs. 200 crores annually
Until FY1999, Procter & Gamble Hygiene and Health Care Ltd used to manufacture shampoos for the
unlisted, wholly owned subsidiary of P&G group, PGHP. Currently, P&G has shampoo brands like Heads
& Shoulders, Pantene and Rejoice.
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The manufacturing arrangement which your Company has with Procter & Gamble Home
Products Limited (PGHP) for shampoo manufacture will be terminated during the current year
Such transfer of money, resources and assets from one company to another may seem perfect without any
issues if all the companies are wholly-owned subsidiaries or private entities of P&G group. However, when
some entities like PGHH and Gillette are listed with stakes owned by public shareholders, then each of
these transactions opens up avenues where economic benefits can be transferred from public shareholders
of one listed company to shareholders of other entities.
1.3) Large sales, purchases, expense sharing, reimbursements between

P&G companies:
As mentioned earlier, P&G Group seems to consider all its entities as different segments of a single strategic
entity. As a result, it manages many business functions centrally and then expenses are allocated among
companies.
In addition, the P&G management bifurcates the overall value-addition chain of manufacturing and
marketing a product between different companies probably based on its preferences about in which entity
it plans to keep maximum profits.
As a result, each P&G company e.g. PGHH ends up making a large amount of sales, purchases and expense
sharing with other group entities.
For example, as per the FY2023 annual report, pages 132-133, in FY2023, PGHH had related party
transactions of more than ₹1,500 cr with other P&G group entities. These transactions included the purchase
of goods of ₹760 cr, reimbursement of shares expenses both paid and received of more than ₹550 cr, and
processing charges of more than ₹150 cr.
As discussed earlier, such transactions are ok if all the companies are wholly-owned subsidiaries or private
entities of the P&G group. However, when some of the entities are listed, then each of these transactions
provides avenues for transferring economic benefits from shareholders of the listed entity to other entities.
For example, the management may make the listed entity sell goods to the unlisted entity at a discount to
the market price or make it purchase goods from the unlisted entity at a premium to the market price. Such
transactions can transfer economic benefits from the minority shareholders of the listed company to the
shareholders of the unlisted entity.
Moreover, when asked about any plans for a merger of the unlisted company (PGHP) with the listed entities,
which may remove many of the above-perceived issues, the management has denied it stating that the
current structure is working well for them.
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Plans to merge with other unlisted entities in India…we can’t comment on this price sensitive
information, our current corporate structure in India is delivering strong results.
1.4) Royalty payments:
Currently, P&G group charges Procter & Gamble Hygiene and Health Care Ltd a royalty of more than 5%
of its sales. As per the FY2023 annual report, page 116, PGHH paid a royalty of ₹212 cr on its sales of
₹3,918 cr, which is about 5.4%.
Over the years, the royalty payment as a percentage of sales has gone up significantly.
In FY1996, PGHH paid a royalty of 1.8% (₹6.67 cr) on sales of ₹366 cr. (FY1997 annual report, page 13).
In FY2005, the rate of royalty payment by PGHH increased to 2.4% (₹17.8 cr) on sales of ₹738 cr (FY2005
annual report, page 20.
In FY2006, the royalty rate increased to 4.1% (₹24.5 cr) on sales of ₹597 cr (FY2006 annual report, page
22.
In FY2007, PGHH paid a royalty rate of 4.9% (₹27 cr) on sales of ₹553 cr (FY2007 annual report, page
24).
As per the company, it pays royalty to the global parent company for technology and trademark utilization.
PGHH does not spend any money on research and effectively pays royalty to the parent company to benefit
from its research activities.
Company has not incurred any expenditure on research and development during the Financial
Year.
However, as the royalty payments have consistently increased from 1.8% to now more than 5% of sales;
an investor may make her own opinion on whether royalty is a mechanism by the parent company to benefit
ahead of other shareholders who only get dividends from the company.
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1.5) Related party transactions with employees/relatives:
In the past, there have been cases where Procter & Gamble Hygiene and Health Care Ltd entered into
transactions with relatives of its senior management.
For example, in FY2003, PGHH took on rent a flat from Ms. Sheela Patel who was the wife of its then
chairman, Mr B V Patel.
Mrs Sheela Patel, wife of Mr B V Patel was paid rent at market rates for letting out her flat to the
Company
An investor would appreciate that such transactions of the company with its management, which are not a
part of their remuneration contract, may open up channels for passing undue benefits to employees and
hamper the alignment of interests of the management and shareholders.
2) Risk of global parent favoring unlisted entity over PGHH:
As mentioned earlier, when the business of P&G in India is spread in listed as well as unlisted entities and
P&G runs these companies like divisions of one single strategic entity, then there is always a risk that while
taking strategic decisions like allotment of new brands, products or higher value-adding businesses, the
parent may prefer the wholly-owned unlisted entity over public listed entities.
This is because in the listed entity, other than the global parent, various other public shareholders are also
present with whom the global parent would have to share the fruits of the business. Whereas, from the
perspective of the global parent, such business decisions hardly make any on-ground implementation
changes because all the P&G FMCG entities in India have the same management (Managing Director etc.),
same sales force, procurement, administration, IT teams etc.
So, the work for the global parent is the same whether it launches a new product/brand in the listed entity
or the unlisted, private entity. But, in the case of a listed entity e.g. PGHH, it will have to share about 30%
of profits with others/public/minority shareholders (holding 29.36% stake in PGHH), whereas it can keep
100% of profits with itself if it launches the product in a private, unlisted, wholly-owned subsidiary, PGHP.
Therefore, shareholders of Procter & Gamble Hygiene and Health Care Ltd always face the risk of the
global P&G parent favouring other entities than PGHH.
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For example, recently, P&G group has announced a ₹2,000 cr capex in Gujarat for its export business of
digestives (Source: P&G India to invest ₹2,000 crore to set up export hub in Gujarat:
Livemint).
For this capex, the management of P&G has clearly said that this capex is not a part of PGHH.
The recently announced capex of Rs. 2000 Cr in digestives for exports will be done under
P&GHH, if Yes, then by why it would get completed: The announcement pertains to a different
legal entity.
In the past, while launching brands like Pampers, P&G preferred its unlisted, wholly-owned entity, P&G
Home Products (PGHP) to PGHH despite baby diapers and sanitary napkins being common categories for
many of its peers. (Source: P&G unveils $6 bn diaper brand in India: Economic Times,
Dec. 12, 2006)
Therefore, investors of Procter & Gamble Hygiene and Health Care Ltd should always be aware of this
aspect while assessing future perspectives of the company.
3) Weakness in processes and controls at Procter & Gamble Hygiene and

Health Care Ltd:
There are a few instances in the past that indicate the processes and controls at PGHH leave scope for
improvement.
For example, in FY2023, the company appointed an independent director who was more than 75 years of
age; however, it did not take prior approval from shareholders for his appointment. Due to this
noncompliance, NSE and BSE put a monetary penalty on PGHH.
except while appointment Mr. Gurcharan Das as an additional Independent Director…age of 78

years on the date of appointment, the Company has not taken prior approval of
shareholders…both the Stock Exchanges imposing penalty of ₹ 1,06,200/- each.
In the past, on multiple occasions, PGHH delayed the deposit of undisputed statutory dues to govt.
authorities.
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For example, as per the FY2012 annual report, page 22, it did not deposit TDS (tax deducted at source) to
govt. authorities even after 6 months when it became due.
In FY2007, it delayed the deposit of TDS as well as dues for IEPF (Investors Education Protection Fund)
for more than 6 months (FY2007 annual report, page 17).
In FY2001, it delayed the deposit of TDS to govt. authorities for more than 6 months (FY2001 annual
report, page 13).
Such payment delays by PGHH for undisputed dues are not only limited to statutory dues. Currently, the
company has undisputed trade payables that have been pending for payment for more than three years.
Payables of more than ₹7 cr are pending for payment for more than one year even when there is no dispute
about PGHH’s liability for payment.
4) Certain business decisions of Procter & Gamble Hygiene and Health Care
Ltd:
4.1) Intercorporate deposits:
During the initial part of its financial history for which annual reports are available (since 1997), significant
sums of money moved out of the company as intercorporate deposits (ICDs). These deposits were not loans
to related parties/P&G group companies as they were not mentioned in the related party transaction section
of annual reports.
In FY1996, the company had given ICDs of about ₹18 cr (FY1997 annual report, page 19). However, at
times, PGHH had put substantial sums of money into these ICDs. For example, in FY2002, the company
had paid out ₹103 cr as ICDs.

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As per the FY2008 annual report, page 24, PGHH had ₹94 cr of ICDs outstanding on June 30, 2008. The
company continued to give ICDs until FY2010 when it received its ₹72 cr of ICDs back and the outstanding
balance became zero.
An investor may contact the company directly to understand who was the counterparty to whom it had
given these ICDs and why it preferred ICDs as a method of deploying cash instead of using it for investment
in the business or as dividend payment to shareholders.
4.2) Manufacturing plant, Honda, Goa:
Originally, Procter & Gamble Hygiene and Health Care Ltd had two manufacturing plants in Goa, Kundaim
and Honda.
In FY2002, the company moved manufacturing activities from the Honda plant to Kundaim for cost
efficiency. The management said that it plans to optimally utilize this plant’s assets including their sale.
During the year, the manufacturing operations at Honda, Goa were consolidated into the factory
at Kundaim, Goa…We are examining ways to optimize use of assets of the Honda facility including
its sale.
However, the management could not make any optimal use of the plant’s assets and the next year, in
FY2003, it wrote down (impaired) its value by about ₹10.5 cr.
Company had discontinued the production at Honda plant…value of the assets at Honda plant has
been written down by Rs 10 46 59 317
Thereafter, in FY2010, PGHH once again impaired its plant by ₹5.6 cr. However, it did not mention, which
plant it has impaired in the year.
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During the year, Plant & Machinery has been impaired at its plant sites amounting to ₹ 5 63 14
749 (Previous year: ₹ Nil).
Subsequently, in FY2018, the company intimated to its shareholders that it had impaired its redundant plant
further by ₹12.6 cr. and is now classifying it as “held for sale.”
Certain Property, Plant and Equipment have been tested for impairment and a loss amounting to
₹1 259 lakhs has been recognized…These were rendered redundant due to Company moving its
manufacturing facility from one location to another. The said assets are now being classified as
‘Held for sale’
In FY2020, the management further impaired its Honda plant by ₹13.9 cr.
further impairment loss amounting to ₹1 388 lakhs has been recognized…company intends to
dispose off the said PPE…continue to be classified as held for sale as at June 30, 2020.
In FY2021, even after about 20 years since the Honda plant was made redundant, the management could
not find an optimal solution for the same and it fully impaired the plant.
…these assets have been fully impaired…and an impairment loss amounting to ₹764 lakhs has
been recognized…continue to be classified as held for sale…since the management intends to
dispose off these assets
As per the latest annual report, in FY2023, the plant is yet to be sold/disposed of.
assets continue to be classified as held for sale as at June 30, 2023, since the management intends
to dispose off these assets
An investor may contact the company directly to understand the reasons why it could not sell the Honda
plant even after more than 20 years when it went out of use and as a result, it had to be fully impaired.
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4.3) Impairment of land:
Usually, land is an asset that is not impaired as it retains its value as land can always be put to different
uses.
However, in FY2004, Procter & Gamble Hygiene and Health Care Ltd impaired one of its land parcels in
Hyderabad.
During the year the value of land at Hyderabad has been impaired by Rs 1 27 59 715.
An investor may contact the company directly regarding this impairment of land and what circumstances
led to the land losing its value substantially.
In addition, at times, the management of PGHH could not put up a proper supply chain of raw materials
and as a result, its sales suffered.
For example, in FY2001, sales of Vicks Vaporub suffered as the management could not source its packaging
at peak season for its demand leading to a loss of business.
VICKS VAPORUB sales declined by 4% mainly due to supply constraints of the new 10 gm plastic
flat pack during the peak colds season (viz October to January) last year.
5) Management Succession of Procter & Gamble Hygiene and Health Care

Ltd:
Procter & Gamble Hygiene and Health Care Ltd is a part of the P&G group and has access to a large pool
of professional managers across its different companies globally. The company has a history of appointing
as managing directors, people who have been with P&G group for more than a decade and have worked
across different countries.
Therefore, over the years, P&G group has provided continuity in leadership to PGHH and it does not depend
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6) Data presented in the annual report:
In many annual reports, in the cash flow statement, Procter & Gamble Hygiene and Health Care Ltd
classified interest/finance expenses as an outflow under cash flow from operating activities (CFO) whereas
the usual convention is to classify it as an outflow under cash flow from financing activities (CFF).
For example, in the FY1997 annual report, on page 19, PGHH included interest paid as an outflow in CFO.
The company continued this practice of including interest paid as an outflow under CFO until FY2004 and
from FY2005 onwards, it started classifying interest paid as an outflow under CFF.
In the recent annual reports, PGHH has clubbed a large amount of expenses as “miscellaneous expenses”
under the note “other expenses” without providing details of what these substantially large expenses pertain
to.
For example, in FY2023, PGHH disclosed miscellaneous expenses of ₹96.5 cr and in FY2022, it was ₹76.3
cr (FY2023 annual report, page 116).
In FY2021, miscellaneous expenses were ₹84.4 cr and in FY2020, it was ₹70.2 cr (FY2021 annual report,
page 97).
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For any information on the break-up of miscellaneous expenses, an investor may contact the company
directly.
The Margin of Safety in the market price of Procter & Gamble

Hygiene and Health Care Ltd:
Currently (March 15, 2024), Procter & Gamble Hygiene and Health Care Ltd is available at a price-to-
earnings (PE) ratio of about 67 based on consolidated earnings of the last 12 months (January 2023 to
December 2023). An investor would appreciate that a PE ratio of 67 does not offer any margin of safety in
the purchase price as described by Benjamin Graham in his book The Intelligent Investor.
stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price
Analysis Summary
Overall, Procter & Gamble Hygiene and Health Care Ltd (PGHH) has grown its sales at a rate of about 7%
over the last 10 years (FY2014-2023). During this period, the operating profit margin (OPM) has fluctuated
significantly between 20% to 29%. This is due to intense competition faced by PGHH from financially
strong large MNCs, and Indian players as well as from pirated, fake and lookalike products.
The presence of equally good products from other MNCs provides a lot of choices to customers, which has
impacted the pricing power of PGHH. As a result, it cannot pass on an increase in input costs to customers
without factoring in affordability. At times, it had to take a significant hit on its profitability when raw
material prices increased sharply because it could not pass it on to customers.
Moreover, because of easy replaceability by customers, the company has to continuously spend a large
amount on advertisement and business promotion to stay in the minds of customers. Otherwise, the
company faces a high risk of losing market share. In the past, the company faced periods where demand
for its products declined and it had to spend aggressively on advertisements to revive demand.
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However, due to intense competition, it could not pass on the impact of increased advertising costs to
customers and had to take a hit on its profitability. Therefore, for PGHH, it has become a game of choosing
between high advertisement spending-led growth with lower profit margins or cutting down on
advertisements to increase profitability but then losing on sales growth. So, at different times in the past,
the company had to choose between high growth or high profitability.
Due to strong price-based competition, the company has to improve its operating efficiency and cut down
on costs to improve its profitability. As a result, it removed less profitable brands from its portfolio, closed
down inefficient plants, and changed outsourcing arrangements to save on costs. It relies more on
outsourcing of manufacturing as well as workforce to run an asset-light business model. At one point,
during FY1998-2008, the company had reduced its workforce by two-thirds.
The company had to continuously find ways to increase productivity through supply chain, distribution
process improvements and optimization of advertising spending.
Due to a focus on asset-light business and good working capital efficiency, Procter & Gamble Hygiene and
Health Care Ltd has generated a lot of surplus cash from its operations. As the company has not invested
money in any large capital expenditure; therefore, over the years, it has paid out large dividends to its
shareholders.
However, at times, the company has used its surplus cash to provide financial support to other P&G group
companies. It is like PGHH has acted as a banker to these companies by giving loans of more than ₹2,000
cr to them whenever they had a requirement of funds.
Global P&G management treats all its Indian subsidiaries involved in the FMCG business as one unit i.e.
like different divisions of the same strategic unit. Therefore, all Indian P&G subsidiaries whether listed or
unlisted, have the same senior management i.e. same person as the managing director. Therefore, P&G
keeps on freely moving money and material between Indian subsidiaries.
Over the years, P&G management has shifted brands and manufacturing plants from PGHH to its unlisted,
private, wholly-owned subsidiary, P&G Home Products (PGHP). It has also preferred PGHP while
introducing new brands and products in India. One of the reasons for the same may be that P&G can have
full benefits of all the profits of business done in the unlisted entity whereas it has to share a part of profits
with minority/public shareholders if it launches any product/brand in the listed companies like PGHH.
In addition, P&G Group manages the business functions of all the subsidiaries centrally. Therefore, there
are numerous large related party transactions of PGHH with other entities like purchase and sale of goods,
reimbursement of expenses, process charges etc., which at times have exceeded ₹1,500 cr annually.
P&G global entities provide research & development support and technology to PGHH and in return charge
royalty. Over the years, royalty payments by PGHH have increased from less than 2% to now, more than
5%. An investor may assess whether royalty payments are a method of the global P&G companies to benefit
ahead of other shareholders.
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At times, decisions of the management of PGHH indicated that there is a scope for improvement in
processes, controls etc. Once, it did not take shareholders’ approval before appointing an elderly person as
an independent director even though it was legally required. At other times, it delayed undisputed payments
to govt. authorities as well as other suppliers.
The management closed down its Honda plant in FY2002; however, it seems that thereafter, it forgot about
it. Subsequently, in FY2018, it was like the management remembered this plant and then started writing its
assets down and by FY2021, fully impaired it while claiming that it intends to sell it off. However, despite
a passage of more than 20 years (since FY2002), the management has yet to do any optimal use/sale of the
Honda plant.
Going ahead, an investor needs to keep a close watch on the competitive intensity and pricing power of the
company. It needs to monitor if the company’s products are able to gain genuine customer interest or if the
company is pushing the products in the market with the force of high advertisement spending. She needs to
check on the productivity improvement steps taken by the management and whether it is able to maintain
asset utilization and working capital efficiency.
The investor needs to see if global P&G management favours its private, unlisted entity over PGHH for
launching new brands/products or treats it as a stable cash flow source to receive dividends, which it
reinvests in its other entities.
She needs to continuously monitor related party transactions of PGHH with other P&G group companies
because each of these transactions opens up avenues for shifting economic benefits from public/minority
shareholders to global P&G shareholders.
These are our views on Procter & Gamble Hygiene and Health Care Ltd. However, investors should do
their own analysis before making any investment-related decisions about the company.
I hope it helps!
Regards,
Dr Vijay Malik
P.S.

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Workshop Videos
Analysis Excel
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5) Abbott India Ltd

Abbott India Ltd, a part of Abbott Group, USA, is a leading pharmaceutical company in India with leading
brands like Thyronorm, Digene, Cremafin, Brufen, and Duphaston among many others.
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Abbott India Ltd does not have any subsidiary or joint venture etc.; therefore, it reports only standalone
financials.
We believe that while analyzing any company, an investor should always look at the company as a whole
present.
Until now, Abbott India Ltd has reported only standalone financials; therefore, we have used the standalone
financials in the analysis.
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Financial and Business Analysis of Abbott India Ltd:

In the last 10 years, Abbott India Ltd has increased its sales at an annual growth rate of 11% from ₹2,289
cr in FY2015 to ₹5,849 cr in FY2024.
Over the last 10 years (FY2015-2024), the operating profit margin (OPM) of Abbott India Ltd has almost
consistently increased from 14% in FY2014 to 25% in FY2024. The net profit margin (NPM) of the
company has followed the trend of its OPM and has increased from 10% in FY2015 to 21% in FY2024.
In the below table, we have presented the data of sales, net profits and net profit margin (NPM) for the last
36 years (1989-2024) for Abbott India Ltd.
In the 36-year historical performance of Abbott India Ltd, sales of the company declined only once in
FY2005. In 1995 and 2001 also, the sales had declined; however, at these times, the company reported
financial performance of lesser duration of 9 months and 11 months respectively.
However, over the last 36 years, the net profit margin on the total income (operating + non-operating
income) of the company has fluctuated significantly. NPM was 7% in FY1991; it declined to 3% in FY1995;
increased to 22% in FY2004; declined to 6% in FY2010. Thereafter, the NPM has almost consistently
increased to 21% in FY2024.
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To understand the reasons for such fluctuations in the business performance of Abbott India Ltd over the
years, an investor needs to read the publicly available documents of the company like annual reports from
1997 onwards, management interactions as well as its corporate announcements.
In addition, an investor should also read the following article in which we have highlighted key factors
influencing the business of pharmaceutical companies: How to do Business Analysis of
Pharmaceutical Companies
After going through the above-mentioned documents and article, an investor notices the following key
factors, which influence the business of Abbott India Ltd. An investor needs to keep these factors in her
mind while she makes any predictions about the performance of the company.
1) Intense competition in the formulations business in the Indian

pharmaceutical market:
The pharmaceutical market in India is highly fragmented. As per the company, the top 10 companies control
only about 43% share of the market. (FY2020 annual report, page 56).
As per one older estimate, India contains about 24,000 pharmaceutical companies and almost 99% of them
are in the unorganized sector.
The Indian Pharmaceutical industry is highly fragmented. It is estimated to have about 24,000
players, of which only around 330 players are in the organised sector.
Due to the fragmented nature of the industry, almost every drug in the market sees intense competition. As
per the company, on average, every drug has about 26 competing brands from multiple companies.
Therefore, the consumer has a lot of choices to choose from.
An average of 26 brands compete for each molecule and many companies have multiple brands
for the same molecule.
For example, in the case of Abbott India Ltd’s key drug, Duphaston, which used to be a market leader in
its segment, the situation quickly worsened from a monopoly position to a competition among 41 brands.
Investors’ meet transcript, September 2022, page 8:
Vivek V Kamath: Duphaston is a very unique situation, we have moved from being the only one to
one amongst the 41 brands in a span of two years.
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On multiple occasions, counterfeits of its well-known drugs have also appeared in the market and hurt its
business.
Cases of counterfeiting of pharmaceuticals in India continue to be reported and this is a serious

concern for industry wellbeing.
The competitive position in the past had reached to such an extent that once it had to sell its manufacturing
plant at Jejuri, Maharashtra as it became unviable to run the plant.
…introduction of new molecules by the Indian Companies…affected the demands of the mass
based products of your Company…affected the capacity utilisation in our factories…and increase
in input cost on the other hand are also causes of concern for viability of the plant.
As a result, the company sold off the plant at a loss.
To beat the intense competition, the company has come up with innovative solutions like providing
anaesthetic equipment free of cost to hospitals so that they may use its drugs in these equipment.
anaesthetic equipments, installed at various hospitals free of cost with the intention of procuring
business for the Company’s products
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2) Pricing controls on major drugs by Govt. of India:
Govt. of India has set up the National Pharmaceutical Pricing Authority (NPPA), which under the Drug
Pricing Control Order (DPCO) releases a list of National List of Essential Medicines (NLEM) and puts
price caps on essential drugs.
Over the years, many key drugs of Abbott India Ltd have faced price caps, which has affected sales as well
as profits of the company. For example, in FY2014, when govt. increased the number of drugs under price
control, then the company had an impact of ₹11 cr in sales and profits.
Drugs Prices Control Order (DPCO) 2013 had a significant impact on some of our major
brands like Thyronorm, Obimet, Epilex. These brands faced new price limits which have
directly impacted our profitability.
The Company has reduced the prices of the products covered under the new DPCO, which resulted
in an adverse impact of ₹11,00.00 Lakhs on Sales and Profits during the period 2013–14.
Price control by govt. has been one of the major adverse factors for the company. Even in previous decades,
the govt. kept a strong pricing control on some of its major drugs like Brufen (a well-known painkiller).
However, price control on ibuprofen hampered the profitability of our pain management business.
Once, the price cap put by govt. on one of its drugs, Betonin was so sharp that the company found it
economically unviable to produce it and therefore, discontinued its sales.
Price reduction announced by the Government has also forced the Company to discontinue
Betonin capsules.
3) Regulatory risk faced by Abbott India Ltd:
Over the years, other than direct price controls over drugs, other govt. policies have also impacted the
company.
For example, changes in indirect taxation policies like excise duty or GST have impacted the company’s
business in the past.
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In FY2005-FY2006, when the govt. changed the calculation of excise duty from the cost base to the
maximum retail price (MRP) base, then a higher outgo of taxes affected its profit margins.
Profits continued to be under pressure due to the impact of levy of Excise Duty on Maximum Retail
Price (MRP) and rising input cost and freight charges due to higher oil prices.
4) Cost reduction strategies adopted by Abbott India Ltd:
Due to intense price-based competition and price control on its key drugs, over the years, the company has
taken multiple steps to reduce its costs and become a cost-competitive player to protect its profit margins.
It has attempted to reduce its manpower and wherever possible use technology and automation to reduce
its operating expenses.
Productivity improvement initiatives like camera detection system and elimination of visual
inspection led to utilization of less manpower.
In the past, the company resorted to the reduction of employee strength using a voluntary retirement scheme
(VRS).
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The company is so focused on keeping its employee count under control that in its meeting with analysts,
it prided itself that in the last few years, its growth was only out of increased productivity and not from
increasing employee count.
Analyst meeting transcript, September 2022, page 6:
Vivek V Kamath: Our entire growth last couple of years has come from productivity increase. It
hasn’t come from adding people.
In addition, the company also took steps like developing new vendors to substitute high-cost import of raw
materials (FY2015 annual report, page 62), changing the packaging of liquid drugs from glass to PET
bottles etc.
Cremaffin and Cremaffin Plus primary packs were changed from glass bottle to PET bottles. This
has resulted in reduction in waste, savings in transportation
The company also used an e-auction system to purchase materials from vendors to find the lowest cost
prices.
Synergies from merger and the e-auctions as a tool for competitive price discovery contributed to
reduction in material cost.
Abbott India Ltd has outsourced most of its production and currently only about one-third of the drugs that
it sells are produced in its own factories.
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Analyst call transcript, September 2022, pages 16-17:
Rajiv Sonalker:…it’s33%, that is in-house manufactured out of the total manufacturing.
However, in the past, when due to intense price-based competition, the demand for its products was
impacted and capacity utilization at its plants came down. Then, to increase the plant utilization and to keep
it economically viable, Abbott India Ltd shifted production of a lot of drugs from third-party manufacturers
to in-house.
During the year the Company insourced the manufacture of two of its key brands Udiliv and
Duphalac at its Goa plant resulting in optimal utilisation of plant capacity.
One of the Company’s major products i.e. Digene has been transferred to its own factory at Goa,
thereby improving the capacity utilization.
In the past, the company merged its office operations from multiple locations to a single one to bring more
synergies and reduce operating costs.
In order to save progressive increase in rent and also to save the recurring expenses for
maintaining the office at Ballard Estate, the Company’s Registered Office was shifted to its owned
office premises at Corporate Park, Chembur…resulted in cost savings
In the last 10 years (FY2015-2024), the tax payout ratio of Abbott India Ltd has largely been in line with
the standard corporate tax rate in India i.e. above 35% until FY2019 and above 25% from FY2020 onwards
when the new corporate tax regime with lower tax rate was announced by the Govt. of India.
Operating Efficiency Analysis of Abbott India Ltd:
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a) Net fixed asset turnover (NFAT) of Abbott India Ltd:
Over the years, the net fixed asset turnover (NFAT) of Abbott India Ltd has been very high in the range of
16 to 39 times. Such a high asset turnover indicates that the company is mainly acting as a trading/marketing
company without a lot of investments in manufacturing plants.
This is in line with the disclosure by the company that it outsources almost two-thirds of its production and
only manufactures about 33% of its products in-house.
Going ahead, an investor should keep a close watch on the fixed asset turnover levels of the company to
assess whether it should continue with its focus on outsourcing production activities or bring them in-house
as such a step will increase the requirement of capital by the company.
b) Inventory turnover ratio of Abbott India Ltd:
Over the years (FY2015-2024), the inventory turnover ratio (ITR) of the company has increased from 6.9
in FY2016 to 9.2 in FY2024.
An increase in ITR indicates an improvement in the inventory utilization by the company.
whether it is able to maintain the efficiency of its inventory utilization.
c) Analysis of receivables days of Abbott India Ltd:
Over the years, the receivables days of Abbott India Ltd have stayed in the range of 19-20 days. Even
though, in some of the years, receivables days increased to 26-27 days; however, since the last 3 years, they
are back to about 20 days range.
Stable receivables days over the years indicate that Abbott India Ltd has collected its money from its
customers on time.
Going ahead, an investor should continue to monitor the receivables position of the company to check if it
continues to collect its money on time from its customers.

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operations (cCFO) of Abbott India Ltd for FY2015-2024, then she notices that over the last 10 years
(FY2015-FY2024), the company has almost converted its profit into cash flow from operations.
Over FY2015-2024, Abbott India Ltd reported a total net profit after tax (cPAT) of ₹5,845 cr. During the
same period, it reported cumulative cash flow from operations (cCFO) of ₹5,829 cr.
Learning from the article on CFO will indicate to an investor that the cCFO of Abbott India Ltd is lower
than the cPAT due to other income of ₹1,065 cr, which is included while calculating PAT and is removed
while calculating CFO.
The Margin of Safety in the Business of Abbott India Ltd:

of a Company
target growth.
Where,
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Over the years, Abbott India Ltd had a very high SSGR ranging from 29%-248% whereas it has grown its
sales at a rate of 11% over the last 10 years (FY2015-2024). Therefore, it has funded its growth from internal
sources and did not require funds from additional sources like debt or equity dilution.
On March 31, 2024, it had a debt of only ₹83 cr against its cash & investment balance of ₹2,134 cr. and
over the years, it had done multiple buybacks of shares e.g. in FY2003, FY2007 and FY2008.
An investor arrives at the same conclusion when she analyses the free cash flow position of the company.
b) Free Cash Flow (FCF) Analysis of Abbott India Ltd:
While looking at the cash flow performance of Abbott India Ltd for the last 10 years (FY2015-FY2024),
an investor notices that it generated cash flow from operations of ₹5,829 cr. During the same period, it did
a capital expenditure of about ₹524 cr.
Therefore, during this period (FY2015-FY2024), Abbott India Ltd had a free cash flow (FCF) of ₹5,305 cr
(=5,829 – 524).
expense of ₹85 cr. As a result, the company had a total free cash flow of ₹6,285 cr (= 5,305 + 1,065 – 85).
Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.
Abbott India Ltd used its free cash flow for paying dividends of about ₹3,742 cr (excluding dividend
distribution tax of about 20%) and has increased its cash & investment balance by about ₹1,491 cr from
₹644 cr in FY2015 to ₹2,134 cr in FY2024.
Going ahead, an investor should keep a close watch on the free cash flow generation by Abbott India Ltd
to understand whether the company continues to generate surplus cash from its business and how it utilizes
it.

FCF
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Additional aspects of Abbott India Ltd:

On analysing Abbott India Ltd and after reading annual reports, its credit rating reports and other public
1) Allocation of business to Abbott India Ltd by the Abbott Group, USA:
Abbott India Ltd is one of the many subsidiaries that Abbott Group has in India. Almost all of these
subsidiaries are in similar business.
In such arrangements, the shareholders of a listed company (Abbott India Ltd) are always at the mercy of
the parent MNC group (Abbott Group, USA) for the allocation of business to their company. If the parent
MNC company decides, then it can easily stop giving the specific Indian subsidiary more business or ask it
to give its existing business to another company of the group.
If any such event takes place, then it has the potential to hurt the interests of public shareholders of the
Indian-listed company (Abbott India Ltd).
In the past, there have been multiple instances where MNC parent company decided to restrict the business
activities of Indian listed companies and instead gave the business to their other unlisted companies in India,
which was detrimental to the interests of public shareholders of Indian listed companies.
Investors may read the case of Linde India Ltd, which unfortunately landed up in such a situation when the
MNC Linde Group decided to restrict the activities of the company only to certain parts of India and asked
its other unlisted subsidiary to focus on the remaining parts of India. Also, the Indian listed company (Linde
India Ltd) was restricted from entering new upcoming businesses like green hydrogen.
Minority shareholders were angry at such decisions by the MNC Linde Group and therefore, they
complained to SEBI (Securities and Exchange Board of India), which issued an order against the company’s
actions and asked for an assessment of the business forgone by Linde India Ltd by such actions of MNC
Linde Group.
Investors may read our detailed analysis of Linde India Ltd in the following article: Analysis: Linde
India Ltd
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Therefore, investors of Abbott India Ltd should be cautious and closely watch the actions of Abbott Group,
USA when it allocates business opportunities, drug brands etc. to the company or its other Indian
subsidiaries.
Also read: Why Management Assessment is the Most Critical Factor in Stock
Investing?
2) Related party transactions of Abbott India Ltd:
Abbott India Ltd enters into numerous transactions with its fellow subsidiaries and other Abbott Group
companies related to sales, purchases of raw materials, stock-in-trade, payment of rent etc. The overall
value of such transactions varies in the range of about ₹500-600 cr every year.
Year after year, the company has sought approvals of higher limits on the transactions that it can conduct
with its promoter-group companies. Currently, it has limits of ₹800 cr with Abbott Healthcare Private
Limited and ₹650 cr with Abbott Products Operations AG., Switzerland.
Still, at times, the company breaches the limits while transacting with different promoter group companies
and takes subsequent approval from its audit committee for the same.
For example, in H1-FY2024, it breached limits for transactions with Abbott Healthcare Private Limited,
Abbott Diagnostics Medical Private Limited and Abbott India Limited Officers’ Group Gratuity Scheme.
While disclosing its related party transactions for H1-FY2024 to stock exchanges on Nov. 9, 2023, it
commented that now, the audit committee has approved the excesses.
As Abbott India Ltd is a cash-rich company that keeps a couple of thousand crores of rupees worth of cash
& investments with it; therefore, the Abbott Group uses it as a bank to meet the cash requirements of its
group companies.
For example, in FY2018, the company gave a loan of ₹200 cr to one of the Abbott Group companies, Alere
Medical Private Limited. Also, at the same time, it gave an interest-free security deposit to another Abbott
Group company, Abbott Healthcare Private Ltd.
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In the past, the senior management of the company have also transactions with the company. For example,
Abbott India Ltd had taken flats on rent from its key managerial personnel (KMP) and had paid rent to
them.
For example, in FY2008, the company paid rent to Mr U D Chiniwala, Director of Risk & Financial
Controlling and Mrs V Jain, Wife of Mr S Jain who was Director of Marketing in the company (FY2008
In FY2005, apart from the above-mentioned persons, the company also paid rent to Mr A V Chandorkar,
Vice President of Human Resources & Administration (FY2005 annual report, page 40).
An investor may note that such transactions between the company and its related parties have the potential
to shift economic value from public shareholders to promoters and KMPs if the sale of goods and services
is done at a price lower than the fair market price or the purchases of goods and services are done at a price
higher than the fair market price.
3) Suboptimal use of surplus cash:
As mentioned earlier, Abbott India Ltd is a cash-rich company and has to invest its money in financial
instruments. However, over the years, the returns earned by the company on its cash & investments were
very low, about 3% per year.
So, stakeholders were not pleased and in one of the analyst meetings, they questioned the company.
Analyst meet transcript, September 2022, page 18:
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Amit:…we have Rs 2500 crore of cash. But when we see other income, we see only 80, 90 odd
crores, I was like this is only 3.2% as a yield, as a treasury function. I’m just not able to
comprehend why such a slower rate
The management tried to defend that they invested in very safe assets as they did not want to put the money
at risk. However, after questioning by analysts, the company realized that even within safe instruments, it
can invest the money in longer-term fixed deposits and earn a higher return.
Therefore, immediately thereafter, it shifted almost half of its surplus money to longer-term (>12 months)
fixed deposits.
In the above table, an investor may note that in the previous year column (FY2022, before the said analyst
meeting in September 2022), there are no “Term deposits with original maturity of more than twelve
months”.
And immediately, the return on its investments jumped up. In FY2023, the company reported interest
income on fixed deposits of ₹140 cr, almost double of about ₹75 cr earned in FY2022.
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In the next year, the full-year impact of this switch to long-term fixed deposits came and the company
reported “other income” of about ₹248 cr over the other income of ₹154 cr in FY2023.
Therefore, the management was sitting on cash parked in suboptimal investments whereas without
impacting the security of money, it could have earned a better return; however, it required hard questions
by an analyst for the company to act on it.
4) Weakness in internal controls and processes at Abbott India Ltd:
Over the years, there have been certain instances that highlight that internal controls and processes at the
company leave a scope for improvement.
For example, the company had breached the limit of foreign investment allowed in the pharmaceutical
sector and its name was highlighted for this breach by the Bombay Stock Exchange; however, still, the
company felt that it did not have any limit breach.
name of the Company appears in the breach list displayed on the website of the Depositories
and Bombay Stock Exchange for having foreign investments in excess of sectoral cap. The
Company has taken a view that there is no breach and accordingly is taking necessary action.
However, soon thereafter, the company realized that it had broken a serious limit and then it started running
from pillar to post to seek approval to condone the limit breach. The company, then applied to the Dept. of
Pharmaceuticals and Reserve Bank of India to condone the breach of the Foreign Exchange Management
Act, 2000.
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it has obtained an Order from the Department of Pharmaceuticals for increase in the limits for
Foreign Investment upto 80% subject to compounding by the Reserve Bank of India. The Company
is in process of compounding of the same.
On other occasions, the company delayed filing of forms with the Ministry of Corporate Affairs (FY2022
annual report, pages 63-64) and disclosing on stock exchanges about an order received from GST
authorities (BSE announcement, March 1, 2024).
In FY2023, the company took a backup of employee expenses data on servers located outside India whereas
it had to keep the data located on servers located within India. (FY2023 annual report, page 176).
Multiple times in the past, the company delayed in payment of undisputed statutory dues like professional
tax to govt. authorities and the dues remained outstanding even for more than 6 months from the date when
they became due for payment e.g. professional tax payments in FY2010, FY2018, FY2020, provident fund
payments in FY2009, FY2023 and payments to Labour Welfare Fund in FY2007.
5) Management Succession of Abbott India Ltd:
Abbott India Ltd is a part of the Abbott group and has access to a large pool of professional managers across
its different companies globally. The company has a history of appointing managing directors, people who
have been with the company for long like the recent appointment of managing director, Ms Swati Dalal
who joined the company in 1995.
Therefore, over the years, there has been a continuity in leadership and Abbott India Ltd does not depend
The Margin of Safety in the Market Price of Abbott India Ltd:

Currently (June 19, 2024), Abbott India Ltd is available at a price-to-earnings (PE) ratio of about 48 based
on consolidated earnings of FY2024. An investor would appreciate that a PE ratio of 48 does not offer any
margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent
Investor.
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Analysis Summary
Overall, Abbott India Ltd has grown its sales at a rate of about 11% over the last 10 years. The company
has faced intense price-based competition, govt. mandated price caps on many of its drugs as well as
multiple taxation changes. The company has taken multiple steps to cut down costs and increase
productivity, which has helped it improve its profit margins over the years.
The company has managed its working capital efficiently and has turned out to be a cash-rich company that
has grown its business using internal cash flows and has rewarded its shareholders with dividends and
buybacks.
However, at times, the MNC promoter group (Abbott Group, USA) has used its cash and resources for the
benefit of its other group companies in India. Such related party transactions and decisions of the parent
group while allocating business opportunities to Abbott India Ltd or its other unlisted subsidiaries, remain
the biggest risk to the public shareholders of the company.
The company enters into multiple sales, purchase and other transactions with other Abbott Group
companies and the size of such transactions is increasing over the years. Such transactions offer the potential
of transferring economic benefits from public shareholders of the company to the MNC promoter group.
Investors should keep a close watch on such related party transactions and analyse them in depth.
Over the years, the management had invested its surplus cash sub-optimally, which was pointed out by
stakeholders. Thereafter, the company started investing its funds judiciously and the return on such
investments has improved significantly.
On occasions, decisions of Abbott India Ltd indicate that its internal controls and processes leave a scope
for improvement whether it was ignoring the breach of sectoral cap of foreign investment or delaying
payment of undisputed statutory dues to govt. authorities.
Going ahead, investors should closely monitor the capital allocation by the company, its profit margins,
regulatory developments, and related party transactions closely.
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The investor needs to see if Abbott Group, USA favours its private, unlisted entity over Abbott India Ltd
for launching new brands/products or treats it as a stable cash flow source to benefit its other entities.
She needs to continuously monitor related party transactions of Abbott India Ltd with other Abbott Group
companies.
These are our views on Abbott India Ltd. However, investors should do their own analysis before making
I hope it helps!
Regards,
Dr Vijay Malik
P.S.

Workshop Videos
Analysis Excel
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6) Varanium Cloud Ltd: How Retail Investors Can Avoid Such Traps
Varanium Cloud Ltd is an SME (small and medium enterprise) claiming to provide data centres, distance
learning solutions, payment gateway services, e-commerce as a service (EAAS), IT infrastructure as a
service (IAAS) etc.
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Recently, SEBI (Securities and Exchange Board of India) issued an order against Varanium Cloud Limited
and its promoter Mr Harshawardhan Sabale. In the order, SEBI highlighted how the promoter (Mr Sabale)
syphoned off the money raised by the company in the IPO, falsified sales and corporate announcements to
increase the share price and then sold his shares at a big profit. Overall, the promoter benefited himself for
more than ₹150 cr at the cost of investors.
In the current article, we analyse the key findings by SEBI in its order dated May 10, 2024. In addition, we
have also analysed the public information about the company to understand, if a retail investor could have
identified the issues/red flags in Varanium Cloud Limited and Mr Harshawardhan Sabale.
In the end, we have also shared our recommendations about what an investor could have done to avoid
falling into the trap laid by the promoter.
Over the years, after reading multiple orders of SEBI on different companies, we have realized that these
orders are a very educative tool for investors to learn the tricks used by the promoters and their companies
to mislead investors.
SEBI orders always highlight the modus operandi, the tools used and the narrative created by promoters to
keep their misdeeds hidden from investors while simultaneously portraying a much better picture of the
business and financial position of the company in the minds of investors.
Reading real-life instances of such misdeeds helps an investor by raising her awareness and attention to
potential red flags, which improves her analytical skills. She can become better at detecting fraud and
thereby become a better investor.
Now, let us see what we can learn from this case study of Varanium Cloud Limited.
Background
The company came out with an initial public offer (IPO) in September 2022 and raised about ₹40 cr net of
expenses. Thereafter, the company claimed that it had used all the IPO money and had completed three
edge data centres (EDC) in Goa, Kudal and Mumbai.
Shortly thereafter, in Dec. 2022, the company proposed a huge preferential issue of ₹1,250 cr for an
acquisition; however, it did not succeed in this fundraising. Nevertheless, in FY2024, it raised about ₹49 cr
via a rights issue.
Things were going relatively fine for the company until January 2024 until the time when it disclosed its
shareholding pattern for December 31, 2023. Until now, since the IPO, the promoters maintained about
63% stake in the company; however, in the December quarter, their stake fell sharply to about 36%.
SEBI order, page 3:
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There was a huge uproar among the investors who had invested their hard-earned money in the company
trusting the promoter of the company. To quell the investors’ discontent, Varanium Cloud Ltd announced
that there was some error in classifying promoters’ shares and that it would file a revised shareholding
declaration soon.
SEBI order, page 3:
for the quarter ended 31st December 2023, we hereby inform you that there was an inadvertent
error in classification of the promoter group shares. In consideration of aforesaid matter, we will
file the revised shareholding pattern by 29th January 2024
However, after queries raised by the NSE (National Stock Exchange) and multiple follow-ups, Varanium
Cloud Ltd did not file any revised shareholding pattern.
At this stage, SEBI and NSE started their investigation and SEBI issued an interim order on May 10, 2024,
highlighting serious misdeeds conducted by the company and its promoter, Mr Harshwardhan Sabale.
Let us see the key findings of the SEBI order (Link to the complete order on SEBI website).
Key Findings in the SEBI Order on Varanium Cloud Ltd

SEBI, primarily, found that:
1. The promoter, Mr Sabale, syphoned off the money raised by the company in IPO.
2. The company falsified its financials to show a great business performance whereas, on the ground,
there was no business activity.
3. The company misled investors by making false announcements to increase its share price and after
pumping up the share price, the promoter dumped its shares in the market and made huge capital
gains at the cost of investors.
Let us try to understand each of these acts of the promoter.
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1) Syphoning off IPO money:

In September 2022, Varanium Cloud Ltd raised about ₹40 cr net of expenses primarily to construct 3 data
centres and 3 digital learning centres.
Red herring prospectus, September 8, 2022, page 56:
Thereafter, in its FY2023 annual report, the company declared that it had completed all three edge data
centres.
We commissioned our first data center in Panjim, Goa in December 2022, followed by our second
installation at Kudal, Sindhudurg district and a third in Mumbai.
On enquiry by SEBI about the status of these data centres, in April 2024, the company stated that its
Mumbai data centre is yet to be launched. So, currently, there are only two data centres.
SEBI order, page 11:
please consider that the Mumbai data center is yet to be launched.
However, when the NSE team visited its two data centres, then it noted that there were no data centres at
these locations.
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Even at the other site, there was no data centre and the premises had very low to nil electricity consumption
whereas data centres have very power-intensive operations.
Therefore, it became clear that the promoter had taken away all the IPO money without using it to create
assets like data centres.
Thereafter, SEBI investigated what the promoter did with the money. It found out that the promoter
syphoned off most of the IPO money (about ₹24 cr out of an IPO of ₹40 cr) by transferring it to other
companies.
One entity, BM Traders had received the bulk of the money (more than ₹18 cr). It turned out that BM
Traders is in the wholesale business of fruits and vegetables. Moreover, it did not have a single employee
and its premises were a residential address without any business activity.
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showed that BM Traders was involved in the wholesale business of fruits and vegetables…BM
Traders in its letter…stated that it…did not have any employee in the business. During a site visit
to the business address of BM Traders by PNB officials, it was found that it was a residential
address and had no business activity.
In addition, the company invested money in one of the promoters’ companies, Turmeric Lifestyle Pvt Ltd
(TLPL), which rented out villas in Goa.
SEBI order, page 9:
Bank Statement of Varanium Cloud Ltd…showed that immediately upon receipt of net IPO
proceeds in its bank account, Varanium transferred Rs.1.50 Crore to TLPL…as per social media
account of TLPL, it is engaged in the hospitality business of renting villas for vacations
It was a clear case where the promoter raised money from investors in an IPO and then syphoned it off.
Investing?
2) Fake financials with no business activity on the ground:

SEBI’s investigation found that Varanium Cloud Ltd did not have any business activity on the ground. Its
edge data centres, which it claimed to construct using the IPO money, did not exist.
Moreover, its distance learning centre (Edmission) at Sawantwadi, which it claimed in the RHP that was
functional since February 2019 also did not exist.
RHP, page 104:
February 2019: Inauguration of the Edmission Centre in Sawantwadi
When the NSE team visited the site of its Edmission Centre at Sawntwadi, then it did not find any distance
learning centre there.
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Therefore, with no business activity in the real world, it was a question of how the company reported ever-
growing sales and profits. The company showed an especially huge jump in its sales after its IPO.
2.1) Fake sales of Varanium Cloud Ltd:
The company reported its sales increase from ₹4 cr in FY2021 to ₹923 cr in 12 months ended December
2023 (i.e. January to December 2023). At the same, it showed its quarterly sales consistently increased from
₹13 cr in the March 2023 quarter to ₹395 cr in the December 2023 quarter.
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Upon investigation, SEBI found out that these sales were not genuine and were only on paper with mere
accounting entries without actual business on the ground and cash inflow in the bank account.
For example, SEBI found that the company reported 70%-80% of sales to a single customer, Amtelfone
Incorporated. However, NSE could not find any information about this company in the public domain other
than its address, which was common with many companies found in the Panama Papers leak.
Varanium had recorded sales worth Rs.326.22 Crore (83.91% of total sales) in FY23 and
Rs.268.10 Crore (71.44% of total sales) in first-half of FY24 with Amtelfone.
Amtelfone’s address was Suite 9, Ansuya Estate, Revolution Avenue, Victoria, Mahe, Republic of
Seychelles. The said address is common with various companies found in Panama Papers as
available in Offshore Leaks Database.
Other than the above, no information about Amtelfone was found in public domain. Even as per
OpenCorporates, no company named ‘Amtelfone Incorporated’ was found by NSE.
It seemed that Amtelfone Incorporated was a fake company.
Moreover, even though, Varanium Cloud Ltd claimed that it had received hundreds of crores of rupees
from Amtelfone; however, SEBI did not find any such receipt in the bank accounts of the company.
Company received Rs.266.01 Crore in FY23 out of the total sales of Rs.326.22 Crore made to
Amtelfone. However, no corresponding Bank Receipt entries were found in the ledger of Amtelfone
or in the Bank Statement of the Company in FY23.
It indicated that the sales transactions shown by Varanium Cloud Ltd with Amtelfone were fake.
During April-Sept 2023, Varanium Cloud Ltd reported sales of about ₹107 cr to an entity named Courage
Clothing LLP (CCL). However, NSE could not find any entity by this name in the public domain.
SEBI order, pages 29,30:
Varanium had recorded sales worth Rs.107.16 Crore (28.56% of total) with CCL in First Half of
FY24.
No details were found regarding any entity by the name Courage Clothing LLP, while doing a
public domain search.
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SEBI also found other instances of fake sales where Varanium Cloud Ltd showed sales of ₹11.8 cr in
FY2023 to a company Varanium Networks Private Limited (VNPL, 99.99% owned by Mr Sabale).
However, VNPL did not show any purchases from any entity in FY2023.
VNPL’s revenue in FY23 stood at Rs.0.41 Crore only, with nil purchases and other expenses of
Rs.0.21 Crore. However, Varanium reported sales of Rs.11.80 Crore to VNPL for the same period
In addition, Varanium Cloud Ltd disclosed that in the Oct.-Dec 2023 quarter, it generated more than 99%
of its sales i.e. ₹392 cr out of total sales of ₹395 cr from its subsidiary in the USA, which it had formed just
two months back in Nov. 2023.
Rs.392.11 Crore out of the consolidated revenue of Rs.395.15 Crore was earned from the newly
formed subsidiary, viz. Varanium Cloud INC, in less than two months.
Upon investigation, SEBI found that this newly formed USA subsidiary had zero employees.
Therefore, it became clear that the sales shown by Varanium Cloud Ltd in its disclosures are fake. At the
same time, SEBI also found out that the expenses shown by the company were also fake.
Also read: How Companies Inflate their Profits
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2.2) Fake expenses by Varanium Cloud Ltd:
As an information technology (IT) company, Varanium Cloud Ltd showed major expenses as server, and
data centre charges as purchases from Amazon Web Services India Pvt. Ltd. (AWS) to the extent of 80%-
100% of its overall purchases ranging in hundreds of crores of rupees.
However, SEBI noted that all these expenses were on paper and no payments were made to AWS from the
bank account of the company.
SEBI order, pages 31, 32:
It was observed that Varanium recorded purchases worth Rs.201.85 Crore (77.79% of total) in
FY23 and Rs.243.53 Crore (100%) in First Half of FY24, with AWS.
AWS’ ledger from April 01, 2023 to December 31, 2023 also showed that there were no payment
entries for nine months of FY24
Similarly, SEBI questioned purchases of about ₹34 cr done by Varanium Cloud Ltd in FY2023, with a
company SecUR Credentials Ltd (SCL) where Mr Sabale owned about 18% stake on March 31, 2024.
SCL provides services for the verification of the background of employees.
It was observed that Varanium recorded purchases worth Rs.33.88 Crore (13.06% of total) with
SCL in FY23…SCL…provides services relating to verification of employee background.
Harshawardhan Sabale…His current stake in SCL as of March 31, 2024 stands at 17.83%
In FY2023, Varanium Cloud Ltd had employee benefits expenses of only ₹1.75 cr (FY2023 annual report,
page 71).
Therefore, Varanium Cloud Ltd did not have so many employees that it needed to pay ₹38 cr for their
background verification.
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Moreover, SEBI found out that out of the total purchases of ₹38 cr shown from SCL, Varanium Cloud Ltd
had made an actual payment of only ₹0.25 cr.
Varanium paid Rs.0.25 Crore only to SCL and the remaining balance was adjusted against Sale
of IT services and adjustment journal entry with ‘Amtelfone Incorporated’
The company’s actions were not limited only to reporting fake financial performance to investors. During
the investigation, the company refused to give numerous documents asked by NSE and SEBI to them stating
that these documents are with GST authorities as it is undergoing a CGST audit.
However, the company could not provide any proof that its GST audit is going on, any intimation from
GST authorities that they are going to audit its books or that GST authorities have taken its documents.
It was observed that though the Company repetitively claimed in its submission to SEBI and NSE
that it was unable to provide supporting documents…on account of ongoing GST Audit, it failed
to provide the copy of Audit intimation or any documentary proof evidencing that GST department
had taken possession of all the relevant records of the Company.
Also read: Finding out whether a Company is Cooking its Books/Manipulating

its Numbers
3) Pump-and-dump operation by Mr Harshwardhan Sabale:

SEBI noted that despite no real business on the ground, Varanium Cloud Ltd kept on making fake highly
positive announcements to investors via stock exchanges to boost its share price.
These announcements ranged from the start of edge data centres that did not exist on the ground to plans
for numerous new businesses sometimes in completely unrelated areas.
For example, the company announced its partnership with The Pokemon Company, Japan for launching
apparel and stationery. It announced the launch of jewellery for young women with Sky Gold Ltd. It
announced about entering into the OTT platform business (Cable Cloud) and its plans to acquire Fastway
Transmission Private Limited for this purpose. (SEBI order, pages 36, 37 and 38).
Due to a continuous flow of such positive announcements and disclosure of continuously increasing sales
and profits, the share price of Varanium Cloud Ltd increased sharply from the IPO price of ₹30.5 (adjusted
for one split and one bonus share) to a high of ₹393 per share.
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Disclosure of growing sales and profits accompanied by an increasing share price led many retail investors
to invest their hard-earned money into shares of Varanium Cloud Ltd.
However, as soon as the lock-in on the pre-IPO shares of the promoter Mr Harshwardhan Sabale ended on
October 12, 2024, the promoter started selling his stocks in huge quantities in the market and got rid of all
the shares that were free from lock-in.
SEBI order, pages 43, 44:
the first lock-in on shareholding of Promoter and Promoter Group was released on October 12,
2023.
Mr. Harshawardhan Hanmant Sabale sold his entire shareholding in Varanium, which was not
under lock-in
An investor can see a significant increase in volume in the trading of Varanium Cloud Ltd due to the selling
of shares by Mr Sabale after Oct. 12, 2023, in the chart below (Source: Screener).
As per SEBI, the promoter made a gain of more than ₹140 cr by selling his shares in the market.
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This is a classic case of a pump-and-dump operation in which retail investors lost a huge amount of money.
The promoter, Mr Sabale, wanted to take more money from investors through the company’s plans to raise
₹1,250 cr via preferential issue for the acquisition of a cable operator, Fastway Transmissions Pvt. Ltd.
However, the investors were saved when the bubble burst before the company could get NSE approval for
the preferential issue when the owner of the target company, Fastway Transmissions Pvt. Ltd absconded
and police started a manhunt to arrest him.
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As per a news media report in the month of December 2023 – “Punjab Police launched a
manhunt for the ‘absconding’ owner of Fastway Transmissions Gurdeep Singh Jujhar and others
associated with it…”
Also read: How to know if Promoters are Losing Commitment to the Company
Interim directions by SEBI:

After its investigation, SEBI concluded that Varanium Cloud Ltd mis-utilized the IPO money and
manipulated its financial statements. There was no business activity on the ground and all the transactions
were on paper only. The company presented a rosy picture of business to investors, which led to an increase
in share price and the promoter offloaded his shares and made huge gains.
Therefore, SEBI barred Varanium Cloud Ltd and Mr Harshwardhan Sabale from the securities market and
stopped Mr Sabale from being associated with any listed company. SEBI also asked the National Financial
Reporting Authority to investigate the role of the auditor of the company, AK Kocchar & Associates in the
whole episode.
Analysis of Public Information of Varanium Cloud Ltd

An investor may think that SEBI can find out all the issues and frauds in companies because they have the
power to ask for all documents and information, which companies have to provide. Retail investors do not
enjoy any such special privileged access to information.
Therefore, we analysed publicly available information and documents about Varanium Cloud Ltd and Mr
Harshwardhan Sabale like red herring prospectus, letter of offer for rights issue, annual reports, corporate
announcements, media articles etc. to understand if a retail investor, solely relying on public information,
could find any issues or red flags related to Varanium Cloud Ltd.
Our analysis brings forward the following points:
1) History of cases/allegations of misdeeds against the promoter,

Mr Harshwardhan Sabale:
There are numerous media articles about allegations of misdeeds against the promoter of Varanium Cloud
Ltd, Mr Harshwardhan Sabale.
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The earliest one goes back to December 2009 when he was arrested by Goa police for misappropriating
₹14 cr from a company by promising them FDI of ₹46 cr. (Source: One-held-for-siphoning-Rs-14-
crore: Herald, Goa)
PANJIM, DEC 8 Panjim police on Tuesday arrested one Harshvardhan Sable for
misappropriating investment money to the tune of Rs 14 crore. PI Sandesh Chodankar said Sable
acted as a consultant to get foreign direct investment (FDI) of Rs 46 crore for a company which
is based in Pernem.
Mr Sabale accepted that it was he who was arrested by Panjim Police for cheating and forgery in 2009, in
a hearing of another case in the Bombay High Court (Source). In the order, Mr Sabale is referred to as
Award Debtor No. 1.
in the cross examination of the Award Debtor No. 1 (Q & A 75), to the query as to whether he
could tell the Arbitral Tribunal as to what were the charges under which the Panaji Police had
arrested him in 2009, he had answered that the charges where for cheating and forgery.
the valuation of the shares held by Award Debtor No. 1 in Varanium Cloud Limited is Rs.
190,51,56,068/-.
Just like in 2009, when Mr Sabale was arrested for cheating someone of ₹14 cr by promising them an FDI
of ₹46 cr, recently, the Economic Offences Wing (EoW) of the Mumbai police booked him for cheating
Mr Kamal Singh, Chairman and CEO of Rolta India Ltd of ₹15 cr by promising him a loan of ₹5,000 cr
from a bank in Mauritius.
As per the media reports, Mr Singh paid ₹15 cr to Mr Harshwardhan Sabale in the name of margin money
for the loan (Source: Mumbai News: Asset Management Firm MD Booked For
Cheating Defence Software Company)
registered a case against Harshawardhan Sabale, the chairperson and managing director of
Varanium Cloud…for cheating another company to the tune of Rs15 crore…complainant in the
matter is Kamal Singh, chairman and CEO of Rolta India
Varanium Cloud offered Rolta India a loan amount of Rs5,000 crore. The loan was applied
through Mauritius-based bank named AfrAsia Bank Ltd and…Rolta India was asked to pay the
margin amount of Rs15 crore to the bank for sanctioning the loan…margin amount paid in dollars
through him.
The news about dealings of Mr Sabale with Rolta India via “The Streamcast Group”, founded by Mr
Harshwardhan Sabale has been in the media since 2019. For example, the following article from 2021: The
‘Streamcast Group’ scam and Rolta: Was it deceitful collusion? (May 28, 2021)
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on May 11, 2019, RIL announced an investment of Rs 5,500 crore by ‘The Streamcast
Group’ supposedly an international group.
Turns out ‘Streamcast Group’ is a scam…incorporated in Malta as three companies…by two

promoters of Indian origin…One a relatively young, (said to be Chartered Accountant) hailing
from Pune Harshawardhan Sabale
Apart from the above, in 2020, there were many media articles where Mr Harshwardhan Sabale along with
Mr Dharmesh Pandya had dubious dealings with the Malta govt. where they promised to invest a large
amount of money to build data centres in Malta. There was an investigation by media led by “The Shift
News” in the whole episode (Source: EXCLUSIVE: Leaked report shows Malta Enterprise
knew past of Streamcast ‘investor’ who left trail of debt behind)
Apparently, later on, Maltese companies sued Streamcast group to recover their dues
(Source: Streamcast ordered to pay Malta state utility €400,000 over botched €75m
data centre project, Nov. 4, 2020)
Therefore, there were many instances even before the IPO was launched that created doubts about Mr
Sabale.
Moreover, in the RHP before the IPO, Varanium Cloud Ltd disclosed that Mr Sabale is of 47 years of age
(RHP, page 121) with no wife or kids.
RHP, Sept 2022, page 122:
Such a situation also raises questions about succession planning.
Also Read: How to do Management Analysis of Companies
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2) Relying completely on investors’ money for projects with nil

promoters’ contribution:
In the RHP, while raising about ₹40 cr net of expenses for 3 edge data centres and 3 digital learning centres,
the company attempted to meet the entire cost of these projects (₹23.4 cr for data centres and ₹8.4 cr for
learning centres, RHP, pages 59-60) by IPO with almost no contribution from existing shareholders
(promoters).
RHP, September 2022, page 56:
Since the entire fund requirement are to be funded from the proceeds of the Issue, there is no
requirement to make firm arrangements of finance under Regulation 230(1)I of the SEBI ICDR
Regulations through verifiable means towards at least 75% of the stated means of finance,
excluding the amounts to be raised through the proposed Issue.
By proposing 100% funding by IPO proceeds, the promoter could escape the assessment of projects by any
lender (bank or NBFC), which would be necessary if even a minuscule debt was proposed as a source of
funds.
Our funding requirements and deployment of the issue proceeds are based on management
estimates and have not been independently appraised by any bank or financial institution.
This prevented the benefit of independent verification of the existence of projects for investors, which could
have reduced the possibility of outright deception where a project is declared complete without any presence
on the ground.
Moreover, the only money put in by the company/promoters before the IPO was a meagre ₹15 lac, which
was also under public issue expenses, which might have been reimbursed out of the IPO proceeds.
Having such a small contribution to the project by the promoters indicated very little skin in the game for
the promoter where almost the entire risk was being borne by new investors in the IPO.
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3) Keeping the issue size below the threshold for higher

compliance requirements:
Varanium Cloud Ltd kept the IPO size at about ₹40 cr, which was less than the limit of ₹100 cr above which
companies need to appoint external independent monitoring agencies to check the usage of funds raised
from investors.
The deployment of the funds towards the objects of the issue is entirely at the discretion of the
Board of Directors and is not subject to monitoring by external independent agency. As per SEBI
(ICDR) Regulations, 2018, as amended, appointment of monitoring agency is required only for
Issue size above ₹10,000.00 lakhs. Hence, we have not appointed any monitoring agency to
monitor the utilization of Issue proceeds.
It became easy for the promoter to syphon off funds as there was no external independent agency that was
checking the usage of funds.
Once again, while raising money by rights issue, Varanium Cloud Ltd kept the issue size at ₹49.46 cr (page
47 of letter of offer for rights issue), which did not require the appointment of an external independent
monitoring agency to check the usage of funds.
Letter of offer for rights issue, September 2023, page 26:
Our Company’s management will have flexibility in utilizing the Net Proceeds. There is no
monitoring agency appointed by our Company and the deployment of funds is at the discretion of
our Management and our Board of Directors…per SEBI (ICDR) Regulations, 2018, as amended,
appointment of monitoring agency is required only for Issue size above ₹10,000.00 lakhs. Hence,
we have not appointed any monitoring agency to monitor the utilization of Issue proceeds.
In addition, it seems that the size of the rights issue was kept at ₹49.46 cr i.e. marginally less than ₹50 cr
because companies with rights issue sizes more than ₹50 cr have to get approval from SEBI for the issue.
In case, the company had decided to keep the issue size slightly more to exceed ₹50 cr, then it would have
to face scrutiny of SEBI, which might have exposed its wrongdoings.
The Letter of Offer has not been filed with SEBI in terms of SEBI (ICDR) Regulations as the size
of issue is up to ₹5,000.00 Lakhs.
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4) The company had changed its auditors every year before the
IPO even though it did not have any major business activity:
In the RHP, the auditor of Varanium Cloud Ltd, M/s. A K Kocchar & Associates highlighted that they have
audited financials for only FY2022. Financials for FY2021 were audited by M/s. A P R A & Associates
LLP and for FY2020 were audited by M/s Garg Goel & Co.
Financial Statements for the Financial Year 2022 have been audited by us. The Financial
Statements for the year ended March 31, 2021 was audited by M/s. A P R A & Associates LLP,
Chartered Accountant, LLP and audit for FY 2020 has been conducted by M/s Garg Goel & Co.,
Every year change in auditor is usually a trigger sign for investors to increase their due diligence of any
company.
5) Profits that were not received in cash (CFO):

After its IPO, Varanium Cloud Ltd started reporting a sharp jump in its sales and profits. Sales that were
₹35 cr in FY2022 before IPO, increased to ₹383 cr in FY2023 and further to ₹923 cr in 12 months ended
December 2023 (i.e. Jan-Dec. 2023).
Similarly, it reported a significant jump in profits also. Net profit after tax (PAT) increased from ₹8 cr in
FY2022 before IPO to ₹82 cr in FY2023 and further to ₹199 cr in 12 months ended December 2023 (i.e.
Jan-Dec. 2023).
However, these sharply increasing profits of Varanium Cloud Ltd were not accompanied by cash flow from
operations (CFO). In FY2023, the company reported a PAT of ₹82 cr but it had a CFO of only ₹3 cr.
Thereafter, in H1-FY2024 (April-Sept 2023), the company reported a PAT of ₹96 cr but it had a CFO of
only ₹5 cr.
As a result, in the 18 months of FY2023 and H1-FY2024 period, the company reported a cumulative PAT
of ₹178 cr but only a minuscule CFO of ₹8 cr, which corroborates with the finding by SEBI that most of
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the sales and profits of Varanium Cloud Ltd were only on paper with no inflows in the bank account
(remember sales to Amtelfone Incorporated discussed above).
We believe that the conversion of profits into cash flow from operations is one of the major parameters of
financial, business and management analysis as it helps expose underlying weaknesses like competitive
weaknesses as well as manipulations like fake sales and profits.
Also read: How Companies Manipulate Cash Flow from Operating Activities
(CFO)
6) Very high pledge of promoter’s shares in Varanium Cloud Ltd:

Soon after the IPO, the promoter of the company started pledging his stake in the company. On March 31,
2023, 10.84% stake of the promoters’ stake was pledged, which increased to 64.16% on September 30,
2023. As per the latest available data on NSE, on December 31, 2023, 43.5% of the promoter’s stake was
pledged.
A high pledging of stake of promoter’s stake in the company is always a red flag because pledging provides
the promoters of any company a way to take out the economic value of their shareholding without selling
those shares.
The pledged shares are in the control of lenders and if any promoter is not able to repay the loan, then the
lenders may sell the promoter’s shares in the market, which is a very adverse event that leads to a massive
decline in the trust of the market in the promoter and her abilities to sustainably run the company on an
ongoing basis. As a result, such selling of shares by lenders leads to a massive sell-off of shares by other
investors leading to a significant loss of value for all investors including retail investors.
Therefore, a high pledge of promoters’ stake in any company must be seen with great caution by investors.
Also read: Share Pledge by Promoters: A Complete Guide
7) Promoters’ remuneration by Varanium Cloud Ltd:

In its communications with shareholders, the company stressed that the promoter, Mr Harshwardhan Sabale
has reduced his remuneration significantly to set up an example of a very good corporate governance.
For example, in the presentation for H1-FY2023 results soon after its IPO, it reported an 89% reduction in
employee expenses from ₹8.29 cr to ₹0.83 cr. At that time, Varanium Cloud Ltd highlighted that it was due
to lower promoter remuneration as he wanted to share profits with the shareholders for better corporate
governance.
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However, an investor would note that the company compared the promoter’s remuneration with his
remuneration of ₹7.5 cr FY2022, which was an unusually high salary withdrawal by any promoter when,
in FY2022, the company had a profit of ₹8 cr. Moreover, it was before IPO when the company was private
and the promoter may deal with the money/profits as she wishes.
However, after the IPO, the promoter reduced his salary to create an impression of very good corporate
governance in the company. Whereas at the same time, as per SEBI, the promoter was busy syphoning off
the IPO money, falsifying sales and profits and he ended up benefiting himself for more than ₹140 cr via
pump-and-dump operations in the stock price.
8) Mismatches in the information disclosed by Varanium Cloud Ltd

in its public documents:
There were occasions when the information provided by the company in one document did not corroborate
with the information disclosed in another document or within another section of the same document.
Let us see some examples.
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8.1) Declaration of fixed assets by the company:
As per the FY2022 annual report, Varanium Cloud Ltd had spent about ₹27.75 cr for the construction of its
data centres.
However, as discussed earlier, in the RHP, the company disclosed that it has spent only ₹15 lac towards
projects, which was also as public issue expenses, which seems a significant deviation from what it
disclosed a few months back.
Moreover, despite declaring that it has spent crores of rupees on data centres and digital learning centres
(inaugurated in February 2019), the company’s auditors continued to claim that it did not have any fixed
assets.
The Company does not hold any immovable property (in the nature of ‘fixed assets’).
The Company does not have any immovable property during the year.
The Company does not have any immovable property during the year.
Moreover, while declaring the list of equipment owned by the company in the letter of offer for the rights
issue in September 2023, Varanium Cloud Ltd copied the table from its RHP for IPO in September 2022
even though it had claimed that during this period, it had completed three edge data centres.
The table below contains the list of equipment at the time of IPO in September 2022.
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The table below is from the letter of offer for the rights issue, September 2023, one year after the IPO after
the company had claimed that it completed three edge data centres. However, the list of equipment in
September 2023 is exactly the same as RHP including the number of computers (110), wifi equipment,
mesh etc.
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If one relies on such disclosures of the list of major equipment and the declaration by auditors that the
company did not have any immovable property, then the company might be hinting that in reality there was
no project/edge data centre on the ground. Nevertheless, it does point out the carelessness in preparing
important documents like the annual report, letter of offer etc.
Also read: How to read the Annual Report of a Company
Let us see other examples where Varanium Cloud Ltd depicted a carelessness in preparation of its disclosure
documents indicating weakness in internal control and processes.
8.2) Carelessness and weakness in internal controls and processes:
In the RHP (September 2022) as well as in the letter of offer for rights issue (September 2023), the company
stated that its average power consumption for the last three months was 3119 KVA even though during the
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intervening period, the company had claimed to commission three data centres, which are supposed to be
power-intensive operations.
Our average consumption as per our billing history for last 3 months is 3119 KVA and the same
is available from Adani Electricity Mumbai Limited.
Our average consumption as per our billing history for last 3 months is 3119 KVA and the same
is available from Adani Electricity Mumbai Limited.
The carelessness of the company in its disclosures was also reflected in its letter of offer for the rights issue
in September 2023 when it mentioned that there is no market for its equity shares as its shares are not listed
on any exchange even though they were trading on NSE for about a year since its IPO.
The Equity Shares have never been publicly traded and the Issue may not result in an active or
liquid market for the Equity Shares. Prior to the Issue, there has been no public market for the
Equity Shares, and an active trading market on the Stock Exchanges may not develop or be
sustained after the Issue.
There are other instances as well where the carelessness of the company in preparing financial reports was
visible. For example, in the April-Sept 2022 results, Varanium Cloud Ltd made a mistake in the calculation
of EPS (earning per share).
NSE announcement, Oct. 21, 2022, page 1:
Basic EPS was inadvertently shown as Rs. 26.24/- instead of Rs 41.47/- per share. It was a
Typographical error and the said mistake was erroneous and unintentional.
Similarly, in the FY2022 annual report, it made errors in the calculations/totalling of CWIP. The starting
CWIP for technologies was ₹257.62 lac and the company added ₹61.74 lac in the year. So, at the end of the
year, the total CWIP for technologies should have been ₹319.36 lac (= 257.62+61.74). However, the
company made a mistake in its annual report and mentioned the year-end value as ₹61.74 lac. This one
mistake was reflected further in the Sub Total for CWIP as well as the Grand Total for Gross Block.
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In both, the RHP of Sept 2022 as well as the letter of offer for rights issue in Sept 2023, Varanium Cloud
Ltd disclosed that it does not own any of the trademarks/logos that it uses including the company logo.
We have not obtained the registration of our trademarks used in our businesses and our inability
to obtain or maintain these registrations may adversely affect our competitive business position.
Our Company is not the legal owner of any of the logos
We have not obtained the registration of our trademarks used in our businesses and our inability
to obtain or maintain these registrations may adversely affect our competitive business position.
Our Company is not the legal owner of any of the logos
This is a huge risk to the brand of any company as any copyright infringement can impact its brand value
significantly. However, the same status over the period of one year may indicate just a copy-and-paste work
or might indicate a weakness in the seriousness of the company to protect its brand.
In addition, the auditor of the company in its RHP stated that it did not conduct any audit test to verify its
transactions etc. So, the auditor refused to express any opinion on its transactions.
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We did not perform audit tests for the purpose of expressing an opinion on individual balances of
account or summaries of selected transactions, and accordingly, we express no such opinion
thereon.
As per the FY2023 annual report, pages 53-54, the secretarial auditor pointed out that Varanium Cloud Ltd
did not comply with regulatory guidelines. It did not meet the minimum number of directors in April 2022.
Also, it did not give an advance intimation to the stock exchange of its board meeting for discussing the
declaration of dividend.
Such instances indicated that the company had weaknesses in its internal control and processes.
The company had continuously received whistleblower complaints; however, unfortunately, none of the
whistleblowers could bring the extent of wrongdoings in the media.
We have taken into consideration the whistle blower complaints received by the Company during
the year while determining the nature, timing and extent of our audit procedures
8.3) Payment facilitation service of Varanium Cloud Ltd:
While providing details of its payment facilitation services (Payfac), in the RHP, the company clarified that
it does not handle payments and therefore, does not require any license from RBI for the same.
at no point in time, does the Company itself process any payments or collect any form of payment
information from the user. The entire payment processing is done by the selected payment gateway
in accordance with the relevant RBI guidelines for the same. Consequently, the Company does not
require any license to operate this facilitation service.
However, the annual reports of the company disclosed that it provided payment facility services to two
promoter entities: Varanium Earth Private Limited (VEPL) and Varanium Lifestyle Private Limited
(VLPL) and it was yet to pay crores of rupees to these companies, which indicated that Varanium Cloud
Ltd handled payments themselves as the money flowed through its accounts.
In FY2022, the company was holding ₹6.24 cr to be paid to VEPL and VLPL for payment facilitation
services.

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In the above disclosure, an investor would note that the transaction amount during the entire year and the
outstanding amount at the year-end are the same. It might also indicate that Varanium Cloud Ltd collected
money from third parties, those who paid money using its payment facilitation services and continued to
hold it in its bank accounts without settling/paying it to the final merchants (VEPL and VLPL).
Normally, payment facilitation services/payment aggregators settle the money received from customers in
2-3 days to the bank accounts of merchants.
In FY2023, the company was holding ₹25.8 cr to be paid to the two promoter companies: VEPL and VLPL.
Holding money in its own accounts on behalf of customers of payment facilitation services without holding
any license from RBI would have indicated increased due diligence by investors.
8.4) Investment in Fincraft Media and Entertainment Private Limited:
In RHP for IPO, Varanium Cloud Ltd disclosed that it had invested about ₹1 cr in a company named Fincraft
Media and Entertainment Private Limited (Fincraft).
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However, when the company appointed a valuer to do a valuation for its preferential issue in January 2023,
then in the valuation report, the valuer, Sagar V Shah disclosed that this investment by Varanium Cloud
Ltd is not visible in the balance sheet of Fincraft. As a result, the valuer refused to consider it in its valuation
of the company. (Source: Valuation report by Sagar Shah)
Valuation Report of Varanium Cloud Limited by Registered Valuer Sagar Shah, page 15:
Further, it appears that there has been an investment appearing in the company named Fincraft
Media. However, per the management representation, same is not investment in shares of
company and was transaction of different nature and same is also supported with the fact
that financial of Fincraft does not show name of VCL in its balance sheet neither as Equity nor as
any other Capital instrument and hence, we have not considered the amount of investment in
arriving at the total value of Non- current investments.
9) Disclosures of litigations against promoters:

Both in the RHP for IPO as well as the letter of offer for the rights issue, Varanium Cloud Ltd declared that
there are no litigations involving its directors, promoters and promoter group.
LITIGATION INVOLVING OUR COMPANY, OUR DIRECTORS AND OUR PROMOTER: Nil
From the above discussion, an investor may note that before the IPO, Mr Sabale was involved in a cheating
and forgery case in Goa in 2009 and in disputes regarding the data centre in Malta in 2020.
Litigation involving our Directors, Promoters and Promoter Group: Nil
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However, before the letter of offer for the rights issue (September 26, 2023), an arbitration court had given
an award against him dated December 22, 2022, where he was asked to pay about ₹36.91 cr to Mr Cherag
Shah. Mr Sabale (Award Debtor) had filed an appeal against this award (Source)
Award Debtor has filed an Arbitration Petition under Section 34 of the Arbitration Act 1 2016
SCC OnLine Bom 5895 9-IAL-16702-23.doc and though an undertaking was given to this Court
that there will be 100% bank guarantee furnished for stay of the impugned Award dated 22nd
December 2022
The amount as per arbitral Award is Rs. 36,91,79,142/- (as per exchange rate Rs. 83.12 is on
August 2023). Further, it is mentioned that the total amount awarded plus interest at the rate of
6% per annum till date amounts to Rs. 50,80,61,542/-.
It was in this case that in March 2024, the Bombay High Court ordered the arrest of Mr Harshwardhan
Sabale (Source: Bombay High Court orders arrest of Varanium Cloud promoter
Sabale; stock hits 5% lower circuit: March 22, 2024)
Whether a retail investor could have found red flags about

Varanium Cloud Ltd and Mr Harshwardhan Sabale from public
documents?
We believe that the publicly available information about the company and its promoter had signs that could
have alerted retail investors about the issues that have gained major attention recently and are clearly
highlighted in the SEBI order.
From the media articles, annual reports, red herring prospectus for IPO, letter of offer for the rights issue,
corporate announcements to NSE etc. an investor could have got to know about:
• Existing history of allegations of misdeeds against the promoter like his arrest in 2009 in Goa for
cheating & forgery, mystery around their actions and litigations against them in Malta etc. In
addition, disputes with Mr Cherag Shah and the incidence of promising unusually large funding to
Rolta India Ltd were also in the public domain.
• After the IPO, Varanium Cloud Ltd could never convert its profits into cash flow from operations
(CFO). In fact, the CFO was almost always very miniscule when compared to reported profits. In
such situations, when any company announces plans for humungous acquisitions like Fastway
Transmissions Pvt. Ltd for more than ₹2,000 cr when it had hardly generated ₹8 cr in CFO since
IPO, then it becomes a significant red flag.
• The company changed its auditors back-to-back before the IPO as none of the auditors was
continuing with it. On a side note, the auditor that continued with it is now referred by SEBI to the
National Financial Reporting Authority (NFRA) for investigation and action for its role in the entire
episode.
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• A very high pledge of promoters’ stake in the company was a cause of concern for investors.
• The company almost never put any of its own money into creating projects. It proposed to fund the
entire cost of 3 edge data centres and 3 digital learning centres solely from the IPO, which resulted
in no skin in the game for the promoter as the entire financial risk was borne by subscribers to the
IPO. This was a risky proposition for investors to subscribe to.
Recommendations: What should a retail investor do to

safeguard herself from such traps?
After analysing the case of Varanium Cloud Ltd and Mr Harshwardhan Sabale, we believe that an investor
should keep the following things in mind while investing in any IPO or any company for that matter.
• Do a thorough background check of the promoter on Google and other online sources and be very
cautious when she finds a history of any suspicious/wrongdoing in the past. Please keep in mind
what a senior banker once said: “There is nothing called a reformed promoter.”
• Invest in IPOs where the amount of money raised is at least ₹100 cr or more (or any revised limit
by SEBI in this regard) so that there is an oversight of an external monitoring agency on the usage
of funds to stop blatant siphoning off of money by promoters.
• Prefer to invest in IPOs/projects where at least some portion is funded by debt and the company
has already tied up the debt with any reputed bank/financial institution. This will ensure that at least
some external agency has gone through the project proposal and has put its mind to the cost
estimates. It also brings down the probability of outright fraud where the projects are declared to
be complete with nothing happening on the ground.
• Be prepared to spend a significant time reading documents like the red herring prospectus, past
annual reports, credit rating reports etc to do a thorough analysis of the company. The following
articles will help you in knowing what you should see while reading these documents:
o How to do Financial Analysis of a Company
o How to do Business Analysis of a Company
o How to do Management Analysis of a Company
o How to find red Flags/Accounting Shenanigans in a Company
o How to read the Annual Report of a Company
Please invest in any stock or any IPO only after doing a complete analysis because only after reading and
analysing any company, we, as investors, will be able to safeguard our hard-earned money from outright
frauds that take place in financial markets.
We wish you the best for a happy and safe investing journey!
Regards,
Dr Vijay Malik
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P.S.

Workshop Videos
Analysis Excel
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7) Seshasayee Paper and Boards Ltd

Seshasayee Paper and Boards Ltd is a leading Indian paper manufacturer.
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In the past, on various occasions, Seshasayee Paper and Boards Ltd has acquired stakes in many companies,
which have been its associates and subsidiaries. As a result, in FY2013 and thereafter, from FY2015
onwards, it has reported both standalone as well as consolidated financials.
On March 31, 2023, the company had one subsidiary, Esvi International (Engineers & Exporters) Limited
and one associate company, Ponni Sugars (Erode) Limited (March 2023 quarter results, page 17).
As a result, while analysing the past financial performance of Seshasayee Paper and Boards Ltd, we have
analysed the standalone financials of the company from FY1996 to FY2012 and for FY2014. In addition,
we have analysed consolidated financials for FY2013 and from FY2015 onwards until Dec. 2022.

Guide
With this background, let us analyse the financial performance of Seshasayee Paper and Boards Ltd.
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Financial and Business Analysis of Seshasayee Paper and Boards

Ltd:
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In the last 10 years (FY2014-FY2023), the sales of Seshasayee Paper and Boards Ltd have increased at 9%
year on year, from ₹996 cr in FY2014 to ₹2,083 cr in FY2023. At times, the company saw its sales decline
like in FY2018, FY2020 and FY2021.
Over the years, the operating profit margin (OPM) of Seshasayee Paper and Boards Ltd has seen high
fluctuations. The OPM declined in FY2013 to 9% from 12% in FY2012. Thereafter, OPM improved to
23% in FY2020. However, it soon declined to 12% in FY2022. In FY2023, the OPM increased to 26%.
Net profit margin (NPM) follows a similar trend and has fluctuated between 2% in FY2015 and 19% in
FY2023.
We have expanded the period of analysis of profitability to the last 28 years (FY1996-FY2023) to better
understand the profitability patterns of Seshasayee Paper and Boards Ltd. The following table shows the
trend.
An investor notices that during the last 28 years, Seshasayee Paper and Boards Ltd had large fluctuations
in its net profit margin (NPM). NPM used to be 17% in FY1996, which declined to 1% in FY1998, stayed
at similarly low levels and at 1% in FY2002. NPM increased to 6% in FY2004 only to decline to 2% in
FY2005. It increased sharply to 10% in FY2007 but declined sharply to 3% in FY2009. NPM increased
again to 11% in FY2011 but declined to 2% in FY2013 and stayed at similarly low levels of 2% in FY2015.
Thereafter, NPM increased to 15% in FY2020 and then declined to 8% in FY2022. Now, NPM has shown
a sharp recovery to 19% in FY2023.
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To understand the reasons for such a financial performance of Seshasayee Paper and Boards Ltd, an investor
needs to read the publicly available documents of the company like its annual reports from FY1997
onwards, credit rating reports by CARE, corporate announcements as well as other public documents.
In addition, an investor should also read the following article explaining the key factors affecting the
business of paper manufacturing companies: How to do Business Analysis of Paper
Manufacturing Companies
The above-mentioned documents show that the following key factors influence the business of Seshasayee
Paper and Boards Ltd, which are critical to understand for any investor analysing the company.
1) No pricing power over its customers due to the non-differentiable

commodity nature of paper products:
Seshasayee Paper and Boards Ltd makes paper products, which are difficult to distinguish between different
competitors. There are specified grades of paper used in different applications and within the same grade,
a customer can easily replace products of one paper manufacturer with another.
For example, if a customer needs a copier paper of 75 GSM (grams per square meter), then she can easily
use 75 GSM paper from any of the manufacturers without a significant impact on usability. Or, a person
can replace the notebook of one paper manufacturer with another easily without any significant impact on
her writing ability.
One of the reasons for the non-differentiation of products by Seshasayee Paper and Boards Ltd is very low
spending on product research and development (R&D). In FY2022, it spent ₹0.8 cr on R&D, which is
0.059% of its revenue of ₹1,355 cr in the year (FY2022 annual report, page 106).
Instead, the company along with the Indian paper industry relies on the Central Pulp and Paper Research
Institute of the Indian Govt. for innovative research in paper products.
Transcript of AGM, July 2021, page 21:
On the research side, Paper Industry has got a centralised research facility at Central Pulp and
Paper Research Institute at Saharanpur…We don’t do fundamental research in paper units.
As a result, paper manufacturers do not have any pricing/negotiating power over their customers. A
customer can easily switch from one paper manufacturer to another.
In the case of Seshasayee Paper and Boards Ltd as well, over the years, many disclosures and explanations
provided in its annual reports show that the company does not have any pricing power over its customers.
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Seshasayee Paper and Boards Ltd is not able to pass on an increase in its input costs to its customers. As a
result, on multiple occasions, its profit margins suffered when costs increased.
For example, in FY1997, the company’s profitability suffered when costs increased a lot and it could not
pass them on entirely to its customers. Its NPM declined from 17% in FY1996 to 6% in FY1997.
Gross profit before interest and depreciation was lower…caused by cost escalations with no
matching price increases of end-products due to unfavourable market conditions.
On similar lines, in FY2018, the company could not get an equal price increase when its input costs
increased. As a result, its NPM declined.
The Company could not pass on fully the cost increase arising out of steep increase in the prices
of Coal, Furnace Oil and other input chemicals during the year.
The recent sharp decline in the profitability of the company in FY2022 when its NPM declined to 8% from
14% in FY2021 was because it could not get a price increase proportional to cost increases.
Coal prices are now at 3 times the pre-covid levels…All these have resulted in significant pressure
on margins, with Price increases in Paper not meeting the impact of cost push in full.
These are examples of the years when Seshasayee Paper and Boards Ltd could not increase its prices
sufficiently to cover its costs. However, there were many years when it had to reduce prices even when the
input costs were increasing.
In some of these years, Seshasayee Paper and Boards Ltd reported very low profitability margins.
For example, in FY1998, it could barely manage to avoid loss and its NPM declined to 1% when its costs
increased; however, its sale prices declined by about 8%.
Gross sales realisation declined by around 8%…in the current year. On the other hand, there was
a further escalation of costs.
In FY2002, the company’s NPM again hit a rock bottom of 1% when its costs were increasing; however,
sales prices were declining.
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units in the industry were unable to effect any increase in prices of their products, even to meet,
partially, the increase in costs. On the contrary, there were frequent price drops
The absence of pricing power of Seshasayee Paper and Boards Ltd has hurt it decade after decade. In
FY2012, its NPM declined to 6% from 11% in FY2011. The company suffered this decline in profit margins
because it had reduced its prices even when it faced significant increases in costs.
Major factors that impacted the profitability were the steep increase in prices of input
materials…Further, the unfavourable market conditions forced the Company to reduce its
prices consistently.
Seshasayee Paper and Boards Ltd continued to suffer due to increasing raw material costs where it had to
reduce prices to sell its goods. As a result, in FY2015, the NPM of the company declined to 2%.
Overall Profit before tax for the year registered a steep fall…when cost increases could not be
passed on to the customers and discounts had to be offered to push-up sales
At times, the company has faced such a low bargaining position in front of its customers that it had to
incentivize them by offering additional offers like a higher credit period. For example, it happened in 1998.
There was unabated pressure on paper prices throughout the year. It also became neccessary to
offer extended credit period to push the products into the market…The net sales realisation for the
Company fell by Rs 1000 to Rs 1500 per tonne
An investor would appreciate that such low bargaining power of Seshasayee Paper and Boards Ltd is due
to intense competition in the industry.
Recommended reading: How to do Business Analysis of Steel Companies
2) Intense price-based competition in the paper industry:
The paper industry in India is highly fragmented with many small and big paper mills competing for
business. In addition, Indian paper mills face intense competition from overseas players, both in finished
paper as well as pulp segments.
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Let us understand why the Indian paper industry faces such intense competition.
2.1) Competition from Indian paper manufacturers who compete mainly on

price:
Indian paper industry is facing an oversupply situation where domestic paper production capacity is much
higher than paper demand. In 2019, India’s domestic production capacity was 25.17 MTPA.
there are over 800 paper mills in operation in the country, with an installed capacity of 25.17
million tonnes and operating at over 80% capacity utilisation.
Indian mills are not able to run at full capacity because the market size of Indian paper demand in FY2022
was only about 18.6 MTPA.
IPMA estimates the domestic market size of paper to be around 18.6 million tonnes per annum.
Out of this, some demand is met by imports, which further restricts the market available for domestic
producers. As a result, domestic manufacturers, which all produce non-differentiable, commodity products,
compete intensely, primarily on price to gain business and keep their mills running.
Throughout its history, Seshasayee Paper and Boards Ltd had to face this intense price-based competition
where it had to offer lower prices/discounts to sell its goods. It had to reduce its prices in FY2004 to generate
sales.
prices were under tremendous pressure, due to competitor mills offering hefty discounts to push
their products into the market. The Company had to offer price concessions for white varieties of
paper in line with the market sentiments from January 2004 onwards
Seshasayee Paper and Boards Ltd had to reduce its prices in FY2012 to sell its goods to customers.
Also, the paper market was unfavourable…forcing the Company to reduce the prices of its
products steeply in sympathy with the other players in the market.
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Credit rating agency, CARE, has continuously highlighted the oversupply situation in the Indian paper
market in its credit rating reports for Seshasayee Paper and Boards Ltd.
Credit rating report by CARE, March 2012, page 1:
ratings are however constrained by…the existing pressure on profitability margins due to over-
supply scenario in domestic markets.
The company acknowledged in FY2013 that the oversupply situation in the market is hurting its ability to
pass on increases in input costs.
margins would continue to suffer from high input costs and manufacturers’ limited ability to pass
on such cost increases to customers due to over-capacity in the Industry.
The price-based competition faced by Seshasayee Paper and Boards Ltd is so intense that even news of a
reduction in input costs like pulp is not very good news for the company. This is because it will have to
pass on the benefits of such cost decline to customers by lowering its product prices due to competition.
Transcript of annual general meeting (AGM), August 2020, page 24:
Pulp prices are coming down. This is not necessarily a happy situation, since along with pulp
prices, paper prices will also come down, which means we will be forced to down revise the prices.
The factors making Seshasayee Paper and Boards Ltd a price-taker are not limited to the overcapacity of
Indian paper producers. Additionally, cheaper imports are also adding to the oversupply situation in India.
2.2) Cheaper imports put pressure on Indian paper manufacturers:
Apart from Indian paper manufacturers, the Indian industry faces intense competition from overseas
manufacturers as well. This competition comes in both segments finished paper and pulp.
One of the main reasons for overseas paper manufacturers to target the Indian market is that it has shown
good growth potential. Per capita paper consumption in India has grown from 5 kg in 2002 (Source: FY2002
annual report, page 16) to about 15 kg in 2022 (Source: FY2022 annual report, page 49).
This growth in paper consumption in India is despite increasing penetration of digital means like the
internet, smartphones and computers.
Moreover, Indian per capita paper consumption is still low as compared to 65 kg of China and 312 kg of
the USA supporting significant growth opportunities for players.
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The per-capita consumption of 14-15 kgs is significantly lower than the world average of around
57 kgs…China’s 65 kg, Indonesia’s 22 kg, Malaysia’s 25 kg, and of course USA’s 312
kg consumption levels.
Indian paper manufacturers including Seshasayee Paper and Boards Ltd have been facing pressure from
cheaper imports for a long time. In FY1997, rising imports of cheaper paper products were one of the
reasons for the decline in the profit margins of Seshasayee Paper and Boards Ltd.
Throughout 1996-97, the paper industry was caught between rising prices of inputs and intense
competition from paper coming from outside of India.
Even after more than two decades, in FY2018, Seshasayee Paper and Boards Ltd highlighted how cheaper
imports are continuously putting pressure on prices in the Indian market.
market was flooded with imports of Copier and Maplitho grades from ASEAN countries taking
advantage of the Zero Import Duty concession, at highly competitive prices, forcing domestic
manufacturers to effect price reduction in these grades.
There are multiple reasons that Indian paper manufacturers like Seshasayee Paper and Boards Ltd are not
able to compete with overseas players and lose out to them on pricing i.e. overseas players are able to sell
their products cheaper in India.
2.2.1) Declining import duties by the Indian govt. on paper imports:
Over the years, due to treaties signed under World Trade Organization (WTO) and thereafter, under
Regional Trade Agreements (RTA) and Free Trade Agreements (FTA), Indian govt. has reduced and even
abolished import duties on the import of paper. This has become one of the major reasons for increased
competition from imports.
For example, in FY1997-FY1998, Seshasayee Paper and Boards Ltd suffered from cheaper imports because
of the removal of import duties on newsprint paper.
reduced import duties on paper from 65% to 20% in quick succession during first half of
1995…abolished import duty on newsprint in March 1994 and removed actual user condition for
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import of newsprint…paved the way for the import of good printing and writing paper in the garb
of newsprint.
In the recent past, since 2014, Indian govt. reduced the duty on the import of paper from ASEAN countries
to zero leading to an increase in the import of paper, which put significant pressure on companies like
Seshasayee Paper and Boards Ltd in passing on costs to their customers.
Credit rating report by CARE, April 2018, page 2:
customs duty on paper in India has been brought down to zero; from 1st January 2014, as per the
terms of the free trade agreement…Due to this, there has been a rise in paper imports from ASEAN
countries…Thus, inability of SPBL to pass-on the high input prices may further put pressure on
its operating margins.
In its FY2019 annual report, Seshasayee Paper and Boards Ltd highlighted the approach of the Indian govt.
to reduce import duties on paper under trade agreements without putting in requisite safeguards as one of
the key weaknesses in the industry.
Weaknesses in Industry: increasing imports consequent on numerous Regional Trade

Agreements (RTAs) / Free Trade Agreements (FTAs) entered into by the Govt. without adequate
safeguards
As a result, overseas players are able to price their products at 10% cheaper than what Seshasayee Paper
and Boards Ltd sells in the Indian market.
Transcript of AGM, August 2020, page 15:
What is the gap in selling price between paper imports and sold by Seshasayee?
• It is more than 10%.
2.2.2) Small-sized inefficient-fragmented paper mills in India with inferior

technology:
Indian paper industry is dominated by many small and medium-sized players who lack the benefits of
economies of scale and therefore are not cost-competitive.
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Indian Paper industry has a fragmented structure consisting of small, medium and large paper
mills, having capacities ranging from 5 to 1,150 tonnes per day
Historically, even the largest-sized paper mills in India have been medium-sized as per global standards.
Seshasayee Paper and Boards Ltd highlighted it to its shareholders in FY2004.
Indian Paper Machines are mostly small in size. By global standards, even the largest machines
are medium size, as large machines are today in the range of 4 00 000 – 6 00 000 tpa, with trim
width upto 10 meters. Most Indian Paper Machines have a trim width of 1.5 – 3.5 meters only.
As a result, Seshasayee Paper and Boards Ltd acknowledged that to be competitive, it will have to grow in
size. As a result, it started a mill development plan (MDP) in FY2005.
To be competitive and cost effective our Company’s present capacity of 115000 tonnes per annum
is inadequate…profitable operations can be ensured only with enhancement of in-house pulping
capacity and addition of new paper making capacity.
Seshasayee Paper and Boards Ltd also intimated to its shareholders in FY2006 that as per a consulting firm
(Jaakko Poyry Consulting of Finland) appointed by the govt. lack of technology upgradation is the key
reason for the non-competitiveness of Indian paper manufacturers.
The CPPRI commissioned Jaakko Poyry Consulting of Finland, in its report has clearly identified
that lack of technology up-gradation is one of the main reasons for the Indian Paper
Industry’s inability to be globally competitive.
However, even after more than a decade, as per Seshasayee Paper and Boards Ltd, the Indian paper industry
still lacks global competitiveness.
Weaknesses in Industry: lack of global competitiveness in costs and quality
As per the company, one of the reasons for this lack of competitiveness is the inability of the Indian paper
industry to merge into large players due to a lack of funds. In addition, most potential targets in India are
small players with old paper mills, which can only produce inferior quality products.
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Though Indian Paper Industry is fragmented with numerous small players, warranting
greater consolidation, the same is a distant possibility, except a few, due to the following factors:
there is shortfall in disposable funds available for investing in mergers and acquisitions.
The paper machines of small players are small in size and hence are not viable for acquisitions
The paper machines of small players are old, obsolete and would not interest foreign players. Such
machines will produce only low quality products.
2.2.3) High cost of raw material in India:
In India, paper manufacturers are not allowed to access natural forests. In addition, paper manufacturers are
not allowed to own land to grow trees as raw materials for their mills. Therefore, there is always an
uncertainty about raw material availability.
In addition, when paper mills buy trees/wood from farmers, then it costs them almost twice what overseas
paper manufacturers get in their countries. In India, Seshasayee Paper and Boards Ltd pays about $120 per
tonne for wood, which is available to foreign players at about $60 per tonne.
As per the company, one of the main reasons for such an excessive cost of wood in India is the much lower
size of plantation fields owned by farmers in India (2-3 acres) when compared to countries like Brazil or
Indonesia (15,000 to 20,000 hectares).
Transcript of AGM, August 2020, pages 22-23:
in Brazil or in Indonesia, they grow tree in plantations of 15000 or 20000 hectares with modern
technologies. Wood price is highly economical there…we take marginal farmers, having 2-3
acres of land…For example, we get wood at Rs 9000 per BD tonne (with Zero % moisture),
roughly translating to US $ 120. Wood doesn’t cost more than US $ 60 in Indonesia.
As one tonne of paper needs 2 tonnes of wood; therefore, to produce 1 tonne of paper, companies need to
spend $120 more in raw material costs in India.
For one tonne of paper, we require two tonnes of wood. There is straight away US $ 120
difference in pulp cost between us and Indonesia.
The excessive cost of raw materials is not limited to wood. Even for recycled paper, the cost is higher in
India because the collection of waste paper in India is low at about 30% than in foreign countries (60-70%).
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Collection of waste paper is poor in India. Our collection rate is less than
30% whereas internationally, it is about 60-70%.
While the high raw material cost is a weak point for Indian paper mills, the availability of cheaper raw
materials is a key strength of European paper mills giving them a huge competitive advantage.
European mills are very strong, they are extremely strong in raw material base in terms of soft
wood. And they are significantly good in the recovery rates from waste paper, meaning waste
paper recovery rates are very high in Europe. These are their strengths.
As a result of such competitive disadvantages of raw material costs, economies of scale and technological
challenges, Indian paper mills are not able to compete with foreign players. High-cost structure of Indian
paper mills makes their products uncompetitive in export markets.
As per Seshasayee Paper and Boards Ltd export of paper is less remunerative than sales in the domestic
market. Only once in about four years, the export market provides better pricing than the Indian market.
out of 4 years in a row probably you make more money in export only in one year. Other 3 years
you get better realization in domestic market.
For example, in FY2010, Indian paper companies including Seshasayee Paper and Boards Ltd were forced
to reduce their exports due to nonremunerative pricing.
domestic mills were also forced to cut-back on their exports, in view of un-remunerative
prices prevailing in the overseas markets
Due to a lack of cost competitiveness, Seshasayee Paper and Boards Ltd realized that it would not be able
to increase exports via its existing model to direct sales to foreign dealers/distributors etc. Therefore, in
FY2012, it resorted to contract manufacturing for overseas paper manufacturers where it could get good
volumes although at a lower profit.
Company had taken the initiative of stepping-up exports of the woodfree varieties and resorting to
high volume ‘Contract Orders’ – albeit – at lower margins to combat the floundering domestic
market.
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In FY2020, Seshasayee Paper and Boards Ltd acknowledged that it is not very competitive than overseas
paper manufacturers as they are more cost competitive and the company does not have any special
advantage over them.
The capacity that they have is far in excess of their requirements and therefore on marginal costing
prices, they are able to dump paper everywhere at lower prices… We don’t have these advantages.
Hence, we are not very competitive in our cost of manufacture. There is no distinct advantage.
As a result of such competitive disadvantages, Indian paper manufacturers find it difficult to compete with
cheaper imports and in turn, lose their pricing power.
3) Attempts to become cost-competitive make paper manufacturing a highly

capital-intensive business:
As discussed above, paper products are non-differentiable commodities and paper companies compete
primarily on pricing to gain business from customers. As a result, being a low-cost producer of paper
products is the biggest competitive advantage for paper companies.
In its AGM in 2020, Seshasayee Paper and Boards Ltd clearly highlighted to its investors that to succeed,
the company must focus on its costs. It does not have any other special advantage over its competitors.
we need to curtail the costs; we have to be competitive; we also need to see that there are not much
leakages out of our system. We are not doing anything wonderful than any other big Paper Mill
To bring cost efficiencies, paper companies go for large plants to get economies of scale as well as higher
bargaining power over their suppliers. As discussed previously, while going for its Mill Development
Program (MDP) in FY2005, Seshasayee Paper and Boards Ltd acknowledged that to stay competitive and
profitable, it would have to grow in size.
Moreover, to bring in cost efficiencies, paper companies have to go for integration of operations like having
in-house pulping plants as well as captive power plants. These initiatives ensure that a paper mill can get
its inputs at a lower cost than other mills that have to source pulp and power from the market.
For example, Seshasayee Paper and Boards Ltd bought a bankrupt paper mill Subburaj Papers Limited
(SPL) in 2011, which struggled to function in the tough operating conditions and defaulted to its lenders.
After the acquisition, Seshasayee Paper and Boards Ltd started supplying low-cost captive power and in-
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house pulp to SPL (later renamed Tirunelveli unit) and the acquired paper unit revived and started reporting
profits.
Credit rating report by CARE, January 2017, page 1:
the loss making Tirunelveli unit performed well during H1FY17…With synergies derived from
both the units by supply of pulp and power, the same led to improvement in the profitability
margins.
However, all the steps of cost efficiencies mentioned above like large size leading to economies of scale
and integrated operations with captive power plants make paper manufacturing a highly capital-intensive
business.
Apart from the high initial capital required to install an integrated paper mill, companies need to continue
to spend money to upgrade their technology to improve efficiencies and expand capacities to maintain
market share.
As per Seshasayee Paper and Boards Ltd, in the last 5-7 years, the paper industry has invested more than
₹25,000 cr in newer technology plants.
The industry has gone up the sustainability curve and has become far more technologically
advanced. In the last five to seven years, an amount of over Rs 25,000 crores has been invested in
new efficient capacities and induction of clean and green technologies.
Most importantly, companies have to keep spending money to meet ever-tightening environmental
regulations. This is because first, the manufacturing of paper produces harmful chemicals and emissions.
In addition, paper constitutes one of the biggest parts of daily waste production. As a result, environmental
activists focus a lot on the activities of paper manufacturing companies.
Paper manufacturing industry generates a notable amount of industrial air, water and land
emissions as discarded paper and boards make up a large portion of landfills, which poses a threat
to the environment.
Paper Industry is often at the receiving end from environmental activists who are wary of
environmental footprint of this resources-intensive industry.
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Due to often tightening environmental regulations, Seshasayee Paper and Boards Ltd had to spend a
significant amount of money to comply with the updated requirements.
For example, in FY2004, the company had to invest significant funds to end the usage of chlorine in paper
manufacturing.
Indian Paper Industry is expected to face environmental pressure for eliminating use of chlorine in
bleaching. The investment required for this process change is substantial.
Similarly, in FY2006, the company had to completely change its pulping machines as they were very old
and did not meet the guidelines under the “Charter on Corporate Responsibility for Environmental
Protection (CREP)”.
existing Wood Pulping Equipment of the Mill is more than 30 years old and requires total
replacement to sustain compliance under CREP and improve further.
Similarly, in 2012, the Indian govt. implemented the PAT (Perform, Achieve and Trade) Scheme and
mandated guidelines for paper companies to use biofuel to produce energy for use in their plants.
With a view to curtail the carbon emission, Government of India, have introduced the PAT
(Perform, Achieve and Trade) Scheme, calling for significant reduction in energy usage by the
Pulp and Paper Units in a specified time frame. Further, REC (Renewable Energy Certificate)
Scheme requires the Indian Paper Industry using a minimum percentage of bio-fuel in the fuel-
mix
As a result, Seshasayee Paper and Boards Ltd had to make investments to enable its plants to use biofuels.
By FY2015, it could significantly increase the usage of biofuels in its plants.
Unit: Erode: The Chemical Recovery Boiler with 16 MW Turbo Alternator is working on 100%
Green Fuel
Unit: Tirunelveli: Use of Bio-fuel to the extent of 85% in the 6.5 MW Captive Power Plant.
Therefore, an investor would appreciate that to run cost-effective integrated paper production units, a
company needs to spend a large amount of money initially and thereafter need to make significant
investments to upgrade technology, meet environmental compliance norms etc.
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However, these integrated paper mills are still price-takers with no bargaining power over customers;
therefore, they earn a low return on their investment. Seshasayee Paper and Boards Ltd acknowledged this
fact of poor returns on capital to its investors in FY2021.
Paper Industry is capital intensive and yields poor returns on investments.
it is capital intensive industry, if you are getting a payback of say 4 years I think it is a good
project, 5 years is also a good project.
Therefore, to reduce the funds required to expand and run paper manufacturing operations, Seshasayee
Paper and Boards Ltd resorted to multiple measures like buying used/second-hand plants instead of
installing brand-new machinery while expanding capacities.
In FY1998, when the company expanded its operations, then it bought a second-hand machine from
Germany.
A good second hand Paper machine has already been imported from Germany for this Project
In FY2006, while implementing MDP-I, Seshasayee Paper and Boards Ltd imported second-hand
machinery from the USA.
The Project envisages replacement of the existing Pulp Mill for which the Company had entered
into an agreement for procurement of a 350 tonnes per day used Pulp mill in USA
Recommended reading: When a company should sell all assets and invest money
in FDs?
4) Paper industry’s business performance goes through boom and bust

cycles:
A look at the profitability performance of Seshasayee Paper and Boards Ltd over the last 28 years (FY1996-
FY2023), will show that it has faced alternate periods of improving and declining performance. NPM had
routinely fluctuated between low levels of 1-2% and low double-digit levels.
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One of the reasons for such fluctuating and cyclical performance is the linkage of paper demand with
general economic growth. When general market sentiment is good, the demand for paper increases and vice
versa. Therefore, when times are good, demand increases more than supply and then paper manufacturers
announce capacity expansions.
However, a paper manufacturing unit requires a significant lead time for commissioning because it also
requires environmental approvals (about 2-3 years). So, in total, a greenfield expansion may take about 4-
5 years from planning to commissioning.
Green field projects are very difficult because to get environmental clearance, it takes 2-3 years.
Then you have another 30-36 months for execution.
As it takes a long time to complete new paper plants, most of the time, when the new capacities become
functional the economic cycle has changed and demand is down. Then, the industry suffers from low
demand and overproduction. It leads to the crashing of prices and profit margins.
For example, in the run-up to the global financial crisis, in FY2006-FY2007, when demand for paper and
profit margins were increasing, many paper companies announced capacity expansions.
Over the next five years, incremental capacity addition is projected at around 2.6 million
tonnes which is nearly 35% of current capacity of the industry…huge capacity additions, expected
over the next few years, will exert pressure on domestic paper prices in the medium term.
When these capacities were completed over FY2008-FY2010, it led to oversupply and the net profit
margins of Seshasayee Paper and Boards Ltd crashed from 11% in FY2011 to 2% in FY2013.
On the supply side, the industry saw significant capacity additions of 1.6 million tonnes during the
Financial Year 2009 to Financial Year 2011…The bunching of these capacities resulted in over-
supply scenario…as these incremental capacities could not be absorbed in the market. As a result,
most players saw significant built-up of inventories as well as pricing pressures in Financial Year
2012.
As a result of oversupply and the resultant price crash, businesses suffer significantly. Seshasayee Paper
and Boards Ltd has barely escaped from losses during such downturns when it reported low NPMs of 1-
3% in FY1998-FY2002, FY2005, FY2009, FY2013-FY2015.
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However, many players are not able to avoid losses in downturns, and as a result, shut down their production
plants.
In FY1997, Seshasayee Paper and Boards Ltd had to postpone its expansion plan because the downturn
made the project unviable.
Company had drawn up an Expansion/Modernisation Plan costing over Rs 450 Crores, to double
its installed capacity from 60 000 tonnes per annum to 1 20 000 tonnes per annum…The Project,
as originally envisaged, has become unviable in the prevailing market conditions.
In FY2002, many paper manufacturing units shut down production to counter the downturn. However, it
was still not able to balance the demand and supply in the market. Seshasayee Paper and Boards Ltd
reported an NPM of 1% in FY2002.
Despite the production cut-back, announced by various paper mills abroad, there was an over-
supply situation, due to decrease in demand. This had put pressure on the prices further.
The closure of mills during a downturn corrects the oversupply, which leads to demand becoming higher
than supply. As a result, product prices increase and the surviving paper units generate good profits.
After the oversupply situation of FY2012-FY2015, many paper units shut down their production, which
corrected the oversupply situation. As a result, the paper prices increased and in FY2017, Seshasayee Paper
and Boards Ltd reported a healthy NPM of 12% up from 2% in FY2015.
Market conditions during the year 2016-17 were stable aided by a growing economy and restricted
availability of paper in the domestic market on account of closure of some units.
The credit rating agency, CARE, has also highlighted the cyclical nature of the paper industry in its reports
for Seshasayee Paper and Boards Ltd.
The paper industry is inherently cyclical owing to the long gestation period in capacity addition
and lead time for raw material generation
In FY2020 when Seshasayee Paper and Boards Ltd’s NPM had improved to 15% from a low of 2% in
FY2015, the company acknowledged that the primary reason for such an improvement in performance is
reduced supply due to the closure of paper mills.
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Paper Companies posted a sharp turnaround in 2017-18 and 2018-19. Domestic paper demand
remained buoyant as closure of stressed domestic capacities led to supply constraints.
In FY2023, when the company reported a lifetime high NPM of 19%, the credit rating agency, CARE,
indicated that it is due to a sharp increase in demand for paper as the economy is opening up after Covid
restriction.
Post Covid, the pent-up demand for print & writing paper (P&W) increased sharply, mainly led
by re-opening of schools, colleges, offices and institutions…Similar trend has been observed for
the 9MFY23 period with full capacity utilisation and around 50% increase in realisations.
Advised reading: Credit Rating Reports: A Complete Guide for Stock Investors
Currently, the supply is low as many paper mills are not in operation. As has been in previous phases of
upturns, soon we might witness an increase in supply from existing closed units as well as new capacities,
which might lead to a correction of prices. Therefore, investors need to be cautious while projecting current
profit margins in the future.
In fact, Seshasayee Paper and Boards Ltd has already disclosed plans for its capacity expansion (MDP-IV),
which is typical behaviour in any cyclical industry where during an upturn, existing players announce
capacity expansions.
The corporate announcement by the company to BSE dated April 29, 2023, page 1:
company to secure Environmental Clearances for project Mill Development Plan – IV (MDP –
IV) in Company’s manufacturing facility in Erode, to augment Paper Capacity from 1,65,000
tonnes p.a. to 2,31,000 tonnes p.a.
An investor should always keep in the cyclical behaviour of the paper industry as evidenced in the historical
performance of Seshasayee Paper and Boards Ltd over the last 28 years (FY1996-FY2023) while she
projects its financial performance.
5) High dependence on the regulatory environment and govt. actions:
The business performance of Seshasayee Paper and Boards Ltd including all other paper players is affected
significantly due to changes in policies by govt. especially related to taxes and levies like custom duties,
and other indirect taxes as well as allocation of key resources like wood raw material and power.
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In FY2001, when the company reported a net profit margin of 1%, then the main reason was the impact of
additional excise duty of about ₹20 cr due to an increase in excise duty to 16%, which was announced in
FY2000.
Government imposed a uniform rate of Excise Duty of 16% on paper manufactured both
from conventional and unconventional raw materials…This measure is a serious blow…as the
impact will be of the order of Rs.1000 lakhs for the existing production and another Rs 1000 lakhs
for the production out of the new Paper Machine.
As a result, in FY2001, Seshasayee Paper and Boards Ltd had to pay an excise duty of ₹32 cr as compared
to ₹13.5 cr in FY2000.
Excise Duty paid during the year was high at Rs 3238 lakhs, as compared to Rs 1348 lakhs, in the
previous year.
A high outflow due to excise duty is detrimental to companies, which do not have pricing power because
many times, they are not able to pass it on to customers and have to take a hit on their margins.
In FY2005, the company saw a decline in profit margins when the govt. withdrew the concessional excise
duty rate of 12% from integrated paper mills using unconventional raw materials like bagasse etc.
paper manufactured with not less than 75% unconventional raw material will be eligible for a
concessional rate of excise duty of 12%, provided they are manufactured in the mills which do not
have a plant attached thereto for making bamboo or wood pulp. By the above Notification dated
10 09 2004, large integrated paper mills, having facilities for making wood and bamboo pulp,
have become ineligible
In FY2012, the profit margins of the company declined when the central govt. increased excise duty and
the Tamil Nadu govt. increased value-added tax (VAT) on paper.
increase in rate of Excise Duty from 4% to 5% with effect from 1st March 2011 and 5% to 6% from
17th March 2012.
Tamilnadu Government increased the rate of VAT for Paper from 4% to 5%
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Similar to the above case where adverse changes in the taxes hurt the performance of Seshasayee Paper and
Boards Ltd, the performance of the company improved when govt. made favourable changes to taxation.
In FY2007, the NPM of the company improved to 10% from 5% in FY2006. The company stated that one
of the reasons was the abolition of additional sales tax by the Tamil Nadu govt.
Major factors that contributed to better profitability for the year: Abolition of Additional Sales
Tax in Tamilnadu after introduction of Value Added Tax
In FY2008, when govt. reduced the excise duty on paper, then the performance of the company improved.
Increase in net sales realisation, due to increase in the prices of paper and reduction in Excise
Duty on Paper from 12% to 8%
In FY2019, the company’s performance improved when govt. imposed an anti-dumping duty on the import
of copier and Maplitho papers. As a result, competition from the import of these products declined.
Flow of imported Copier grades and Maplitho grades gradually moderated when the Customs
Department imposed an Anti-dumping Duty on imported Copier
Apart from changes in duties and taxes, govt. influences the demand for paper products as a customer as
well. For example, in FY2011, govt. placed large orders of paper products for census work and under the
Right to Education Act., which led to a good performance of paper companies including Seshasayee Paper
and Boards Ltd.
census work, by Government of India, triggered demand for substantial volume of paper.
passage of the Fundamental Rights to Education Act in Parliament increased the demand for
large volume of paper for text books and notebooks
However, in FY2013, the company’s business suffered when the Tamil Nadu govt. announced a free
notebook distribution scheme.
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Demand in the notebook segment had come down, due to announcement of free notebook
distribution scheme by the Government of Tamil Nadu
Additionally, when govt. is not able to provide essential inputs like power to paper industries, then their
performance suffers. For example, during FY2009-FY2010 and from FY2012 to FY2015, the profit
margins of Seshasayee Paper and Boards Ltd suffered when the Tamil Nadu govt. put severe restrictions
on the drawl of power from the grid.
The production could have been higher but for the severe restrictions on power
availability imposed by the State Government, which affected production whenever our Captive
Power Plants were shut for annual inspection and during maintenance related outages
Production was constrained due to restrictions imposed on Grid Power drawal by the State
Government especially when Annual Shuts were taken upon our Power Plants.
Similarly, in FY1999, the project progress of Seshasayee Paper and Boards Ltd was impacted when the
govt. changed its policies and mandated that the import of second-hand plants would require a license. As
a result, the project completion of the company was delayed by about 7 months.
latest EXIM Policy announcement by the Central Government has come in the way, by
putting restrictions on the import of second hand capital goods. After the said Policy
announcement, import of second hand capital goods requires a licence.
The policy of govt. to restrict the access of paper companies for natural forest resources has led to a scarcity
of raw materials for paper companies like Seshasayee Paper and Boards Ltd and has contributed to volatility
in wood prices.
The supply of wood to domestic paper industry from natural forest resources is restricted by strict
government regulations and causing raw material availability issues.
Moreover, when Seshasayee Paper and Boards Ltd tried to enter into contracts with farmers for contract
farming, then after putting in time and resources for about 5 years, it realized that it cannot enforce its
contracts with farmers when they refused to sell the trees/wood to it despite agreeing to it in a written
contract.
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Many farmers, unmindful of the agreement, fell the trees and sell in the open market. They also do
not settle the Bank dues. Consequently, the agreement is only on paper and the Company is not in
a position to enforce the agreement terms with the farmers.
In addition to the above conditions where non-enforceability of contracts hurt the company, in FY2022, the
company could not complete its project on time because govt. did not issue visas to Chinese nationals who
could have installed the machinery on its site.
Chinese suppliers were not able to depute their engineers for installation jobs in India, since
Indian embassy was not issuing visas to Chinese nationals.
Therefore, regulatory changes in taxes, duties, license/approval policies, and allocation of resources have a
major impact on the performance of Seshasayee Paper and Boards Ltd and an investor should always keep
it in her mind.
Recommended reading: How to analyse New Companies in Unknown Industries?
6) Dependence on nature for water and wood as raw material:
Paper production uses a lot of water and wood, which are natural raw materials and weather (e.g. monsoon)
plays a significant role in their availability.
On numerous occasions, due to poor monsoon, the water level in the Cauvery river, which is its main water
source, declined. As a result, Govt. put limits on its water consumption, which affected paper production
by Seshasayee Paper and Boards Ltd.
production could have been higher by another 1000 tonnes, but for the water shortage and the
poor quality of water from the River Cauvery
The company’s paper production suffered again in FY2017-FY2018 as well as FY2021 due to a water
shortage arising because of poor monsoons.
Production was affected in both the Units due to severe shortage of water faced during the summer
season due to continuous failure of monsoon
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The company adapted to the scarcity of water by adjusting its process and product mix to reduce its
consumption was water as well as resorting to alternate sources like groundwater.
We were consuming 60 cu.metre of water per t of paper some time ago. Today we are consuming
only 40 Cu.metre at Erode. Our consumption is hardly 12-13 cu.metres at our unit 2,
Just like water scarcity, excess rains also create issues for the paper industry because in heavy rains it
becomes difficult to source wood and bagasse.
loss of production during October / November 2004, due to heavy rains in Tamilnadu that led
to depleted inflow and non availability of raw material.
The paper industry has faced fluctuations in the prices of wood and bagasse as these are scarce resources
and many competitors find uses for them.
scarcity of forest based raw materials resulted in scramble for acquisition of available material
by competing mills, leading to raw material prices soaring to high levels in the last one year
Many sugar mills use bagasse as fuel in their captive power plants leaving little for paper manufacturers.
most of the sugar mills have their own co-generation power plants, based on bagasse, thus leaving
a small volume of bagasse to the paper industry, as raw material for paper making.
In FY2013, the company faced challenges in sourcing raw materials and had to import costly pulp, which
affected its profit margins, which declined to 2% during the year.
Prices of wood have shot up by well over 60% in less than a year’s time. Manufacturers are
currently turning to overseas sources for meeting a part of their annual requirements, albeit,
at higher prices.
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7) Other cost reduction measures adopted by Seshasayee Paper and Boards

Ltd:
We discussed above how Seshasayee Paper and Boards Ltd increased the size of its business to benefit from
economies of scale, increased in-house pulping capacity and installed a captive power plant to reduce its
operating costs to gain competitive advantages. Its Erode plant produces surplus pulp and power, which it
transfers to the Tirunelvelii plant. Increasing pulp capacities have helped in significant improvement in
profit margins as it replaced costly imported pulp.
With excess production of pulp at the Erode plant, the company has also lowered the dependence
on imported pulp to a certain extent as well, which in turn has also contributed to significant
increase in the margins.
We also saw how the company relied on importing second-hand plants to lower the costs of its expansion
projects.
Apart from the above, the company also took steps like a voluntary retirement scheme (VRS) in FY2006
after the company faced a cyclical downturn in FY2005 and its NPM had declined to 2%.
introduced two Voluntary Retirement Schemes, one with a benefit of lump sum payment and
another Heirship Scheme. In total, 105 employees opted to retire under both the Schemes.
Maintaining a good relationship with labour is critical for paper mills including Seshasayee Paper and
Boards Ltd because in the past, in FY2000, the company faced a strike by its labour for demanding a wage
hike.
a flash strike resorted to by a section of workmen between August 31,1999 and September 4, 1999,
to press their demand for increase in wages / salaries and other benefits
in FY2009, the labour could get bonus payments higher than the expectations of management impacting
the profit margins of the company.
during the discussions held on June 14, 2008, an agreement was reached…providing more
benefits than what were envisaged under the amended Payment of Bonus Act.
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The credit rating agency, CARE has also highlighted the sensitivity of the paper industry to labour issues
in its report for Seshasayee Paper and Boards Ltd in April 2023, page 3.
Paper manufacturing is labour-intensive; therefore, manufacturers are exposed to the risk of

disruption from managing human capital efficiently, ensuring safety and overall well-being.
To ensure raw material availability, the company made significant changes in its input mix. Originally, it
relied primarily on bagasse for paper production. However, in 1978, it started using primarily bamboo and
in 1981, it started producing paper primarily from hardwood (Source: Company website).
Originally, designed for using bagasse, as the primary raw material mixed with 20%
bamboo fibre. In 1978, Raw material mix underwent a substantial change, with bamboo and
hardwood forming 60% and 40%. In 1981, it added one more digester, to increase the share of
the hardwood in the furnish mix to 80% and restricting bamboo use to only 20%.
Later on, the company started focusing on bagasse and promoted its own sugar mill in 1984 to ensure an
adequate supply of bagasse (Source: Company website).
In 1984, the Company promoted Ponni Sugars and Chemicals Limited, a sugar manufacturing
unit as the captive source for bagasse supply.
Recently, the company after facing setbacks in getting farmers to grow trees under contract, has now shifted
to a tree farming program where it supplies saplings and technical guidance to farmers and then buys trees
from them at market price. Such steps have improved raw material availability for the company.
We have created Ponni Sugars and the bagasse is available to us to cater to our bagasse needs.
We have the tree farming programme, which helps us to grow as much wood as we consume. There
is raw material security.
In addition, the company has a tie-up with sugarcane growers under its “Lift Irrigation Scheme” where it
supplies treated water to the farmers for growing sugarcane who then sell the sugarcane to its associate
company Ponni Sugars (Erode) Ltd.
Our Company has a structured, innovative Lift Irrigation Scheme by which our treated waste
water is used to irrigate nearly 1500 acres of land in which local farmers grow sugar cane. The
sugar cane produced is procured by our associate Company viz. Ponni Sugars(Erode) Limited
which in turn gives bagasse
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Further recommended reading: How to do Business Analysis of Sugar Companies
Over the last 10 years (FY2014-FY2023), except for FY2017 and FY2021, the tax payout ratio of
Seshasayee Paper and Boards Ltd is in line with the corporate tax rate prevalent in India. The decline in the
tax payout ratio in the recent year is due to a reduction in the corporate tax rate announced by India in
FY2020.
In FY2017, the company reported a lower tax payout ratio of 23%, which is primarily due to the tax benefits
available for captive power plants under IT section 80IA and for adjustment of carry-over losses. In the
FY2018 annual report, an investor may check the previous year’s figures (FY2017) to understand the tax
reconciliation numbers.
Tax on Deduction Under Section 80 IA -16.78 (₹ cr)
Carry Over Loss adjusted -16.19 (₹ cr)
Provision for Income-tax has been made considering the deduction under Section 80-IA in respect
of the Captive Power Plant
Operating Efficiency Analysis of Seshasayee Paper and Boards

Ltd:
a) Net fixed asset turnover (NFAT) of Seshasayee Paper and Boards Ltd:
Over the years, the NFAT of the company had stayed between 1 and 2, which represents a low asset turnover
indicating the capital-intensive nature of paper manufacturing. NFAT declined to 1.1 in FY2021 because
of reduced demand for paper production due to covid related lockdown.
In FY2023, NFAT has recovered sharply to 2.5 due to the opening of the economy post covid leading to
pent-up demand for paper.
Going ahead, an investor should monitor the NFAT of Seshasayee Paper and Boards Ltd to understand
whether it is able to efficiently utilize its assets.
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b) Inventory turnover ratio (ITR) of Seshasayee Paper and Boards Ltd:
Over the years, the ITR of Seshasayee Paper and Boards Ltd has been within 7-9 levels. ITR declined to
3.9 in FY2021 due to covid lockdown as the company was not able to sell its inventory in the market. Post-
pandemic, as the economy opened up, its ITR improved to 7.7 in FY2022 and 11.4 in FY2023.
Nevertheless, in FY2023, the company saw a sharp increase in inventory; however, as per the company, it
was due to logistic challenges as at this time all companies faced challenges in getting containers for sea
transport.
Inventory increase in Q1, 3000 tons increased from March, this is only mostly logistic issues,
almost all these are covered by orders…we have some difficulty in getting containers, we have
some difficulty in getting shipping space
Frequently, Seshasayee Paper and Boards Ltd has reported zero finished goods inventory at the year-end.
Corporate announcement to BSE, April 1, 2023, page 1:
Company had sold its opening stock of finished goods as well as the entire quantity of paper
produced during the FY 2022-23 and had achieved “Zero Stock of Finished Goods” at both of its
units (Erode and Tirunelveli) as on March 31, 2023.
In the paper industry, manufacturers rely on the channel of dealers in addition to selling some quantity
directly to corporate customers and govt. departments via tenders. These dealers in turn deal with actual
consumers like small printing presses.
Rating Methodology for Paper Industry, ICRA, November 2015, page 2:
Paper is largely consumed by many small printers who work on behalf of various
publishers/FMCG companies; hence most of the sales of the paper mills are typically through
dealers/indentors who source orders from these printers and act as an interface between the mill
and the customers.
Seshasayee Paper and Boards Ltd also sells its goods via dealers, distributors, indentors etc. both in Indian
and foreign markets.
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It has a well-built network of more than 70 active indentors distributing SPB’s products across
India and 10-11 international agents…Its production is largely order based procured by its dealer
network.
As far as the claims of the company of achieving zero stock even during cyclical downturns, an investor
may do her assessment whether the company had very good production management skills or it pushed
goods to dealers to show zero stock like automobile industry where carmakers are said to push cars to
dealers to show higher sales.
Dealer Group Accuses Maserati of Inflating Sales Numbers
Going ahead, an investor should check the inventory position of the company to assess whether it manages
its inventory efficiently.
c) Analysis of receivables days of Seshasayee Paper and Boards Ltd:
Over the years, the receivables days of Seshasayee Paper and Boards Ltd have improved from 45 days in
FY2015 to 17 days in FY2023. A reduction in receivables days shows that the company has collected its
dues from customers in time.
Going ahead, an investor should watch the trend of receivables days of Seshasayee Paper and Boards Ltd
to assess whether it continues to collect its receivables on time.
operations (cCFO) of Seshasayee Paper and Boards Ltd for FY2014-FY2023, then she notices that over the
years (FY2014-FY2023), the company has converted its profit into cash flow from operations.
Over FY2014-23, Seshasayee Paper and Boards Ltd reported a total net profit after tax (cPAT) of ₹1,321
cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹1,742 cr.
Learning from the article on CFO will show an investor that the cCFO of Seshasayee Paper and Boards Ltd
is higher than the cPAT due to the following reasons:
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Going ahead, an investor should keep a close watch on the working capital position of Seshasayee Paper
and Boards Ltd.
The Margin of Safety in the Business of Seshasayee Paper and

Boards Ltd:

of a Company
target growth.
Where,

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An investor would notice that over the years, Seshasayee Paper and Boards Ltd had reported an SSGR of
11-16% whereas over the last 10 years (FY2014-FY2022), it has grown its sales at a rate of 9% year on
year.
As Seshasayee Paper and Boards Ltd has grown within the levels that can be supported by cash generated
by its business operations, therefore, it has grown without raising debt or diluting equity. As a result, on
March 31, 2023, the company reported a debt-free status.
For MDP-III, the company first requested a loan of ₹82.5 cr from lenders and availed disbursement of ₹11.2
cr. However, later the company decided that it could easily fund the project from its own cash generation.
Therefore, it returned the loan of ₹11.2 cr taken and cancelled the balance loan.
originally we availed around 11.2 crores out of the sanctioned 82.5 crores for the project MDP
III. But then half way through, we decided that we will fund it with our own funds. Therefore, we
have returned this 11.2 crores also.
Over the last 10 years, the company had the following changes in its equity capital. In FY2013, the share
capital of the company increased as it issued shares to amalgamate its associate company Subburaj Papers
Limited (SPL) with itself.
SPL shareholders are given 1363628 Equity Shares of ₹10/-each fully paid-up (pending
allotment): ₹136 lakhs
In FY2020, it seems that the equity capital declined to ₹12 cr from ₹12.6 cr in FY2019. However, this
change is due to the adoption of new Indian Accounting Standards (IndAS) where shares held by SPB
Equity Shares Trust are deducted from equity capital.
Pursuant to the Scheme of Amalgamation of SPB Papers Limited with the Company, 568181
Equity Shares with face value of ₹10 each…were allotted to SPB Equity Shares Trust…in the
financial year 2012-13. The original cost of the investment is adjusted in other equity
b) Free Cash Flow (FCF) Analysis of Seshasayee Paper and Boards Ltd:
While looking at the cash flow performance of Seshasayee Paper and Boards Ltd, an investor notices that
during FY2014-FY2023, it generated cash flow from operations of ₹1,742 cr. During the same period, it
did a capital expenditure of about ₹467 cr.
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Therefore, during this period (FY2014-FY2023), Seshasayee Paper and Boards Ltd had a free cash flow
(FCF) of ₹1,275 cr (=1,742 – 467).
of ₹176 cr. As a result, the company had a free cash flow of ₹1,283 cr (= 1,275 + 184 – 176). Please note
While looking at the overall cash-flow position of Seshasayee Paper and Boards Ltd over the last 10 years
(FY2014-2023), an investor notices that the company has used its free cash flow primarily in the following
avenues:
• ₹389 cr as repayment of debt because over FY2014-FY2023, the company has repaid its entire debt
of ₹389 cr outstanding in FY2014.
• ₹163 cr as dividends excluding dividend distribution tax (DDT) to its shareholders. When DDT
was applicable, then the company would have paid an additional 20% of the dividend amount as
DDT.
• ₹632 as an increase in the cash & equivalents from ₹62 cr in FY2014 to ₹694 cr in FY2023.
Going ahead, an investor should keep a close watch on the free cash flow generation by Seshasayee Paper
and Boards Ltd to understand whether the company continues to generate surplus cash from its business
and whether it continues to use it largely to pay dividends to the shareholders.

FCF

Additional aspects of Seshasayee Paper and Boards Ltd:

On analysing Seshasayee Paper and Boards Ltd and after reading annual reports, credit rating reports and
other public documents, an investor comes across certain other aspects of the company, which are important
for any investor to know while making an investment decision.
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1) Management Succession of Seshasayee Paper and Boards Ltd:
Seshasayee Paper and Boards Ltd is the main company of the ESVIN group. Currently, promoters, Mr Sri
N Gopalaratnam, Chairman, (age 76 years) and Mr K S Kasi Viswanathan, MD (age 72 years) are leading
the company.
Both the promoters are very senior in age and as per the company, it is working on a success plan, which it
may disclose in the coming year.
Yes, sir, we have a succession plan and you will get to see them as we go by, in this coming year.
We have seen a new induction into our board now; similar things will happen also probably next
year or I think we have a succession plan in mind and we are implementing them in stages.
An investor should watch the developments at the company related to succession planning and contact the
company directly for any clarifications.
It is essential that the new leadership team starts the transition when senior leaders are actively involved so
that they can guide the younger people through the nuances of business decisions.
2) Probe by the Competition Commission of India (CCI) into unfair trade

practices by Seshasayee Paper and Boards Ltd:
Currently, CCI is investigating the role of the company along with other large paper manufacturers in
allegedly running a price cartel during January 2012-December 2013.
Allegation, leveled against large paper manufacturers in India (including our Company)
of simultaneous price increases during the period January 2012 – December 2013, is
currently under evaluation by the Competition Commission of India.
While CCI was investigating Seshasayee Paper and Boards Ltd, then it found an email sent by one employee
of the company to its senior manager detailing meetings of smaller non-wood-based paper manufacturers
for coordinated price actions. Based on those emails, CCI initiated an enquiry against non-wood-based
paper manufacturers and found them guilty of running a price cartel.
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As a result, the CCI put a penalty on some of the non-wood-based paper manufacturers and their industry
association, the Indian Agro & Recycled Paper Mills Association (IARPMA), for their anti-competitive
business practices.
CCI order, November 17, 2021, page 61:
Commission concludes that OPs had indulged in cartelisation in fixing prices of writing and
printing paper as detailed in this order, by participating in the meetings convened under the
umbrella of the platform provided by their trade association and discussing prices and
the roadmap for coordinated increase, besides monitoring the decisions taken in such meetings.
CCI also found that due to cartelization, some of the players like Ruchira Papers Ltd increased their product
prices even when their cost of production had declined.
The parallel behaviour of OP-12 by making an overall increase of Rs. 6000/- PMT between
September 2012 to March 2013, coupled with an increase in prices despite fall in cost of
production is strongly indicative of OP-12 being part of concerted conduct resorted to by non-
wood based paper manufacturers, who increased prices after discussions in a coordinated
manner.
In the CCI order, as per details on page 1, opposite party 12 (OP-12) refers to Ruchira Paper Ltd.
An investor may read our detailed analysis of Ruchira Papers Ltd along with the issue of warrants allotment
by the company to its promoters where the promoters seem to have benefited at the cost of minority
shareholders, in the following article: Analysis: Ruchira Papers Ltd
As per the CCI order, one of the paper manufacturers, Trident Ltd (opposite party 21) accepted its role in
cartelization and price-fixing.
Yes, it is true that competing paper mills used to meet, discuss and arrive at a consensus on
prices of paper to be increased and the quantum of discount to be offered.
Yes, on a few occasions we did implement the price increase decided in such meetings unaware of
the consequences of this Act.
As discussed above, all the paper manufacturers are price-takers in the market as they produce
nondifferentiable commodity products. Therefore, it seems that many paper companies joined together to
decide the price in the market to gain pricing power.
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The CCI enquiry against large paper manufacturers is still in progress. Therefore, investors should keep a
close watch on the result of this enquiry and any order/penalty by CCI.
3) Expansion projects by Seshasayee Paper and Boards Ltd:
As discussed above, paper companies do not have any pricing power over their customers and face intense
price-based competition from both foreign and domestic paper manufacturers. In such a situation, low-cost
producers of paper enjoy a competitive advantage.
Large paper producers enjoy a lower cost of production due to economies of scale. As a result, Seshasayee
Paper and Boards Ltd acknowledged to its investors that for sustainable and profitable growth, it needs to
increase its size.
Therefore, over the years, Seshasayee Paper and Boards Ltd has executed multiple expansion plans.
Moreover, an investor also notices that the company kept on adjusting its expansion strategy to changing
market situation.
For example, as discussed above, in FY1997, the company announced an expansion plan of ₹450 cr to
increase its capacity from 60,000 MTPA to 120,000 MTPA. However, it shelved this plan when business
conditions turned unfavourable (FY1997 annual report, pages 6-7).
Thereafter, during FY1998-2000, the company implemented a revised plan (₹188 cr) and expanded its
paper manufacturing capacity to 115,000 MTPA (FY1998 annual report, page 6).
Thereafter, in FY2004, the company set up a 21 MW captive power plant for ₹65 cr. to reduce its energy
costs and become a low-cost paper producer (FY2004 annual report, page 9).
Subsequently, in FY2006-2009, the company started a mill development plan (MDP-I) to replace its ageing
pulp manufacturing equipment and chemical recovery boilers by spending about ₹350 cr (FY2006 annual
report, pages 10-11).
In FY2015, the company started MDP-II for about ₹480 cr to increase its paper manufacturing capacity to
275,000 MTPA, pulping capacity to 145,000 MTPA and increase the capacity of the captive power plant
by 15MW (FY2015 annual report, page 14). The plan was later downsized to a paper production capacity
of 212,000 MTPA.
As soon as the MDP-II was completed in FY2019, immediately, Seshasayee Paper and Boards Ltd started
its further expansion plan, MDP-III for about ₹315 cr (FY2019 annual report, page 17). Later, in the
presentation for AGM in July 2022, the company intimated that it has reduced the cost of MDP-III to ₹288
cr and the project is nearing completion.
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Presentation of AGM, July 2022, page 31:
MDP III: Revised Project Cost Estimate – Rs 288 crores…Project is nearing completion
After MDP-III, the company had a paper production capacity of 255,000 MTPA and pulping capacity of
154,000 MTPA (FY2022 annual report, page 37).
Now, immediately after the completion of MDP-III, Seshasayee Paper and Boards Ltd has started planning
MDP-IV to increase its total paper production capacity to 321,000 MTPA (total for both units) and pulping
capacity to 252,000 MTPA (both wood and bagasse). Phase-I of the plan will focus mainly on increasing
the pulping capacity and will cost about ₹700 cr.
Corporate announcement to BSE dated April 29, 2023, pages 1-2:
Phase-I of MDP-IV will consist of activities for enhancing the pulp capacity to 2.52 lakh
tonnes p.a. in Unit: Erode with a marginal increase in paper capacity…project cost for Phase-I is
estimated at Rs.700 crores and the company expects to fund the entire project out of its internal
accruals
An investor should closely watch the implementation of the expansion plans of Seshasayee Paper and
Boards Ltd and assess whether it is able to complete them within time and cost estimates.
Like the acquisition of the stressed paper mill, Subburaj Papers Limited, done by the company in FY2011,
currently, it is looking to buy another company, Servalakshmi Paper Mill Limited (SPML) via the route of
bankruptcy law.
In FY2020, Seshasayee Paper and Boards Ltd expressed its interest in buying Servalakshmi Paper Mill
Limited (SPML). However, soon Covid pandemic hit businesses. As a result, the company intimated to
NCLAT that it would want to reduce the acquisition price.
Transcript of AGM, August 2020, pages 6 and 32:
during the FY 2019-20, the Company had submitted a composite scheme of compromise or
arrangement with creditors and stakeholders of Servalakshmi Paper Mill Limited, under
Liquidation.
Our company is approaching NCLAT for down revision of the scheme settlement terms, post Covid
19.
In FY2021, the company intimated to the liquidator that it is no longer interested in buying SPML.
It seems that after tough negotiations finally, it could get terms to its liking and now it has made a final
offer to buy SPML. Nevertheless, its offer is challenged in front of NCLT who has reserved its decision in
December 2022 and is yet to pronounce it.
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Q4-FY2023 result document, April 29, 2023, page 11:
The Company participated and emerged as the successful bidder…for the Sale of M/s.
Servalakshmi Paper Limited…Applications filed challenging the e-auction…were heard by NCLT,
Chennai bench and the Hon’ble Tribunal had reserved the matters for Orders on 19.12.2022.
Investors should watch developments related to this acquisition to assess whether Seshasayee Paper and
Boards Ltd has made a fair bid and if successful, then if it can revive this bankrupt paper mill.
4) Interconnected holdings of promoters in different companies:
An investor may notice a pattern in the way ESVIN group holds its stake in group companies. The group
has made many companies hold shares of each other. Let us see some examples.
– Seshasayee Paper and Boards Ltd holds 27.45% of shares of Ponni Sugars (Erode) Limited and in return,
Ponni Sugars (Erode) Limited holds 14.02% shares of Seshasayee Paper and Boards Ltd.
– Seshasayee Paper and Boards Ltd holds a 15.78% stake in High Energy Batteries (India) Limited (HEB)
and in return, HEB holds a 0.08% stake in Seshasayee Paper and Boards Ltd.
– Seshasayee Paper and Boards Ltd held a 22.22% stake in SPB Projects and Consultancy Limited (SPB-
PC) as per FY2002 annual report, page 57. As per FY2022 annual report, page 236, it has maintained its
equity investment in SPB-PC. In return, SPB Projects and Consultancy Limited holds a 0.02% stake in
Seshasayee Paper and Boards Ltd.
We as investors do not appreciate such interlinked shareholding patterns when promoters make a publicly
listed company to buy shares of/give loans to their group companies and in return use that money (money
is fungible) to buy shares of a public-listed company. It leads to an increase in the shareholding of promoters
in the publicly listed company but it uses the money that originally belonged to all the shareholders i.e.
including minority shareholders as well.
Let’s see how such transactions work by taking an illustration of a public company (A) and a promoter
group company (B). The key steps involved in such transactions are:
• Move the money of the company (A) to another entity (B). This entity (B) may be a subsidiary of
the company or a promoter group entity.
• The money may be transferred from A to B by way of either investment in the shares of B or as a
loan or an advance to B.
• Once the entity (B) has received the money, then it buys shares of the company (A) from the open
market or from other large shareholders.
• Thereafter, the promoters include the shares of the company (A) owned by the entity (B) in the
promoters’ category and show a higher promoters’ shareholding in the company (A)
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Such transactions result in promoters showing a higher shareholding in the company (A) to the stock
exchanges. However, an investor would notice that the money used by the promoters to increase their stake
is provided by the company (A). This money belonged to all the shareholders of the company, both
promoters and public shareholders in their proportionate shareholding of the company (A). However, now
the promoters end up taking benefit of all the shares of the company (A) bought by this money via the entity
(B).
In addition, investors will find that the money given by company (A) to the entity (B) stays with B for long.
If the money is by way of investment in the equity shares of B, then there is no need for B to return it ever.
Even though, if the money given by company (A) to entity (B) is by way of loans or advances, then
promoters as controllers of company (A) do not ask for repayment of the loan from B. In some cases,
promoters as controllers of the company (A), make A give new money to B so that it can repay the old
loans and continue to keep the money in one form or another (ever-greening).
We have analysed many companies that indulge in such interlinked cross holdings in group entities
like Escorts Ltd, Ion Exchange (India) Ltd, National Peroxide Ltd (Wadia
Group), Dynemic Products Ltd etc.
We have illustrated more such ways by which promoters increase their shareholding in listed companies in
the following article: How Promoters use Loopholes to Inflate their Shareholding
5) Capital allocation decisions and investments in promoter-group entities

by Seshasayee Paper and Boards Ltd:
Over the years, the company has invested in many companies, which belong to its promoter group, ESVIN
group. It has invested money as equity as well as provided loans/intercorporate deposits (ICDs). At times,
it even wrote off the money given to promoter group entities.
In FY2017, Seshasayee Paper and Boards Ltd wrote off intercorporate deposits (ICDs) of ₹5 cr effectively
acknowledging that it gave ₹5 cr to someone from whom, now, there is no chance of getting it back.
In FY2000, Seshasayee Paper and Boards Ltd wrote off its total investment of about ₹1.1 cr in Esvin
Advanced Technologies Limited/
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Miscellaneous Expenses under Schedule ‘Q’ includes write off of trade advances of Rs. 70.60
lakhs due from Esvin Advanced Technologies Limited and Rs 40.59 lakhs towards diminution in
the value of investment in the equity shares of the said company.
Seshasayee Paper and Boards Ltd invested ₹12 lac in ESVIN Biosys International Limited in FY1998 as
per FY1998 annual report, page 19. After 7 years, in FY2005, it wrote off its entire investment in ESVIN
Biosys International Limited (FY2005 annual report, page 68).
Recommended reading: How Promoters benefit themselves using Related Party

Transactions
Let us see some other capital decisions of Seshasayee Paper and Boards Ltd.
5.1) Esvi International (Engineers & Exporters) Limited:
In FY2013, Seshasayee Paper and Boards Ltd acquired shares of Esvi International (Engineers & Exporters)
Limited (EIEEL) from promoters of ESVIN group i.e. it acquired a promoter-group company.
The company paid ₹12 cr to promoters for this acquisition.
ESVIN is a company belonging to the Promoter Group…Currently, it holds properties and derives
property income. During the year, our Company acquired 100% of the shares of ESVIN at a
consideration of ₹12 crores
Therefore, effectively, via this transaction, for ₹12 cr, Seshasayee Paper and Boards Ltd bought some
properties belonging to the promoters.
As per the comparison of the standalone and consolidated balance sheet disclosed by the company in the
FY2013 annual report, page 116, the incremental fixed assets in consolidated financials were only ₹1.45 cr
(consolidated fixed assets: ₹ 716.28 cr, standalone fixed assets: ₹ 714.83 cr).
Therefore, effectively, Seshasayee Paper and Boards Ltd purchased assets with a value of ₹1.45 cr on the
balance sheet for about ₹12 cr. Moreover, it was without considering the liabilities of EIEEL.
In FY2016 annual report, Seshasayee Paper and Boards Ltd disclosed some financial numbers of EIEEL.
As per these financial details, EIEEL had a net worth of only about ₹18 lac because assets of ₹1.45 cr also
had liabilities of ₹1.29 cr.
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Moreover, in FY2017, Seshasayee Paper and Boards Ltd invested a further ₹2 cr in EIEEL (FY2017 annual
report, page 106) taking the total investment to ₹14 cr.
As per the FY2021 annual report, page 268, EIEEL made a loss of ₹3 lac during the year.
An investor may contact the company directly to understand more about the properties owned by EIEEL to
understand whether the original payment of ₹12 cr in FY2013 and the additional ₹2 cr investment in
FY2017 made by Seshasayee Paper and Boards Ltd is reasonable. In addition, she may also seek
clarification on whether there are any other assets/rights owned by EIEEL, which are not visible on the
balance sheet that may influence the value of the company.
5.2) Ponni Sugars and Chemicals Limited:
The company promoted Ponni Sugars in 1984 as a part of the promoter group to get an assured supply of
bagasse. Ponni Sugars had two units, one in Erode (TN) and another in Balangir (Orissa).
In FY1998, the financial condition of Ponni Sugars deteriorated significantly and it had to undergo financial
restructuring where Seshasayee Paper and Boards Ltd had to invest an additional amount of ₹5 cr in Ponni
Sugars in an attempt to revive it (FY1998 annual report, page 4).
However, despite additional investment, the company’s financial position did not improve and it underwent
corporate debt restructuring (CDR) where its two sugar units were separated into Ponni Sugars (Erode)
Limited and Ponni Sugars (Orissa) Limited.
In FY2003, Seshasayee Paper and Boards Ltd had to write off the Orissa unit when after remaining defunct
for many years, the company could not sell it. In total, the company recognised a loss of about ₹7.5 cr on
it.
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The Balangir Unit of POL remains idle for the past couple of years. The revival of the unit seems
to be impossible. Even efforts to sell off the units did hot fructify…The net worth of POL has been
fully eroded…Consequently, our Company has written off the value of investments…The write off,
so made, amounted to Rs 641 lakhs. Further, the lease rental arrears for the Boiler given on lease,
amounting to Rs 120 lakhs…have also been written off as Bad Debts
In the AGM in August 2020, Seshasayee Paper and Boards Ltd acknowledged that an investment in the
Orissa unit was a mistake.
Ponni Sugars (Orissa) Limited went in to Liquidation and we have demerged from
it…Unfortunately, Orissa venture was a misadventure.
Nevertheless, the Erode unit of Ponni Sugars seems to be working fine, even though the company had to
invest more money into the equity capital of the unit during FY2011, FY2014, and FY2016. On March 31,
2022, the company invested about ₹20 cr in the equity capital of Ponni Sugars (Erode) Limited.
Ponni Sugars (Erode) Limited is a listed entity and as per its reported financials, it is a profitable and debt-
free company.
5.3) Other investments:
In FY2003, Seshasayee Paper and Boards Ltd wrote off its investment in Seshasayee Paper and Boards
Employees Co-operative Thrift and Credit Society Limited (FY2003 annual report, page 47).
In FY2003, the company invested in OPG Energy Private Limited. This investment was visible in the
annual reports until FY2017 (page 142). However, after FY2017, the investment vanished from the annual
reports. In the FY2018 annual report, there is no mention of this investment being sold.
In FY2015, Seshasayee Paper and Boards Ltd invested in shares of Bhatia Coke & Energy Limited.
However, in the very next year, in FY2016, it sold this entire investment.
An investor may seek clarification from the company about the purpose of these investments and how they
help public shareholders of the company.
Recommended reading: Why Management Assessment is the Most Critical Factor

in Stock Investing?
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6) Foreign exchange fluctuations (forex) risk faced by Seshasayee Paper and

Boards Ltd:
Seshasayee Paper and Boards Ltd faces forex risk primarily due to three factors.
First, it imports its entire requirement of coal for generating power in its captive power plant.
20-25 years we have been importing coal; 100% of our coal from Indonesia, but then the last year
or so the prices have shot up 3 times.
The company has to import its entire coal requirement because it neither has a linkage with any domestic
coal mine nor has logistics infrastructure like a railway siding.
Well, we are far away from mines and we don’t have a linkage with any mine, and we also don’t
have linkage for railways.
As a result, whenever Indian Rupee weakens against foreign currencies, the cost of imported coal for
Seshasayee Paper and Boards Ltd increases.
Second, the company imports a part of the pulp used at its Tirunelveli unit. Excess pulping capacity at
Erode unit can take care of about 60% of the pulp requirements of the Tirunelveli unit.
The excess pulp production at the Erode unit caters to around 60% of the pulp requirement of the
Tirunelvelii plant
For the balance, the company has to buy pulp from domestic as well as overseas suppliers. Therefore,
whenever, Indian Rupee weakens against foreign currencies, the cost of imported pulp for the company
goes up.
For example, in FY2009, when Indian Rupee declined sharply against US Dollar, then the cost of imported
pulp for the company increased sharply leading to a significant fall in its NPM to 3% from 10% in FY2008.
Major factors that contributed to lower profitability for the year: Adverse exchange rate between
Indian Rupee and US Dollar resulting in higher cost of imported Pulp, imported Coal
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Third, Seshasayee Paper and Boards Ltd exports about 15-20% of its production. Whenever Indian Rupee
strengthens against foreign currencies, then its products become expensive for overseas customers hurting
its competitiveness.
The company faced such a situation in FY2007 and FY2008 when Indian Rupee appreciated sharply against
US Dollar and its exports became non-remunerative. Therefore, it had to cut down its exports.
Company scaled down its exports, since exports were becoming un-remunerative due to
steep appreciation of Indian Rupee vis-à-vis US Dollar.
Going ahead, an investor should watch if the company enters effective hedging strategies to reduce the
impact of foreign exchange fluctuations on its performance.
7) Scope for improvement in financial data presentation by Seshasayee

Paper and Boards Ltd in annual reports:
While reading annual reports of the company from FY1997 to FY2022, an investor notices a few occasions,
where she finds scope for improvement.
In FY2011, when Seshasayee Paper and Boards Ltd purchased Subburaj Papers Limited (SPL), then it gave
a loan of ₹180 cr to SPL so that it could settle dues to lenders. These intercorporate loans and advances are
usually shown by companies under cash flow from investing (CFI) whereas Seshasayee Paper and Boards
Ltd classified it under cash flow from financing (CFF).
Similarly, in FY2014 annual report, in the related parties’ section, Seshasayee Paper and Boards Ltd did
not disclose numerous promoter-group entities with whom it does transactions on a day-to-day basis like
Ponni Sugars (Erode) Limited, SPB Projects and Consultancy Limited etc.
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In FY2015, the company updated its list of related parties and included many promoter-group entities.
An investor may note that all these promoter-group companies used to be a part of the list of related parties
in earlier annual reports as well e.g. FY2013 annual report, page 68.
An investor may contact the company directly to understand the reasons why it removed promoter-group
entities from the related parties’ list in FY2014.
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The Margin of Safety in the market price of Seshasayee Paper and

Boards Ltd:
Currently (May 11, 2023), Seshasayee Paper and Boards Ltd is available at a price-to-earnings (PE) ratio
of about 4.6 based on consolidated earnings FY2023. An investor would appreciate that a PE ratio of 4.6
appears low and seems to offer a margin of safety in the purchase price as described by Benjamin Graham
in his book The Intelligent Investor. However, due to the recent sharp increase in profitability of
the company due to upcycle phase, the PE ratio may seem lower.
Moreover, we recommend that an investor may read the following articles to assess the PE ratio to be paid
for any stock, which considers the strength of the business model of the company as well. The strength in
the business model of any company is measured by way of its self-sustainable growth rate and the free cash
flow generating the ability of the company.
Analysis Summary
Seshasayee Paper and Boards Ltd has grown its business at a rate of 9% per annum over the last 10 years
(FY2014-FY2023). During this period, its profitability has improved significantly. However, a look at the
profit margins of the company over the last 28 years (FY1996-FY2023), shows that the company’s
performance follows strong cyclicity where profit margins have peaked at 11-15% and then declined to 1-
2%.
Seshasayee Paper and Boards Ltd faces intense price-based competition because its products are non-
differentiable commodities and customers can easily switch from one supplier to another. As a result, it
faces strong competition from both domestic as well as international paper manufacturers.
Overseas paper players are attracted to the Indian market because it shows a strong growth potential whereas
paper consumption in developed markets is slowing down. Moreover, the Indian govt. has reduced import
duties on paper due to many trade agreements making imports more cost competitive.
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Overseas paper manufacturers usually have large and efficient mills when compared to Indian paper
manufacturers who have small-sized mills low on technology, which have a high operating cost. As a result,
Indian players including Seshasayee Paper and Boards Ltd find it difficult to beat imports. The price of
paper products of Seshasayee Paper and Boards Ltd is about 10% higher than the price of imported paper
products.
Indian paper mills are also affected by high raw material/wood costs, which puts them at a disadvantage.
To become cost-competitive, paper mills like Seshasayee Paper and Boards Ltd need to grow in size to
benefit from economies of scale and higher bargaining power over suppliers. In addition, they need to have
integrated operations with pulping units and captive power plants. All these make cost-efficient paper units
a capital-intensive business. Over the years, Seshasayee Paper and Boards Ltd has spent a significant
amount of money in growing its production capacity, pulping capacity and on captive power plants.
Additionally, Seshasayee Paper and Boards Ltd had to spend a lot of money on replacing old equipment to
meet changing environmental guidelines. Its performance is highly dependent on regulatory changes like
excise tax, customs duties on imports, anti-dumping duties etc.
In addition, its business depends heavily on the availability of water, and wood, which are natural resources
and the availability of power from the grid where govt. has significant control.
From its end, Seshasayee Paper and Boards Ltd has attempted a lot to reduce its costs like offering VRS to
excess staff, buying second-hand equipment for expansion plans, promoting tree-farming to become wood-
positive, tying up with farmers through the Lift Irrigation Scheme to promote sugarcane crop to source
bagasse etc. However, despite all these measures, during downturns, it has barely avoided losses with NPM
falling to 1%.
As paper manufacturers do not have pricing power over their customers; therefore, some players seem to
have formed a cartel to control prices. As a result, CCI is conducting an enquiry into the role played by
Seshasayee Paper and Boards Ltd in cartelization.
Over the years, the company has generated sufficient free cash flow so that it is now a debt-free company
and has plans to fund its upcoming capital expenditure plans from internal cash accruals.
Promoters leading the company are now very senior in age and the company seems to be working on a
succession plan, which it has promised to declare soon.
The promoters have formed inter-linked shareholding where most of the group companies hold shares of
each other. We believe that such shareholding patterns are not in the best interests of minority shareholders
and promoters should opt for simplified shareholding structures.
In the past, Seshasayee Paper and Boards Ltd has made many investments in promoter group companies
where at times, it has given the money and later on written it off. Investors should be cautious while
analysing such investments of the company in promoter-group entities.
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Seshasayee Paper and Boards Ltd faces forex risk due to the import of raw materials like pulp and coal and
also because it exports about 15-20% of its products.
In addition, while reading the annual reports of the company, an investor should be careful because there
have been instances where it removed the names of many promoter-group entities from the list of related
parties.
Going ahead, an investor should keep a close watch on the cyclical changes in the business performance of
Seshasayee Paper and Boards Ltd and not get overly influenced by current significant improvement, which
might be an upturn phase of a cycle. In the past, after significant improvement, its performance had declined
sharply. An investor should always keep this in mind.
The investor should also keep a close watch on the policy changes affecting paper manufacturers, its
inventory and receivables levels. She should track the progress of the proposed acquisition by the company
and its upcoming MDP-IV project to see if it is able to complete it within time and cost estimates.
The investor should also watch its succession planning, the status of the CCI investigation, any additional
investment by the company in promoter-group entities as well as its hedging steps to reduce the impact of
forex changes.
These are our views on Seshasayee Paper and Boards Ltd. However, investors should do their own analysis
before making any investment-related decisions about the company.
I hope it helps!
Regards,
Dr Vijay Malik
P.S.

Workshop Videos
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Analysis Excel
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8) Ramco Industries Ltd

Ramco Industries Ltd is a part of the Ramco group containing companies like The Ramco Cements Ltd,
Ramco Systems Ltd etc. Ramco Industries Ltd is one of India’s largest manufacturers of building materials
like fibre-cement sheets and boards, Calcium Silicate boards etc. Apart from these building materials, the
company also has a significant presence in the textile-yarn segment.
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Apart from operations within Ramco Industries Ltd, the company has investments in various subsidiaries
both within India and abroad as well as investments in many associate companies, which are a part of the
Ramco group. As a result, Ramco Industries Ltd reports both standalone as well as consolidated financials.
On March 31, 2023, the company had three subsidiaries (>50% shareholding) and 6 associate companies
(> 20% shareholding) that were included in its consolidated results. Q4-FY2023 results’ announcement,
page 18:
Subsidiaries:
• Sudharsanam Investments Limited

• Sri Ramco Lanka (Private) Limited, Sri Lanka
• Sri Ramco Roofings Lanka (Private) Limited, Sri Lanka
Associates
• The Ramco Cements Limited

• Ramco Systems Limited
• Rajapalayam Mills Limited
• Ramco Industrial and Technology Services Limited
• Madurai Trans Carrier Limited
• Lynks Logistics Limited
As a result, while analysing the past financial performance of Ramco Industries Ltd, we have analysed its
consolidated financials.

Guide
With this background, let us analyse the financial performance of Ramco Industries Ltd.
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Financial and Business Analysis of Ramco Industries Ltd:

In the last 10 years (FY2014-FY2023), the sales of Ramco Industries Ltd have increased at 7% year on
year, from ₹785 cr in FY2014 to ₹1,458 cr in FY2023. During this period, the sales of the company have
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increased almost consistently, year on year except in FY2020 when sales declined by 6% to ₹974 cr from
₹1,037 cr in FY2019.
However, over the years, the operating profit margin (OPM) of Ramco Industries Ltd has seen highly
cyclical fluctuations. The OPM was 8% in FY2014 and then increased to 13% in FY2017. Thereafter, OPM
declined to 11% in FY2020. However, in FY2021, OPM increased to 16%. Recently, OPM has declined to
10% in FY2023.
Moreover, in FY2014, the company reported a net loss of ₹3 cr.
To understand the reasons for such cyclically fluctuating financial performance of Ramco Industries Ltd,
an investor needs to read the publicly available documents of the company like its annual reports from
FY2000 onwards, credit rating reports by CRISIL and ICRA and its corporate announcements submitted
to stock exchanges.
The above-mentioned documents show that the following key factors influence the business of Ramco
Industries Ltd, which are critical to understand for any investor analysing the company.
1) Poor pricing power due to the commodity nature of building material and
textile yarn products of Ramco Industries Ltd with many substitute products:
Both the business segments of Ramco Industries Ltd: building materials i.e. fibre cement sheets, boards etc.
as well as textiles are commodities in nature where a customer can easily replace products from one supplier
to another without suffering a lot of problems in functionality.
Apart from sourcing products from competitors, customers can also switch to substitute products. For
example, for fibre cement sheets used in roofing, customers can use galvanized iron (GI) steel sheets, for
fibre cement board used in furniture, customers can use wood or medium-density fibreboard (MDF) etc.
Credit rating report by CRISIL, May 2017:
Furthermore, AC roofing manufacturers also face stiff competition from manufacturers of

galvanised iron (GI) roofing sheets, which has emerged as a viable alternative for AC roofing as
the same is easily transportable and on account of price decline of GI sheets in recent years.
Along the same lines, for textiles (cotton yarn), customers can use clothes made of synthetic yarn.
Therefore, the products made by Ramco Industries Ltd do not provide it with any technological superiority
where its customers are bound to use its products and can easily replace it as a supplier. As a result, Ramco
Industries Ltd does not have a high negotiating/bargaining power over its customers.
Credit rating report by ICRA, October 2019, page 2:

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threat of substitute products such as GI steel sheets limits the company’s pricing flexibility to pass
on the fluctuations in raw material prices.
Due to a lack of pricing power, Ramco Industries Ltd is not able to pass on the increase in the costs of its
raw materials to its customers. Therefore, during periods of increasing raw material prices, its profit margins
are hit.
For example, in FY2004, the company’s profit margins were impacted because the increase in cotton prices
could not be fully passed on as increased yarn prices.
Yarn price improved marginally but not enough to absorb the increase in Cotton prices
Even after the progression of the business for about a decade, in FY2014, Ramco Industries Ltd faced the
same situation of a low pricing power while passing on increases in raw material costs to its customers,
both in building materials as well as textile segments. Ramco Industries Ltd reported a net loss in FY2014.
Margins are under pressure as the market could not absorb the increase in operational costs such
as material costs (due to Indian Rupee depreciation), power cost, etc.
cotton prices are currently ruling high at uneconomical levels. Due to sluggish demand for yarn,
the Spinning Mills are not able to increase the yarn prices in line with the increased cotton cost.
While the cost of major inputs are increasing steeply, the yarn prices are falling
Even in recent years, in FY2023, after many decades, Ramco Industries Ltd is not able to pass on increasing
raw materials costs to its customers. This low pricing power has led to a sharp decline in its OPM in FY2023
to 10% from 15C% in FY2022.
operating profitability is expected to range between 9-11%, mainly due to higher asbestos fibre
costs, and lower pass-on of the same to customers, due to intense competition from substitute
products.
Substitute products have a significant impact on the demand and prices of Ramco Industries Ltd. For
example, in 2022 when steel prices increased, which impacted the prices of GI steel sheets, then Ramco
Industries Ltd could also increase its prices of fibre cement sheets and earn a higher revenue.
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Revenue growth was supported by healthy demand from rural markets, and substitution demand,
with the price of steel products (substitute) also registering a sharp increase.
Strong correlation in sales was noticed when the prices of substitutes went up.
The low pricing power of Ramco Industries Ltd was also visible in FY2013 when it intimated to its
shareholders that its profit margins have declined because govt. incentives are no longer available and it
cannot increase prices to maintain its profitability.
The drop in Profitability is due to the full utilization of the incentives of the Government of West
Bengal.
2) Low entry barriers and intense competition faced by Ramco Industries Ltd
put pricing pressure:
Ramco Industries Ltd faces intense competition from its peers in both building materials as well as textile
segments due to low barriers to entry for fresh players.
ratings, however, remain constrained by stiff competition in the industry, characterised by low
entry barriers and ease of capacity expansion
In the building materials segment, 19 players compete for customers’ orders leading to intense competition
as manufacturers of GI sheets also add to the competition.
faces stiff competition from peers given the modest growth and the presence of 19 players in the
industry. Furthermore, AC roofing manufacturers face stiff competition from manufacturers
of galvanized iron (GI) roofing sheets
The textile industry is highly fragmented containing both organized and unorganized players. Therefore,
the textile segment of Ramco Industries Ltd also faces fierce competition, which puts pressure on its profit
margins.
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In addition, the company witnessed moderation in margins in the textile segment owing to higher
raw material prices and intense competition from fragmented and established players.
A combination of commodity products and intense competition from peers usually leads to price-based
competition where all the players start to cut each other’s prices to gain business from customers. As a
result, Ramco Industries Ltd has continuously faced pricing pressure since the early part of its existence.
In FY2004 annual report, the company intimated to its shareholders that its product prices are expected to
be low due to intense competition.
selling prices are expected to be under pressure due to severe competition.
In FY2007, due to pricing pressure from competitors, the profit margins of the company declined leading
to a decline in profits despite an increase in sales.
Due to sharp increase in raw material costs and lower realization due to acute competition, the
Sheet Division’s Profits have come down
Similarly, in FY2012, the price war between cotton mills lead to a sharp decline of more than 30% in yarn
prices.
The mounting pressure of inventory with Indian Mills and their eagerness to get rid of their
inventory before the arrival of new cotton, virtually pushed the global yarn prices down by more
than 30 per cent within a month.
The credit rating agency, CRISIL, highlighted that intense competition in the fibre-cement sheets segment
was the main reason for the suboptimal performance of this business of Ramco Industries Ltd in FY2014-
FY2016.
Weak demand scenario and intense competition limited players ability to pass on input price
increases to end users, resulting in subdued operating performance of RIL’s AC roofing business
in the past three years
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The impact of competition on the pricing ability of Ramco Industries Ltd is so much that it is able to charge
a higher price to the customers only when all the competitors increase the prices.
Realisation also improved marginally compared to last year due to stiff pricing policies by
competition.
3) Cyclical nature of the business of Ramco Industries Ltd:
Both key business segments of Ramco Industries Ltd: building materials, as well as textiles, face alternate
periods of boom and bust. There are a few factors that lead to this cyclicity in the business performance of
the company.
The first factor is a dependence of the building material division on the real estate sector as well as the
textile sector, which is dependent on the general economic cycle in the country.
During upcycle phase of the economy, people have a higher surplus of money, which increases demand for
both building materials (new houses and home improvements) as well as textiles. Whereas during the
downcycle phase of the economy, people postpone their expenditure on homes as well as on textiles.
For example, in FY2011, Ramco Industries Ltd faced a reduced demand for products in its division:
building materials and textiles. As a result, it had to curtail its production of fibre cement sheets. Similarly,
a lower demand for textiles leads to an oversupply of yarn and lower prices.
Considering the prevailing market condition, production of Fibre Cement (F.C) Sheets during the
year 2010-11 was regulated with an intent to avoid stock build-up. Hence the actual production
was lower
Current Year working may not be encouraging as there is a glut in Yarn Market throughout
India. Prices of Yarn has come down and practically no enquiries
Also read: How to do Business Analysis of Real Estate Companies
In the past, during FYFY2002-FY2003, Ramco Industries Ltd faced similar pressures on its business
performance due to a downcycle in the general economic scenario.

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profit margins were under considerable pressure due to lower realizations.
there was considerable drop in the selling prices of FC Sheets…The lower production was due
to reduced demand in International market for the Cotton Yarn.
In fact, in the recession around the IT bubble of FY2000, the demand for one of the company’s products:
fibre cement pipes suffered so much that for almost 4 years it did not have any sales and the company had
to shut down this division and it gave its plant on lease to another pipe manufacturer.
FY2002 annual report, page3:
there had been practically no production of Pipes over the last 4 years. M/s. Kanoria Sugar and
General Manufacturing Co. Limited, one of the major producers of Pressure Pipes, evinced
interest to take on licence our Pressure Pipe production facilities
Along similar lines, in FY2023, the textile segment of the company suffered due to a decline in demand
from the US and European markets.
Demand in textile segment has also moderated in current fiscal due to recessionary environment
in Europe and US markets and the cotton yarn spreads have come down, thereby affecting the
profitability in textile segment as well.
The dependence on the general economic scenario for the demand for products results in alternating periods
of good and subdued business performance of the company, which is seen in its cyclical operating profit
margins (OPM).
Another factor leading to cyclicity in the performance of the company is its dependence on rural markets
for the demand for its products. Demand in rural markets is linked to monsoon, which is unpredictable and
generally leads to alternating periods of good and poor monsoon that impact the performance of Ramco
Industries Ltd.
Credit rating report by ICRA, April 2023, page 2:
Vulnerability of demand to cyclicality in rural markets
In FY2014, when Ramco Industries Ltd reported net losses, then one of the key reasons for the mediocre
performance was low demand from rural markets due to extended monsoon.
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Sale of FC Sheets has dropped by 19% compared to last year. Lower Offtake from the market is
due to unseasonal and extended monsoon during the year
In FY2016, the country faced poor monsoons leading to a decline in demand for products of Ramco
Industries Ltd.
Decrease in volume could be attributed to poor monsoon in the year resulting in lower demand in
retail sales.
Along similar lines, when there is an upsurge in rural demand, then Ramco Industries Ltd shows good
business performance. For example, during Covid in FY2021, when there was a reverse migration of labour
from large cities to rural areas, then the demand for building materials increased sharply in rural areas. As
a result, in FY2021, Ramco Industries Ltd reported its best profit margins in the last decade.
The strong pent up demand for asbestos roofing products mainly due to reverse migration of rural
population led to better average realizations and consequent improvement in profitability to
18.1% compared to 11.2% last year.
Later on, as the economy opened up and the migrant labour returned to cities, the sharp upsurge of rural
demand declined and in FY2023, the operating profit margin (OPM) of the company declined to 10%.
4) Attempts by Ramco Industries Ltd to increase its operating efficiency:
While operating in a commodity business with low switching costs for customers and intense price-
based competition, only companies with a low-cost structure are able to survive and grow.
Therefore, over the years, Ramco Industries Ltd has taken multiple steps to reduce its operating
costs.
4.1) Installation of windmills:
After facing a strong recession following the IT bubble, in FY2003, Ramco Industries Ltd started investing
in windmills to reduce its power costs.

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We have commissioned 3 nos. of windmills aggregating a capacity of 2.5 MW in Tirunelveli Dist.,

Tamil Nadu
Thereafter, it quickly increased its windmill capacity to 14.90 MW by FY2006.
Company commissioned new Wind Mills with an aggregate capacity of 8.65 MW…As on
31.03.2006, the position regarding Wind Mills is as follows: – Total capacity installed 14.90 MW
The company reaped the benefits of installing windmills in FY2012 when Tamil Nadu faced a power crisis
and the state govt. restricted the power that companies could draw from the grid to only 25% of their
requirements. During this period, having its own source of cheaper power helped the company.
The power cut in Tamil Nadu has worsened during the year…power availability was only
25% from March 2012…Timely decision taken by your Directors to install Windmills in previous
years and purchase of power from Third Party have helped the Company to tide over the power
crisis.
Currently, the company has 15 windmills with a total power generation capacity of 16.73 MW (FY2022
To counter the power crisis, in FY2014, the company invested ₹1 cr in Cauvery Power Generation Chennai
Private Limited (CPGCPL) so that it could get cheaper power under its group captive power arrangement.
However, it did not result in desired results and Ramco Industries Ltd sold off its investment in CPGCPL
later.
During the year, the Company made an investment of ₹ 100.00 lakhs in the Equity Shares of
Cauvery Power Generation Chennai Private Limited in order to enable the company to purchase
electricity from them under Group Captive arrangement…The Company has not renewed the
power purchase agreement beyond March 2014 and hence sold the above investment
4.2) Strategic decisions for units working poorly:
Whenever any business unit of Ramco Industries was not working well, then it took strategic decisions so
that either it starts to contribute meaningfully to the profitability or at least stop hurting the business due to
its losses.
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As discussed earlier, one such example was the shutting down of the fibre cement piping division when it
did not produce anything for four consecutive years until FY2002. Then, Ramco Cement Ltd shut down
this unit and leased it to another pipe manufacturer and started earning lease income.
Later, when the demand for these pipes declined so much that the lessee was not able to pay reasonable
rent, then in FY2023, it sold the assets of the pipe division altogether (Q4-FY2023 results, page 5).
Let us see another such example when Ramco Industries Ltd took strategic steps to reduce its costs and add
to its profitability.
In FY2006, the company installed a cement clinker grinding plant in Kharagpur, West Bengal for backward
integration.
Cement Clinker Grinding Plant with a capacity to produce 600 Tonnes of Cement Per Day (both
OPC and PPC) was commissioned at Kharagpur, West Bengal and production was taken in
March, 2006. While OPC is meant for captive consumption for the manufacture of FC sheets, PPC
is being sold in the market.
However, soon, the plant started facing troubles because the company was unable to source clinker to use
in the plant.
Due to non-availability of Clinker, the production of Cement was lower in 2007-08.
As low-capacity utilization was putting pressure on the company’s profit margins, it entered a deal with
Ultratech Cement, the largest cement manufacturer in India. Under the deal, the company started acting as
a processor for Ultratech where Ultratech provided the clinker and bought the cement produced from the
plant.
To overcome this difficulty, in October 2008, the Company entered into Agreements with M/s
Ultratech Cement…for continuous supply of Clinker to the CCG plant and also for sale of PPC /
OPC from the plant to ULTRATECH.
As a result of this deal, the cement plant that we previously becoming a drag on its profitability due to low
utilization, now, started contributing to its profitability with improved cement production.
In FY2009, within 6 months of the deal, the cement production increased to 54,487 MT from 6,668 MT in
FY2008 (FY2009 annual report, page 7). In FY2010, cement production increased to 105,320 MT (FY2010
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Later, in FY2018, the company sold this cement clinker grinding plant to its promoter-group company, The
Ramco Cement Ltd (FY2018 annual report, page 135).
On another occasion, when Ramco Industries Ltd realized that it is not able to make desired profits from
its plastic storage tank division, then it shut it down in FY2010 even though it had to take a loss of about
₹1 cr due to the closure.
Directors have taken a conscious decision to exit from the production and sale of the Plastic
Storage Containers, considering the lower profit margin available in this type of operation.
Impairment loss written off – Plastic storage tank 99,74,514
4.3) Voluntary retirement scheme for its employees:
In FY2015, Ramco Industries Ltd launched a voluntary retirement scheme (VRS) for its employee in its
attempts to rationalize its workforce and optimise its employee expenses.
The Company had announced Voluntary Retirement Scheme (VRS) for the employees of
Arakkonam Manufacturing Division during the year under review. A sum of ₹ 336.34
(lac) (Previous Year ₹ Nil) has been paid during the year
4.4) Entry into high-margin product segments:
To improve its profit margins, Ramco Industries Ltd is focusing to increase the share of segments like
calcium silicate board (CSB), which has a comparatively higher profit margin than fibre cement sheets and
board.
Calcium Silicate Board (CSB) segment (~15% of total revenues in fiscal 2022) will partially
mitigate the impact on margins as CSB segment commands higher margins.
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5) High regulatory risk in the business of Ramco Cement Ltd:
The company faces a significant regulatory risk in its business due to the following factors.
5.1) Usage of asbestos as raw material in fibre cement sheets and boards:
One of the key raw materials to make fibre cement boards and sheets is asbestos, which has many adverse
health-related consequences.
Asbestos mining and usage are banned in many countries. In India, mining of asbestos is completely banned
whereas usage of only white asbestos is permitted. The usage of blue and brown asbestos, which are quite
harmful is banned.
In India, only white asbestos (known as crysotile) fibre is used, as blue and brown asbestos have
been banned. Furthermore, all forms of asbestos mining are banned in the country.
Therefore, Ramco Industries Ltd has to import its entire requirement of asbestos from limited countries that
still allow the mining of asbestos e.g. Russia, Kazakhstan etc. In the recent past, Brazil and Canada which
used to allow asbestos mining have now banned it. It has further reduced the sources of asbestos available
to Ramco Industries Ltd.
company is exposed to the risk of a ban on mining and use of asbestos in Russia and Kazakhstan (which
are the largest exporters of this mineral). Brazil and Canada, which were among the world’s largest
producers, have already banned the mining and sale of asbestos in 2017 and 2018, respectively.
Due to these tight regulatory conditions related to asbestos, in FY2023, due to Russia Ukraine war, the
availability and price of asbestos were sharply impacted. During 2023, the price of asbestos increased by
about 30% and due to a lack of pricing power, Ramco Industries Ltd had to take a hit on its profit margins.
Its OPM fell to 10% in FY2023 from 15% in FY2022.
In the current fiscal, supplies of asbestos fibre from Brazil have been impacted due to a legal
issue with the producer, while the ongoing Russia-Ukraine war, has resulted in cost of fibre from
these markets going up…increase in asbestos base price by 30% in CY 2023
Even in FY2020, when the operating profit margin of Ramco Industries Ltd had declined, then one of the
key reasons was an increase in asbestos prices, which it could not pass on to its customers.
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Also, one of the three global suppliers of asbestos shut operations after a mining ban, leading to
a rise in the price of asbestos. Consequently, the operating profitability margin fell to 11.5% from
12.6%.
The health hazards related to asbestos mining, sales and processing continuously keep a very high
regulatory risk on the business of Ramco Industries Ltd as overnight any adverse regulation may impact its
business very significantly.
In the past, there have been public protests against asbestos in the markets where Ramco Industries Ltd
operates like Bihar. Source: Bihar’s Singur? Stir over asbestos plant: Times of India
Ongoing public protests in Muzaffarpur over an upcoming asbestos plant have forced the district
administration to impose Section 144 near the facility
To reduce the risk of a ban on asbestos, the company has started production of non-asbestos products like
Greencor.
Greencor, Non-Asbestos roofing sheets have been well accepted in the market
5.2) Power-intensive operations:
The business of Ramco Industries Ltd consumes a significant amount of power. Therefore, it is exposed to
govt. and regulatory changes related to the power sector.
For example, in FY2013 when due to a power crisis in Tamil Nadu, the govt. increased power prices sharply
by 30% and also the wheeling charges i.e. tariff charged by govt. to deliver power from windmills locations
to the factory, then despite having captive windmills, the profitability of the company suffered and its textile
business segment reported losses.
The hike in electricity tariff rate by 30% by Government of Tamil Nadu and also hike in Wheeling
and other charges imposed on Wind Mills have pushed up the cost of power very steeply.
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In FY2014, the govt. put further tightened the terms for purchasing power from windmills and as a result,
the company’s windmills were temporarily shut down leading to a loss of 6 million units costing about ₹3.5
cr leading to an increase in its power costs despite having captive windmill power plants.
unusual restrictions imposed by…(TANGEDCO) in evacuation of power generated by wind mills,

which has resulted in loss in generation of power from wind mills to the extent of approximately 6
million units, which translated into ₹ 3.50 Crores in monetary terms. Due to shut-down of wind
mills by TANGEDCO, the Company was forced to purchase the power…Due to this, the power
cost during the year has gone up substantially
Subsequently, the company had to face other regulatory challenges related to power sourcing. For example,
in FY2015, govt. mandated that companies that have captive power plants connected to the state grid must
purchase a minimum of 0.5% of their power requirements from solar sources. This was irrespective of the
fact that the captive power is windmill power. Otherwise, companies had to buy renewable energy
certificates (REC) from the market or deposit the money with govt.
Ramco Industries Ltd challenged this regulation in court and got a stay.
Consumers owning grid connected captive power generating plants…are obligated to consume
a minimum of 0.5% of their energy requirements from solar sources. The non-complainants are
required to purchase Renewable Energy Certificates (REC) from markets @ 1 REC per 1,000
units of shortage or deposit an equivalent amount in a separate designated fund… approached the
Honourable Chennai High Court and obtained an interim stay
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6) Risks due to operations in Sri Lanka:
Ramco Industries Ltd has fibre cement sheet manufacturing operations in Sri Lanka via two subsidiary
companies.
Originally, the company expected to derive significant benefits from its Sri Lankan operations. However,
recently, its Sri Lankan has faced many problems one after another.
6.1) Political unrest:
In FY2019, the Sri Lankan operations of the company were impacted due to political unrest in the country.
Overseas operations of subsidiaries: There was a drop in volume due to political unrest last
year.
The same situation continued in FY2020 and impacted the business of its subsidiaries (FY2020 annual
report, page 10).
Moreover, in FY2022 and FY2023, due to the economic crisis in Sri Lanka, Ramco Industries Ltd faced
challenges in receiving royalty payments from its Sri Lankan subsidiaries. Royalties of more than ₹23 cr
were stuck for more than a year due to restrictions imposed by Sri Lankan central bank.
Q2-FY2023 results, October 2022, page 5:
Balance outstanding of Royalty amount is Rs. 2334 lakhs as on 30.09.2022, which is being
received on part payments due to current status of repatriation restrictions imposed by the Central
Bank of Sri Lanka
6.2) Foreign exchange fluctuations risk faced by Ramco Industries Ltd:
The company faces foreign exchange risk on multiple fronts. First, it must import a substantial portion of
its raw material because its entire asbestos requirement needs to be imported. It exposes its business
operations to the fluctuations of the Indian Rupee (INR) against various other currencies.
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Second, its business operations in Sri Lanka add the risk of fluctuations of the Sri Lankan Rupee (LKR)
against various other currencies and increase its forex risk.
In recent years, due to the economic crisis in Sri Lanka, LKR witnessed a sharp decline against all major
currencies. As a result, Ramco Industries Ltd suffered substantial foreign exchange losses due to its Sri
Lankan operations.
In FY2022, the company lost about ₹23 cr due to foreign currency fluctuations (FY2022 annual report,
page 183).
In FY2023, the Sri Lankan operations of the company lost about ₹13 cr due to foreign exchange
fluctuations.
Exchange fluctuation loss accounted in Sri Lanka subsidiary companies included in Other
Expenses: ₹1,312 lac
Going ahead, an investor needs to closely monitor developments related to the Sri Lankan operations of the
company to check whether the profitability improves.
The impact of global events on the business of Ramco Industries Ltd goes beyond its imports and Sri Lankan
operations. Recently, it was significantly impacted by issues faced by sea trade especially due to the Russia-
Ukraine war and global container shortages, which increased its transportation and handling costs.
In FY2022, it could not execute its orders due to high freight costs and container shortages.
There were a quite a few large volume orders which remained unexecuted due to very
steep increase in freight costs, and also due to acute shortage in container availability.
Similarly, in FY2023, higher freight costs due to the Russia-Ukraine war and INR depreciation impacted
its profit margins.
Profitability moderation is due to elevated freight costs due to Russia-Ukraine crisis and effect of
rupee depreciation on imports in fiscal 2023.
An investor should always keep in her mind the commoditised and cyclical nature of the business of Ramco
Industries Ltd. She should remember that governments the world over are tightening their regulations on
asbestos due to health hazards, which might leave a significant impact on the company at the stroke of a
pen. Going ahead, she should closely monitor regulatory developments impacting Ramco Industries Ltd.
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Over the last 10 years (FY2014-FY2023), the tax payout ratio of Ramco Industries Ltd has seen significant
fluctuations. During the initial part, FY2014-FY2016, the tax payout ratio was low due to losses and using
minimum alternate tax (MAT).
The Company has taxable income for the year computed under section 115JB of the Income Tax
Act, 1961 (Minimum Alternate Tax).
Thereafter, from FY2017 to FY2022, the tax payout ratio has been in line with the corporate tax rate
prevalent in India. The tax payout ratio stayed at 30% or above even after the announcement of the new
reduced rate of corporate tax in FY2020 because the company decided not to opt for the new tax regime.
Q1-FY2023 results, July 2022, page 4:
The Company has not exercised this option based on current evaluation of the benefits available
in existing tax regime.
In FY2023, the reduction in the tax payout ratio to 13% is because, from FY2023, Ramco Industries Ltd
has opted for the new income tax regime and the deferred taxes have been recalculated as per the new
regime. Due to this decision, the tax liabilities of the company declined by about ₹20 cr.
Q4-FY2023 results, May 2015, page 6:
Company has opted for shifting to new tax regime from FY 2022-23. Consequently, the Company
has restated the net deferred tax liability as at 1-4-2022 in accordance with the reduced rate by
crediting Rs.1986 Lacs to the Statement of Profit and Loss during the year.
Recommended reading: Deferred Tax Assets, Tax Payout (P&L vs. CFO): Queries
Answered
Operating Efficiency Analysis of Ramco Industries Ltd:
a) Net fixed asset turnover (NFAT) of Ramco Industries Ltd:
Over the years, the NFAT of the company had stayed between 2 and 2.5. NFAT improved to 2.9 in FY2022,
which was primarily due to pent-up demand post-covid and a surge in rural demand due to reverse migration
of labour from cities to the hinterland. However, as economic activity has come back to normal post-covid,
the NFAT of the company has also started declining to its long-term average levels.
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Going ahead, an investor should monitor the NFAT of Ramco Industries Ltd to understand whether it is
able to efficiently utilize its assets.
b) Inventory turnover ratio (ITR) of Ramco Industries Ltd:
Over the years, the ITR of Ramco Industries Ltd has been within 3 – 3.5 levels. It indicates that the company
has maintained its efficiency of inventory management.
ITR has declined to 2.9 in FY2023, which is primarily due to the accumulation of asbestos inventory by the
company in view of uncertainties of its availability due to the Russia-Ukraine war.
RIL has increased the inventory levels of asbestos fiber stocks due to uncertainties in supply
Whenever any company accumulates significant inventory of any raw material whose price is volatile, then
it may face inventory write-down/losses if the price of the raw material declines.
Ramco Industries Ltd faced losses of ₹2.4 cr on its cotton inventory in FY2020 and FY2021 when cotton
prices declined sharply due to covid pandemic.
Mark to Market (MTM) Loss on Cotton inventory: Due to outbreak of Covid-19…the

market price of Cotton had fallen by 5% due to poor market demand…During the month of April,
2020, the Cotton Corporation of India (CCI) has started selling the cotton by offering huge
discount…and the market price of cotton had fallen by another 10% and the impact on cotton
inventory was ₹ 238.29 Lakhs
Going ahead, an investor should monitor the inventory position of Ramco Industries Ltd to assess whether
it is able to manage its inventory efficiently.
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c) Analysis of receivables days of Ramco Industries Ltd:
Over the years, the receivables days of Ramco Industries Ltd have improved from 28 days in FY2015 to 19
days in FY2023. A reduction in receivables days shows that the company has collected its dues from
customers in time.
Receivables days have increased to 33 days in FY2020 when covid related lockdown was announced.
However, since then, receivables days have improved to 19 days in FY2023.
Going ahead, an investor should watch the trend of receivables days of Ramco Industries Ltd to assess
whether it continues to collect its receivables on time.
operations (cCFO) of Ramco Industries Ltd for FY2014-FY2023, then she notices that over the years
(FY2014-FY2023), the company has converted its profit into cash flow from operations.
Over FY2014-23, Ramco Industries Ltd reported a total net profit after tax (cPAT) of ₹1,706 cr. During the
same period, it reported cumulative cash flow from operations (cCFO) of ₹824 cr.
It may seem that the company is not able to convert its profits into cash; however, an investor may note that
the consolidated profit after tax of Ramco Industries Ltd contains a significant amount of “Share of
Profit/(Loss) of Associates.” It relates to those companies where Ramco Industries Ltd has more than 20%
but less than 50% stake. This represents the proportionate share of the company in their net profit, which
may not be received in cash by the company. This is because the cash inflow from these associate companies
will be in the form of dividend payments received by Ramco Industries Ltd from them. These dividend
payments when received will be classified under cash flow from investing activities.
As a result, “Share of Profit/(Loss) of Associates” increases the net profit of the company over the years
without a commensurate increase in cash flow from operating activities.
During the last 10 years (FY2014-FY2023), Ramco Industries Ltd reported a total of ₹977 cr as “Share of
Profit/(Loss) of Associates”. Therefore, excluding it, the company had a net profit of ₹729 cr against which
it had a cumulative CFO of ₹824 cr.
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Learning from the article on CFO will show an investor that the following factors put a significant influence
on cPAT and cCFO leading to a higher cCFO compared to cPAT excluding “Share of Profit/(Loss) of
Associates”:

• Other income of ₹269 cr (a non-operating income) over FY2014-FY2023, which is added while
calculating PAT but is deducted while calculating CFO.
Going ahead, an investor should keep a close watch on the working capital position of Ramco Industries
Ltd.
The Margin of Safety in the Business of Ramco Industries Ltd:

of a Company
target growth.
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Where,

An investor would notice that over the years, Ramco Industries Ltd had reported an SSGR in the range of
30-40% whereas, over the last 10 years (FY2014-FY2022), it has grown its sales at a rate of 7% year on
year. As a result, the company has grown its sales within the levels that its business profits can sustain.
Therefore, over the years, Ramco Industries Ltd had no need to raise any additional capital. In fact, it has
reduced its debt by ₹100 cr over the last 10 years from ₹408 cr in FY2014 to ₹308 cr in FY2015.
In addition, the company has paid out dividends of about ₹52 cr excluding dividend distribution tax to its
shareholders and has invested a significant amount of money in its associate and group companies.
The investor gets the same conclusion when she analyses the free cash flow position of Ramco Industries
Ltd.
b) Free Cash Flow (FCF) Analysis of Ramco Industries Ltd:
While looking at the cash flow performance of Ramco Industries Ltd, an investor notices that during
FY2014-FY2023, it generated cash flow from operations of ₹824 cr. During the same period, it did a capital
expenditure of about ₹416 cr.
Therefore, during this period (FY2014-FY2023), Ramco Industries Ltd had a free cash flow (FCF) of ₹408
cr (=824 – 416).
of ₹239 cr. As a result, the company had a total free cash flow of ₹438cr (= 408 + 269 – 239). Please note
As discussed earlier, Ramco Industries Ltd has used its surplus cash to reduce its debt, pay dividends to
shareholders and invest in its associates and other promoter-group companies.
The cash and investments balance of the company has increased by ₹2,894 cr over the last 10 years from
₹237 cr in FY2014 to ₹3,131 cr in FY2023 primarily due change in accounting standards from GAAP to
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IndAS, which led to the recognition of its investments in shares of listed associate companies at market
value.
During the transition period to IndAS, in FY2016, it had the major impact of an increase of about ₹1,740
cr.
as a part of adoption of Ind AS, due to fair value adjustments on investments in associates and
other transition adjustments, the net worth for FY2016 was revised upwards by ~Rs. 1740.0 crore.
Going ahead, an investor should keep a close watch on the free cash flow generation by Ramco Industries
Ltd to understand whether the company continues to generate surplus cash from its business and how it
utilizes the same.

FCF

Additional aspects of Ramco Industries Ltd:

On analysing Ramco Industries Ltd and after reading annual reports, credit rating reports and other public
1) Management Succession of Ramco Industries Ltd:
Ramco Industries Ltd is a part of the Chennai-based Ramco group. Currently, Mr P.R. Venketrama Raja,
Chairman (age 64 years) and his son, Mr P.V. Abinav Ramasubramaniam Raja, MD (age 29 years) who
are a part of the promoter family, are leading the company.
P.V. Abinav Ramasubramaniam Raja – Son of P.R. Venketrama Raja
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The presence of two generations of promoters in the company at the same time indicates that the company
has put in place a management succession plan in which the new generation of the promoter family is being
groomed in business while the senior members of the promoter family are still active.
2) Project execution by Ramco Industries Ltd:
Over the years, the company has undertaken many capacity expansion projects, which it completed on time,
which indicates good project execution skills by the company. Let us see examples of a few such projects.
In FY2000, immediately after its Sri Lankan subsidiary commissioned a fibre cement sheet plant of 45,000
MTPA, it announced further expansion by 50,000 MTPA. The company completed the additional
expansion within a year (FY2001 annual report, page 4).
In FY2003, the company started work on a calcium silicate board (CSB) project in Arakkonam, Tamil Nadu
and a fibre cement sheets project in Kharagpur, West Bengal with a timeline to complete it by September
2003 and January 2004 respectively (FY2003 annual report, page 7). Ramco Industries Ltd commissioned
the CSB project in September 2003 and the FC sheet project in March 2004 (FY2004 annual report, page
6).
In FY2004, Ramco Industries Ltd started work on a fibre cement sheets project in Vijayawada with a
timeline to complete it by March 2005 (FY2004 annual report, page 7). It commissioned this project in
March 2005 (FY2005 annual report, page 9).
In FY2005, it started work on a fibre cement sheets project in Bhuj, Kutch, Gujarat and a new cotton yarn
spinning unit at Rajapalaiyam, Tamil Nadu with a timeline to complete it by March 2006 (FY2005 annual
report, page 10). The company commissioned the fibre cement sheet project ahead of schedule in January
2006 and completed the spinning mill project on time in March 2006 (FY2006 annual report, page 8).
In FY2005, the company started work on a cement clinker grinding project at Kharagpur with a timeline to
complete it in the next year (FY2005 annual report, page 10). It commissioned this project in March 2006
In FY2006, Ramco Industries Ltd proposed to enter the plastic storage tanks business (FY2006 annual
report, page 5). The company completed its manufacturing plant in the next year itself and then it planned
to expand its storage tank manufacturing capacity by making another plant in Maksi, MP (FY2007 annual
report, page 7). It commissioned the plant at Maksi in the next year (FY2008 annual report, page 10).
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In FY2007, it started to work to expand its cotton yarn capacity by adding 16,800 spindles with a timeline
of August 2007 (FY2007 annual report, page 8). It commissioned this project in December 2007 (FY2008
In FY2009, the company started work on a fibre cement sheets project in Gangaikondan, Tamil Nadu with
a timeline to complete it by September 2010 (FY2009 annual report, page 5). It commissioned this project
ahead of schedule in July 2010 (FY2011 annual report, page 7).
In FY2010, the company started work on a fibre cement sheets project in the Bhojpur district, Bihar
(FY2010 annual report, page 7). It commissioned this project in May 2011 (FY2011 annual report, page 7).
In FY2011, it started work on its second unit of fibre cement sheets in Sri Lanka with a timeline to complete
it in FY2012 (FY2011 annual report, page 8). It commissioned this project on March 30, 2012 (FY2012
In FY2012, the company started work on a calcium silicate board (CSB) project in Kotputli, Rajasthan
(FY2012 annual report, page 7). It commissioned the project in FY2014 (FY2014 annual report, page 16).
Therefore, the history of timely project execution by Ramco Industries Ltd indicates that it has good project
management skills.
Now, in January 2023, the company has proposed to set up a new CSB plant in Madhya Pradesh with a
timeline to complete it in 12-18 months.
Credit rating report by CRISIL, January 2023
RIL is also contemplating investing Rs.200 crores to set up a CSB plant in Madhya Pradesh…will
take 12-18 months for completion.
An investor should monitor the developments related to this project to assess whether the company is able
to complete it within the allocated cost and timelines.
3) Related party transactions of Ramco Industries Ltd with promoter group

companies/associates:
Over the years, Ramco Industries Ltd is involved in numerous transactions with its promoter group
companies many of which are its associates i.e. it owns between 20-50% stake in those companies.
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An investor always be cautious when she comes across transactions between a company and its promoter
group companies because these transactions have the potential to shift economic benefits from public
shareholders to promoters.
Let us analyse the related party transactions of Ramco Industries Ltd.
3.1) Commission paid to Raja Charity Trust, sole selling agent:
Ramco Industries Ltd has appointed Raja Charity Trust (RCT) as its sole selling agent for the company in
India and it pays a 1% on sales to it.
M/s. Raja Charity Trust will be the Sole Selling Agent for the products of the Company in
India…will be entitled to a commission of 1.00% (one percent) exclusive of taxes
RCT is a trust where the promoters (the chairman and the managing director) and one of the non-
independent directors of the company are trustees.
Shri. P.R. Venketrama Raja, Shri Abinav Ramasubramania Raja and Sri.S S Ramachandra Raja,
as the trustees of RCT
It may seem that the promoters in their personal capacity have formed an entity (RCT) and have garnered
the sole selling agent contract from Ramco Industries Ltd and are earning commission on sales.
In the last 10 years (FY2014-FY2023), Ramco Industries Ltd has paid a commission of about ₹61 cr to
Raja Charity Trust.
As it is the same people, the Chairman and the MD of Ramco Industries Ltd who have established RCT
and are running the operations of RCT, then an investor questions why the same Chairman and MD could
not create the same selling channel within Ramco Industries Ltd.
An investor is left confused why the company is effectively paying a commission to the Chairman and the
MD for selling its products via their personal entity (RCT) when it is already paying them
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remuneration/salary in the Company for working to the best of their abilities to generate maximum returns
for the shareholders.
Moreover, the company, apart from giving business to RCT is also providing loans to it so that RCT can
run its operations smoothly.
Loan given to related party represents…loan given to M/s. Raja Charity Trust, an associate entity
– ₹50 lakhs
Please note that promoters are acting as the sole selling agent of the company and earning a commission
for very long. As per the earliest available annual report of the company (FY2000) available on BSE, page
5:
M/s. Raja Charity Trust, our Sole Selling Agents for Fibre Cement products in India, have been
taking all efforts for marketing the entire production of the Company.
An investor may contact the company directly to understand why the Chairman and the MD could not create
the selling infrastructure within Ramco Industries Ltd and they had to set up a separate entity (RCT) to act
as a sole selling agent and the company had to pay a commission of ₹61 cr over last 10 years.
Investing?
3.2) Investments by Ramco Industries Ltd in promoter group companies:
Ramco Industries Ltd has been investing money in other Ramco group companies for a long time. Out of
many investments made by it in the promoter-group entities, the largest ones are in The Ramco Cements
Limited (RCL, previously known as Madras Cements Ltd), Ramco Systems Limited (RSL) and
Rajapalayam Mills Limited (RML).
To estimate the money invested by Ramco Industries Ltd in its promoter-group companies over the years,
an investor may have to take the FY2016 balance sheet as the base because it is the last fiscal year when
the balance sheet recorded investments on a cost basis.
As per FY2016 annual report, page 94, the company had invested more than ₹385 cr in other Ramco group
companies. More than 99% of these investments were done in the three companies: RCL, RSL and RML.
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Thereafter, in FY2019, it invested a further ₹10 cr in RCL by buying 148,000 shares from a promoter entity,
Vishnu Shankar Mills (VSM).
During the first half fiscal 2019, RIL has purchased 148,000 shares in Ramco Cements for Rs 10
crore from Vishnu Shankar Mills through related party transaction.
This transaction might be like giving an exit to VSM from RCL by purchasing these shares, which might
have served the twin purpose of VSM getting the money and still, the ownership of these shares of RCL
staying within the promoter Ramco group.
In FY2020, the company put in an additional ₹27.5 cr in shares of promoter group companies: ₹10 cr in
RCL and ₹17.5 cr in Lynks Logistics Limited. (FY2020 annual report, page 166).
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In FY2021, the company put in an additional ₹40.5 cr in shares of promoter group companies: ₹29.7 cr in
shares of RCL by purchasing them from a promoter group company, Ramaraju Surgical Cotton Mills
Limited and ₹10.8 cr in Lynks Logistics Limited. (FY2022 annual report, page 199, screenshot shown
below).
In FY2022, the company put in an additional ₹61.3 cr in shares of promoter group companies: ₹50.6 cr in
shares of RCL by purchasing shares worth ₹14.7 cr from the Chairman of Ramco Industries Ltd, ₹25.9 cr
from his sister and shares worth ₹10 cr from RML. In addition, the company purchased shares of Lynks
Logistics Limited for ₹9.51 cr and shares of RML for ₹1.21 cr (rights issue).
As mentioned earlier, purchasing shares of RCL for ₹50 cr by Ramco Industries Ltd is like giving an exit
to the promoters (Chairman and his sister) and their company, RML. By this transaction, these entities got
the money (₹50 cr) whereas the ownership of these shares of RCL stayed within the promoter Ramco group.
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In FY2023, Ramco Industries Ltd invested ₹45 cr in shares of Ramco Systems Ltd (RSL) (page 2 of BSE
announcement dated June 13, 2023: Disclosure of Related Party Transactions – Half Year ended 31.3.2023)
Therefore, in all, until FY2023, Ramco Industries Ltd has invested about ₹570 cr in shares of promoter
group companies (=385 + 27.5 +40.5 + 61.3 + 45).
As per Q4-FY2023 results, page 9, on March 31, 2023, the market value of these investments is about
₹3,000 cr
Even though an investor may feel good that the money invested in promoter group companies has increased
in value; however, she should always keep in her mind that when public companies enter such transactions
with promoter group companies, then this money is no longer readily available to the company. Most of
the time, these investments continue for decades, almost as permanent holdings by which promoters
exercise their control on these entities.
For example, the investment of Ramco Industries Ltd in RCL (previously known as Madras Cements Ltd)
and RML dates more than 20 years, at least before FY1999 as per the earliest annual report of the company
for FY2000 available on the BSE website.
Moreover, we believe that such transactions/cross-holdings usually indicate the use of loopholes by
promoters to inflate their shareholding in their group companies.
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These steps are not illegal as there does not seem to be any law prohibiting the purchase of shares of group
companies; however, as illustrated below, these steps benefit the promoters; that’s why promoters create
such cross-holding structures of group companies.
Take an example of the shareholding of Ramco Industries Ltd (RIL) in The Ramco Cement Ltd (RCL). On
March 31, 2023, the company owns about 21.36% stake in RCL. This stake is classified as promoter’s
holding (i.e. Ramco’s holding) in RCL (check here: BSE).
However, on March 31, 2023, Ramco promoters have only 53.88% of Ramco Industries Ltd (RIL) (check
here: BSE). The remaining 46.12% is owned by public shareholders. Therefore, out of the 21.36% stake
of RCL owned by RIL, only 11.51% is owned by Ramco promoters (=21.36% * 53.88%) whereas the
remaining 9.85% is owned by public shareholders (=21.36% * 46.12%).
As per the above calculation, ideally, via RIL, the stake of Ramco promoters in RCL should be only 11.51%
instead of disclosed 21.36%. However, the promoters due to their majority shareholding in RIL, end up
controlling the entire stake of 21.36% of RCL owned by RIL i.e. also the 9.85% stake of RCL ideally owned
by the public shareholders of RIL.
I.e. by putting in 53.88% of the money (Ramco promoters’ stake in RIL), the promoters are able to control
100% of the ownership of RIL in RCL shares.
Along similar lines, Ramco promoters are effectively able to control a higher stake in RIL by owning this
stake via other publicly listed group companies.
On March 31, 2023, out of the 53.88% stake in RIL owned by Ramco promoters, 15.40% is owned by The
Ramco Cements Ltd (RCL where promoters have 42.29% stake and the rest is owned by the public) and
9.68% is owned by Rajapalayam Mills Limited (RML where promoters have about 55.43% stake and rest
is owned by the public).
Therefore, out of the 53.88% stake owned by promoters in Ramco Industries Ltd (RIL), public-listed group
companies own a 25.08% stake (=15.40 + 9.68) in which public shareholders also own a substantial stake.
Therefore, by owning their stake in RIL via these public-listed group companies (RCL and RML), the
promoters are able to control even that portion, whose money is effectively contributed by the public
shareholders of RCL and RML.
Therefore, we believe that via these cross-holding structures, promoters are able to inflate their stake. If
they own their stake in company A via another publicly listed company B (where they have a 50% stake),
then for ₹1/- put by them in company B, they can control a stake worth ₹2/- in Company A, which is by
using the equal stake of the public in company B.
In the past, Ramco promoters seem to have used another loophole of using intercorporate deposits to
increase their shareholding in their group companies.
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Let us see an example of it from FY2007 when effectively The Ramco Cements Ltd (RCL, previously
called Madras Cements Ltd) gave an intercorporate deposit (ICD) of ₹4 cr to RIL, which RIL transferred
to its wholly owned subsidiary, Sudharsanam Investments Limited (SIL), which then used it to buy shares
of RCL.
In FY2007, Ramco Industries Ltd (RIL) bought additional shares of Madras Cements Ltd for about ₹17.4
cr as the cost value of RIL’s investment in Madras Cements Ltd on a consolidated basis increased from
₹38.9 cr in FY2006 to ₹56.3 cr in FY2007.
However, out of this investment of ₹17.4 cr, only ₹13.4 cr of shares were purchased in the name of Ramco
Industries Ltd (RIL) because, in the standalone financials, the value of RIL’s investment in Madras Cements
Ltd increased from ₹34 cr in FY2006 to ₹48.4 cr in FY2007.
Therefore, we may conclude that the remaining investment of ₹4 cr (=17.4 – 13.4) done by RIL in Madras
Cements Ltd was done via its subsidiary, which is the difference between the increase in RIL’s stake in
Madras Cements Ltd in consolidated and standalone financials.
To learn the source of money that was used by its subsidiary, Sudharsanam Investments Limited (SIL) to
buy shares of Madras Cements Ltd, we read the FY2007 annual report in detail.
In the related party transactions section, we notice that in FY2007, Ramco Industries Ltd (RIL) had given
an ICD of ₹4 cr to SIL and at the same time, Madras Cements Ltd had given an ICD of ₹4 cr to Ramco
Industries Ltd (RIL).
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As money is a fungible commodity; therefore, the above series of transactions indicate that Madras Cements
Ltd gave an ICD of ₹4 cr to Ramco Industries Ltd (RIL), which then forwarded this ICD of ₹4 cr to its
subsidiary Sudharsanam Investments Limited (SIL). SIL then used this ₹4 cr to buy shares of Madras
Cements Ltd.
Therefore, in this case, effectively, by using the money lying with Madras Cements Ltd, the promoters
could increase their control over Madras Cements Ltd by routing that money via RIL and then SIL into
buying shares of Madras Cements Ltd.
₹4 cr originally lying with Madras Cements Ltd belonged to both promoters as well as public shareholders
in proportion to their shareholding. However, now, after this series of transactions, the promoters have
complete control of the shareholding of ₹4 cr of Madras Cements Ltd purchased using this money because
this entire stake will reflect under “Promoters’ shareholding” in Madras Cements Ltd.
In FY2023, Ramco Industries Ltd (RIL) sold shares of HDFC Ltd worth ₹48 cr and out of this invested ₹45
in shares of Ramco Systems Ltd (RSL).
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Sale proceeds of ₹48 cr belonged to all the shareholders of RIL i.e. 53.88% belonged to the promoters and
46.12% belonged to public shareholders. However, after investing ₹45 cr in shares of RSL, promoters will
effectively control the entire shareholding of RSL purchased using this money.
Please note that these steps may not be illegal; however, they allow promoters to own a higher percentage
of stake in their group companies than if they distribute this money to all shareholders (e.g. as dividends)
and use only their share of money to buy shares of group companies.
To learn more about other loopholes used by promoters to inflate their shareholding in companies and to
read other live examples, an investor should read the following article: How Promoters use
Loopholes to Inflate their Shareholding
Promoters are keen to increase their shareholding in the Ramco group companies to the extent that they
frequently pledge their existing shareholding with lenders to get loans that they use to buy shares of group
companies.
For instance, Mr P.R. Venketrama Raja, Chairman of Ramco Industries Ltd had pledged a part of his
shareholding in the company to raise loans for buying shares of other group companies.
Corporate announcement to BSE, January 6, 2023, page 1:
3.3) Loans and guarantees were given to promoter group companies by

Ramco Industries Ltd:
Over the years, on numerous occasions, Ramco Industries Ltd has given loans as well as given guarantees
for loans taken by its promoter-group companies from other lenders.
In FY2009, Ramco Industries Ltd gave an intercorporate deposit (ICD) to Ramco Systems Ltd of ₹1.25 cr
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In FY2010, the company gave ICDs to Ramco Systems Limited for ₹1.25 cr and to Rajapalayam Mills
Limited for ₹3 cr.
Additionally, Ramco Industries Ltd has been giving guarantees to the lenders on behalf of promoter-group
companies for the loans taken by them.
For example, in FY2013, the company had given guarantees for almost ₹110 cr to the promoter group
entities namely: Ramco Systems Limited (₹65.5 cr), Shri Harini Textiles Limited (₹36.3 cr) and Deccan
Renewable Wind Electrics Ltd / Axis Wind Energy Ltd (7.7 cr).
FY2013 annual report, page 75, related party transactions section:
The company has been extending guarantees for promoter group companies for a long time. For example,
in FY2001, it had given a guarantee for ₹16 cr to a promoter group entity, Thanjavur Spinning Mill Limited.
Corporate guarantees furnished by the company to banks on behalf of M/s. Thanjavur Spinning
Mill Limited to support their credit facilities was outstanding to the extent of Rs.16 crores as on
31st March, 2001.
Giving guarantees to banks for loans taken by others is risky because if due to any reason, these other
companies are not able to repay their lenders, then the lenders will recover their money from Ramco
Industries Ltd.
While doing its assessment, the credit rating agency CRISIL adds these guarantees to the debt of Ramco
Industries Ltd. So, these guarantees effectively carry the same risk as the debt taken by Ramco Industries
Ltd itself.
outstanding amounts against corporate guarantees provided to weaker Ramco group companies
have been included as debt of RIL.
It seems ironic when a company like Ramco Industries Ltd, which has been supporting numerous promoter-
group entities by way of equity investments, loans and guarantees, when announces its own capital
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expansion project, then instead of tapping into all these entities for funds, it has to take loans and pay interest
costs.
The company plans to take a loan of ₹150 cr to fund its latest announced calcium silicate board project.
RIL is also contemplating investing Rs.200 crores to set up a CSB plant in Madhya Pradesh and
is expected to avail Rs.150 crores of debt for the project.
In the past, there have been instances where Ramco Industries Ltd had to use short-term loans for long-term
purposes, which usually is a sign of stretched liquidity because using short-term loans for long-term
purposes creates an asset-liability mismatch, which can create a risky situation for companies.
Company has utilized Rs.29.68 Crores from Short Term sources towards Long Term obligations.
Therefore, it seems that at times, Ramco Industries Ltd has gone out of its way to help promoter-group
entities.
Investing?
3.4) Business transactions with promoter group entities:
Ramco Industries Ltd enters into many sale and purchase transactions with other Ramco group companies
including the sale of yarn to Rajapalayam Mills Limited, Rajapalayam Textile Limited, Sandhya Spinning
Mill Limited, purchase of cement from The Ramco Cements Limited etc. Cumulatively, these transactions
exceed ₹100 cr in a year. In FY2022, Ramco Industries Ltd sold and purchased goods and services worth
₹133 cr (FY2022 annual report, pages 193-195).
In addition, the company sold its assets to group companies e.g. in FY2018, it sold its cement clinker
grinding plant to The Ramco Cements Ltd for ₹21.13 cr.
An investor should closely monitor all the related party transactions of Ramco Industries Ltd with its
promoters and their entities because all such transactions have the potential of transferring economic
benefits from public shareholders to promoters.
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3.5) Joint ownership of Aircrafts with promoter group companies:
In FY2004, Ramco Industries Ltd invested ₹1.02 cr to get 1/8th stake in an aircraft with other Ramco group
companies (FY2004 annual report, page 28).
In FY2009, the company increased its stake in the aircraft from 1/8 th to 1/6 th by putting in additional
₹35.5 lac. (FY2009 annual report, page 27).
In FY2011, it bought joint ownership (50%) in another aircraft by investing ₹5.8 cr (FY2011 annual report,
page 51).
The FY2012 annual report disclosed that Ramco Industries Ltd owns these aircrafts in joint ownership with
The Ramco Cements Ltd (previously known as Madras Cements Ltd).
In FY2016, the company sold its transferred its ownership of the aircraft to a promoter group company
providing aircraft charter services, Madurai Trans Carrier Limited (MTCL) and received a 17.17% equity
stake in MTCL.
In FY2022, Ramco Industries Ltd paid ₹4.13 cr to MTCL for aircraft charter services (FY2022 annual
report, page 196).
In the case of ownership of aircraft and availing chartered aircraft services, an investor may do her due
diligence regarding the need for such services or whether the company could have been better with other
available alternatives.
As in the case of all other related party transactions, an investor should be very cautious while analysing
them.
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4) Remuneration of promoters of Ramco Industries Ltd:
While analysing the remuneration paid by the company to its promoter family members, an investor notices
some incidences, which need consideration while doing management analysis.
While analysing the remuneration of promoters, we have assessed them in comparison to the performance
of operations of Ramco Industries Ltd i.e. after excluding the share of profit of associate companies.
The below table shows the net profit of Ramco Industries Ltd from its operations after excluding the share
of profits of associates from FY2014 to FY2023.
In FY2017, the net profit of the company excluding the share from associates declined by 20% from ₹69
cr in FY2016 to ₹56 cr in FY2017. However, in FY2017, the remuneration of the Chairman, Mr P.R.
Venketrama Raja increased by 260% to ₹3.13 cr from ₹1.12 cr in FY2016 (FY2017 annual report, page
47).
Along similar lines, in FY2019, when the net profit of the company excluding the share from associates
declined by 6% from ₹79 cr in FY2018 to ₹74 cr in FY2019, the remuneration of the MD, Mr P.V.Abinav
Ramasubramaniam Raja increased by 41% to ₹2.92 cr from ₹2.07 cr in FY2018 (FY2019 annual report,
page 50).
The next year, in FY2020, when the net profit of the company excluding the share from associates declined
further by 6% to ₹69 cr, the remuneration of the MD, Mr P.V.Abinav Ramasubramaniam Raja increased
by another 40% to ₹4.03 cr (FY2020 annual report, page 51).
It represented a case where the salary hike given to the promoters has no correlation with the operating
performance of the company. The company itself stated this fact in its annual report.
There was no relationship between the average increase in remuneration and the Company’s
performance
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As a result, there is no surprise that the MD of the company at the age of 28 years, in FY2021, drew a salary
of ₹8.24 cr, which seems high at about 7% of the net profit of the company excluding the share from
associates in FY2021 of ₹116 cr.
Advised reading: How to identify Promoters extracting Money via High Salaries
5) Ramco Industries Ltd reported debt as an inflow under cash flow from
operating activities:
While analysing the FY2015 annual report, an investor notices that the company has included an increase
in the current maturity of long-term debt (CMLTD) as an inflow under cash flow from operations (CFO).
An investor can ascertain it via the following steps.
In the cash flow statement for FY2015, the company has disclosed ₹54.89 cr as an inflow on account of
“Other current Liabilities” in the CFO calculation.
The section “other current liabilities” in the annual report shows that it has increased by about ₹50 cr in
FY2015 to ₹145.49 cr from ₹95.76 cr in FY2014.
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Out of different components of “other current liabilities”, the biggest contributor to the increase during
FY2015 is Current Maturities of Long-term Debt (CMLTD): Secured and Unsecured portions, which have
increased to ₹92.95 cr (= ₹73.07 cr secured + ₹19.88 cr unsecured) in FY2015 from ₹51.69 cr in FY2014
i.e. an increase of ₹41.26 cr (= 92.95 – 51.69).
Therefore, out of the ₹54.89 cr of inflow shown by Ramco Industries Ltd in the CFO calculations under
“other current liabilities”, the maximum contribution from CMLTD (₹41.26 cr), is nothing but a debt
component.
Therefore, we may conclude that in FY2015, Ramco Industries Ltd included ₹41.26 cr of debt as an inflow
under cash flow from operations, which had the impact of showing a higher CFO than it actually is.
We can crosscheck this finding by ascertaining the cash flow from financing activities of Ramco Industries
Ltd for FY2015.
In the summary balance sheet for FY2015, an investor notices that the long-term borrowings (LTB) have
decreased from ₹183.02 cr in FY2014 to ₹112.95 cr in FY2015 representing a decrease (outflow) of ₹70.07
cr (= 183.02 – 112.95). On the other hand, short-term borrowings (STB) show an increase (inflow) of
₹33.48 cr from ₹173.67 cr in FY2014 to ₹207.15 cr in FY2015.
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The data of LTB and STB showed in the summary balance sheet excludes the current maturity of long-term
debt (CMLTD). This is because, in the summary balance sheet, the CMLTD is shown under other financial
liabilities.
Cash flow from financing activities of Ramco Industries Ltd for FY2015 shows only the outflow in LTB
(₹70.07 cr) and the inflow in STB (₹33.48 cr) as calculated above using only the LTB and STB data from
the summary balance sheet without factoring in the CMLTD.
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A comprehensive view from all the calculations done in the above discussion would show that the data in
the CFF only corresponds to the LTB and STB as per the summary balance sheet data. Therefore, the CFF
data misses the impact of the current maturity of LTD (CMLTD), which is an increase/inflow of ₹41.26 cr
included in the other financial liabilities.
At the same time, the calculations of the CFO include the impact of CMLTD through “other current
liabilities”.
Therefore, the net impact of these accounting assumptions followed by Ramco Industries Ltd is that the
inflow/increase due to CMLTD of ₹41.26 cr is shifted from cash flow from financing activities (CFF) to
cash flow from operating activities (CFO).
This effectively inflates/increases the CFO by ₹41.26 cr and deflates/decreases the CFF by ₹41.26 cr.
As a result of these accounting assumptions, an investor should be extra cautious while analysing the
financial data presented in the financial statements.
Advised reading: How Companies Manipulate Cash Flow from Operating

Activities (CFO)
6) Scope for improvement in internal processes and controls at Ramco

Industries Ltd:
An investor comes across many instances which indicate that internal processes and controls of the
company have a scope for improvement. Let us see some of these instances.
In FY2014 and FY2015, the company delayed its interest payments to lenders and as a result reported
“Interest Due but not paid” in the annual report. At the end of FY2014, it had an “Interest Due but not paid”
of ₹2.10 cr and at the end of FY2015, it was ₹1.57 cr.
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A delay in the payment of interest despite having a large investment portfolio indicates that it might be due
to a lack of oversight that interest payments got delayed.
In FY2010, the company purchased some DEPB scrips from the open market to adjust against its pending
custom duty liabilities. However, it could not verify the authenticity of these scrips. Later, these scrips
turned out to be fraudulent and in FY2015, the company received a notice from the Department of Revenue
Intelligence (DRI).
Company received a notice from the Department of Revenue Intelligence (DRI) for an amount of
₹ 32.40 lakhs excluding interest and penalty pertaining to the year 2009-10 for short payment of
customs duty to the extent of utilization of DEPB Scrips purchased in the open market by the
Company and which were originally obtained by the ultimate export firms fraudulently as alleged
by the DRI
In FY2018, the company delayed the filing of Annual Performance Reports (APR) under FEMA regulations
for its Sri Lankan subsidiaries.
As regards compliance with FEMA…the Annual Performance Reports (APR) for the financial year
ended 31st March 2017…should have been submitted…on or before 31st December 2017.
However, the Company:
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(a) Has not submitted the APR of its WOS, M/s. Sri Ramco Lanka (Private) Limited…as on the
date of this report; and
(b) Has belatedly submitted the APR…of the financial year ended 31st March 2017 to the AD in
respect of…its SDS M/s. Sri Ramco Roofings Lanka (Private) Limited, only on 23rd May 2018.
In FY2019, the company could not verify whether the auditor of the company who has issued limited review
reports for its quarterly results had met all the requirements stipulated by ICAI. In FY2019, one of its
auditors did not meet the condition of the peer review certificate from August 15, 2018, to March 25, 2019.
Regulation…requires the listed entity to ensure that the limited review reports…on a quarterly
basis are to be given only by an Auditor who has subjected himself to peer review
process…and holds a valid certificate…The Peer Review process of one of the Company’s Joint
Auditors M/s. Ramakrishna Raja & Co., was due for review on 15th August 2018…and the
Certificate was issued by the Peer Review Board on 26th March 2019.
Therefore, it seems that the internal processes and controls at Ramco Industries Ltd have a scope for
improvement.
An investor may read the example of National Peroxide Ltd, a Wadia Group company, where there was a
history of inadequate internal controls and later, a fraud came out indicating that the senior management
was siphoning off the money for almost 10 years. Later on, the company fired the senior management
including the managing director of the company.
An investor may read our detailed analysis of National Peroxide Ltd and the fraud due to weak internal
controls in the following article: Analysis: National Peroxide Ltd
The Margin of Safety in the market price of Ramco Industries Ltd:

Currently (July 1, 2023), Ramco Industries Ltd is available at a price-to-earnings (PE) ratio of about 11.9
based on consolidated earnings of FY2023. An investor would appreciate that a PE ratio of 11.9 appears
low and seems to offer a margin of safety in the purchase price as described by Benjamin Graham in his
book The Intelligent Investor. However, the market may be giving it a low PE ratio due to the
continuous outflow of cash from the company to other Ramco group companies.
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Analysis Summary
Ramco Industries Ltd has grown its business at a rate of 7% per annum over the last 10 years (FY2014-
FY2023). During this period, its sales have seen a nearly consistent increase; however, its profitability has
followed a cyclical pattern as its OPM has fluctuated between 8% and 16%.
The company’s products are commodity in nature where a customer can easily switch from one supplier to
another without a significant impact on functionality. In addition, customers can also choose from many
substitute products like GI steel sheets. Therefore, Ramco Industries Ltd does not have strong pricing power
over its customers and whenever raw material prices increase, then it is not able to pass it on to customers.
As a result, it has to take a hit on its profit margins.
Ramco Industries Ltd operates in an intensely competitive environment, both in the building material as
well as textile segment where players compete on price to gain customers’ business. Due to low entry
barriers, the competitive intensity is continuously high.
The company depends upon the general economic situation for its demand because the real estate industry
with spending on home improvement and clothing creates demand for its products. As a result, it faces
cyclicity in its demand and its business performance.
In such a situation, Ramco Industries Ltd attempts to reduce its costs and become a low-cost producer to
survive and grow amid intense price-based competition. It has installed windmills to reduce its power costs,
has closed uneconomical business segments like piping division and plastic storage containers, contracted
with Ultratech to improve utilization of its cement plant and later sold it to a group company, The Ramco
Cements Ltd. It also rationalized its employee costs by offering VRS and is increasing its presence in the
high-margin calcium silicate board segment to increase its profit margins.
The company uses asbestos to make its fibre-cement sheets and boards, which is a toxic material and is
banned in many countries for mining as well as use. India has banned all mining of asbestos and allows
only the use of imported white asbestos in manufacturing while completely banning the use of blue and
brown asbestos.
As a result, Ramco Industries Ltd has to import its asbestos requirement from limited suppliers, whose
number is continuously reducing due to the ban on asbestos mining in Brazil and Canada. Now, coupled
with the ongoing Russia-Ukraine war, the prices of asbestos have increased impacting its profit margins.
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Recently, it is maintaining a high asbestos inventory due to supply uncertainties. Ongoing local protests in
India against asbestos processing plants increase the regulatory risk for the company.
Ramco Industries Ltd has also suffered from adverse regulatory changes in the power segment especially
in Tamil Nadu. It has also faced challenges in its investments in the Sri Lankan market as recently, its
operations are hit by political unrest and economic downturn in the country. Due to restrictions imposed by
Sri Lankan central bank, it could not get royalties from its overseas subsidiaries.
The company has produced a surplus cash flow over the last 10 years (FY2014-FY2023) and has invested
a large portion of it in equity shares of other Ramco group companies like The Ramco Cements Ltd, Ramco
Systems Ltd and Rajapalayam Mills Ltd. Some of these companies own large stakes in Ramco Industries
Ltd. These cross-holding structures allow promoters to increase their shareholding in group companies by
utilizing even those resources that ideally belong to public shareholders.
Ramco Industries Ltd has also given loans and guarantees to lenders for loans taken by other promoter-
group companies. It seems ironic because, for its own expansion project, the company is planning to take
debt despite going out of the way to support other promoter-group companies with its resources.
Currently, promoter-family members: the 64-years old chairman and his 28-years old son, managing
director are leading the company. In the past, the promoters have received large salary hikes despite a
decline in the profits excluding the share of profit of associates of the company.
In addition, the promoters earn a 1% commission by acting as the sole selling agent for the company via
their trust. In the last 10 years (FY2014-FY2023), the company has paid a commission of about ₹61 cr to
their trust. We believe that instead of running a separate trust as a selling agent, promoters could have used
their skills to create selling teams and infrastructure within Ramco Industries Ltd to save the company’s
costs and increase profits for public shareholders.
Ramco Industries Ltd enters into business transactions for the purchase and sale of goods and services
exceeding ₹100 cr every year with other promoter-group companies. It also shares chartered aircrafts with
the Ramco group. Investors should analyse all these transactions in depth.
The company seems to have good project execution skills because, in the past, it has completed numerous
capital expansion projects within or ahead of scheduled timelines.
There is a scope for improvement in the internal controls and processes at Ramco Industries Ltd because at
times a lack of oversight seems to have resulted in delays in payment of interest to lenders, and submission
of required documents to govt. authorities. Moreover, the company has shown debt under the current
maturity of long-term debt (CMLTD) as an inflow under cash flow from operations (CFO) instead of cash
flow from financing activities (CFF).
Therefore, investors should increase the level of their due diligence while analysing the company’s financial
statements.
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Going ahead, an investor should keep a close watch on the profit margins of the company to assess whether
it is able to handle an intensely competitive environment. She should check further investments by the
company in promoter-group companies to see if it diverts its resources for the benefit of group companies.
Investors should closely track regulatory developments related to asbestos and the power sector as they
have a significant impact on the company. They should monitor developments in Sri Lanka because a
significant money is invested by the company there. They should check each related party transaction of
the company with its promoter-group entities because each of these transactions has the potential of shifting
economic benefits from public shareholders to promoters.
These are our views on Ramco Industries Ltd. However, investors should do their own analysis before
I hope it helps!
Regards,
Dr Vijay Malik
P.S.

Workshop Videos
Analysis Excel
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9) Rushil Decor Ltd

Rushil Decor Ltd is a leading Indian wood panel manufacturer producing laminates and medium-density
fiberboard (MDF) under brands VIR Laminates, VIR MDF, VIR Studdio etc.
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Financial and Business Analysis of Rushil Decor Ltd:

In the last 10 years (FY2014-FY2023), the sales of Rushil Decor Ltd have increased by 14% year on year,
from ₹256 cr in FY2014 to ₹838 cr in FY2023. From FY2014 to FY2017, sales of the company increased
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from ₹256 cr to ₹306 cr. However, during FY2018-FY2021, sales stagnated at about ₹340 cr. Thereafter,
sales increased in FY2022 and FY2023 to reach ₹838 cr.
Over the years, the operating profit margin (OPM) of Rushil Decor Ltd has seen highly cyclical fluctuations.
The OPM was 10% in FY2015 and then increased to 16% in FY2017. Thereafter, OPM declined to 10% in
FY2021. However, by FY2023, it again increased to 18%.
Net profit margin (NPM) follows a similar cyclically fluctuating trend where it reported losses in FY2015
and then NPM increased to 9% in FY2018. Thereafter, NPM declined to 4% in FY2021 and then increased
to 9% in FY2023.
To understand the reasons for such cyclically fluctuating financial performance of Rushil Decor Ltd, an
investor needs to read the publicly available documents of the company like its annual reports from FY2011
onwards, credit rating reports by India Ratings, CARE, and Infomerics, red herring prospectus (RHP) for
its initial public offer (IPO) in June 2011, letters of offer (LOI) for rights issues in 2020 and 2023, and its
corporate announcements submitted to stock exchanges.
The above-mentioned documents show that the following key factors influence the business of Rushil
Decor Ltd, which are critical to understand for any investor analysing the company.
1) Commodity nature of wood panel products with readily available

substitutes taking away pricing power:
Key products of Rushil Decor Ltd, laminates as well as MDF, are near commodities in nature where a
customer can easily switch from products of one manufacturer to another without any major impact on the
functionality. In addition, customers can use many kinds of wood panels like particle board, medium-
density fiberboard, high-density fiberboard, plywood, stone etc. in their furniture and fixtures.
In its RHP for its IPO, Rushil Decor Ltd highlighted the threat of substitution as well as an absence of
pricing power due to the commodity nature of its products.
RHP, June 2011, pages 19 and 136:
Threats: High value of substitution
Weakness: Lacks pricing advantage being a commodity product
Additionally, the quality of a particular type of wood panel like MDF etc. is almost similar across different
manufacturers in India or abroad. This is because most wood panel manufacturers use German technology,
bringing in uniformity of quality.
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Rushil Decor Ltd highlighted this aspect of the wood panel industry in its conference calls during July 2021
(page 12) and August 2021 (page 9):
The product size which runs in India market is different from the one which are for exports,
otherwise the quality is the same
as far as this MDF machineries are concerned worldwide it is one and the same it is all German
technology everywhere. So you get the same output what you are getting outside
Therefore, due to the commoditized nature of wood panels, laminates and MDF products, Rushil Decor Ltd
is not able to enjoy any pricing power over its customers. Because the customers can easily switch to other
manufacturers.
In FY2016 annual report, page 42, the company highlighted that customers have options to choose from
many manufacturers as well as other cheap substitutes for wood panels. As a result, market prices in the
industry are subdued.
However, presence of numerous companies accompanied by increase in low priced

substitute products is anticipated to adversely affect the decorative laminate market price trend.
The lack of pricing power was visible in the company’s explanation in Nov. 2021 conference call (page 15)
when it highlighted that even though its raw material prices have increased, it cannot pass it on to its existing
contracts. It indicated that the contracts do not contain any formula-based pricing, which could have
automatically saved Rushil Decor Ltd.’s margins when raw material prices increase and the company does
not have the pricing power to increase prices mid-way to maintain its margins.
if you have taken in your order book earlier at the old rate, so you do not have outgo otherwise to
supply at the old rate. In that scenario you have to supply at an old rate
A lack of pricing power is also visible when Rushil Decor Ltd, during the August 2022 conference call
(page 8) accepted its inability to take a price hike because raw material prices were stable. This is because,
in such a situation, customers can easily switch to other suppliers.
There’s no chance of taking price hike at present. As I said prior, chemical price and raw material
price are quite stable
In fact, in FY2019, when the OPM of the company declined sharply to 11% from 16% in FY2018, the
company was forced to reduce its prices in line with its competitors.
During the year, Company reduced the prices of MDF Board in line with overall scenario in the
MDF Industry
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Another reason for a lack of pricing power for wood panel manufacturers is that the customer is highly
price-conscious and switches to local and unorganized players if companies like Rushil Decor Ltd charge
a premium.
RHP, June 2011, pages 16 and 113:
Most of the end-users are either price conscious or trend oriented.
Despite brand building and aggressive marketing, Our Company and the wood based industry in
general continue to face competition from the unorganized sector.
2) Intense price-based competition in the wood panel industry:
The wood panel industry in which Rushil Decor Ltd operates faces intense competition both from organized
and unorganized Indian manufacturers as well as overseas manufacturers. Moreover, due to the commodity
nature of wood panels, manufacturers end up competing on price where they try to win customers by
offering a lower price than competitors.
laminate and wood panel industry is intensely competitive and highly fragmented with majority of
the sector comprising unorganized players resulting in pricing pressure in the industry.
The credit rating agency, CARE also highlighted the intense competition from the unorganized sector in
the laminates segment and from the organized sector in the MDF segment.
Credit rating report by CARE, July 2018, page 3:
The plywood and laminate industry is highly fragmented with presence of unorganized players,
resulting in high competition and pressure on prices…However, MDF industry is completely
organized.
As per Rushil Decor Ltd, about 60% of the market of laminates is under unorganized players. As a result,
there is intense price competition in the laminates segment.
Present market size of Indian Laminate Industry is around ₹52 Bn, out of which organised sector
share is around 40%, the balance being share of unorganised sector players.
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In comparison, the MDF market is dominated by large organized players. However, as per Credit rating
agency, Infomerics Ratings (Infomerics), these large organized MDF players also undercut prices to gain
customers’ business.
Credit rating report by Infomerics, Sept 2020, page 6:
the market is intensively competitive as larger players in the industry are quite aggressive to take
part in the demand
During its rating of the IPO of the company, ICRA highlighted the intense competition and low bargaining
power of the company as a weakness.
RHP, June 2011, page 40:
Competitive pressures arising from intensely competitive and fragmented nature of the industry
and RDL’s limited bargaining power owing to moderate scale of operations
In FY2015, the only year in the last 10 years (FY2014-FY2023), when Rushil Decor Ltd reported losses, it
highlighted intense price-based competition as one of the key reasons for its losses.
Due to high competitions in market, the competitors are doing price cutting of products to compete
or keep their existence in markets which is ultimate big problems for the industries
The competitive situation in the wood panel industry in India is complicated by the extensive import of
wood panels from countries like Thailand, Vietnam, Laos and Indonesia where wood is available at a very
cheap price than India. Moreover, wood panel manufacturers in India cannot benefit from lower wood
prices abroad because they cannot import raw wood.
If you go to Thailand or other countries like Vietnam, Laos their wood cost is half of our
cost…Finished goods you can take it from there not raw wood.
In the past, Rushil Decor Ltd tried to benefit from lower wood prices in Laos (LAO PDR) by planning a
subsidiary there in FY2016
Further, looking to easy availability of raw material at cheaper rate, the Company has planned to
establish a subsidiary Company in the country “LAO PDR”.
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However, it soon realized that it will not be able to source wood from Laos and then stopped its plans of
operations in Laos in FY2017.
Further, LAOS Government has made strict rules regarding wood management, wood
cutting, wood relocation and wood business in LAO PDR…at last Company decided that it will
not wait further and has put off the idea to establish the business in the Country LAO PDR.
Nevertheless, in addition to lower wood costs, many times, overseas manufacturers are encouraged by their
govt. policies sell wood panels in India at a price even lower than the cost of production, which is called
dumping. This creates intense competition at a very low price for Indian manufacturers.
competing suppliers mainly from China, Srilanka, Malaysia, Thailand, Indonesia, Vietnam and
some other Asian countries due to the advantages of favorable government policies of those
countries…are dumping their products in Indian Domestic markets at very lower price and in
bulk.
As a result, the wood panel industry sought protection from the Indian govt. via anti-dumping duties.
Because, the anti-dumping duties are already in force against Malaysia, China, Thailand and
Srilanka, Vietnam and Indonesia of plain MDF board above 6.00 mm thickness
Even in the current year, 2023, the imported price of MDF and other wood panel products is about 10-15%
lower than the price quoted by Indian manufacturers.
And the gap is again 10% to 15% depends on the destination…Yes. Import prices are lesser than
5% to 10%.
Due to a lower price in export markets, Rushil Decor Ltd is not finding it easy to profitably export its
products, especially MDF where it has an export obligation to offset the duty-free import of machinery for
its Vishakhapatnam MDF plant.
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Export margins are very less rather you can say. If you see the global pricing there is no much left
out only there is the EPC obligation that is why compulsorily you have to export…So export is not
affordable.
3) Capital-intensive business of Rushil Decor Ltd:
Wood panel business is capital-intensive in nature. Both key business segments of Rushil Decor Ltd i.e.
laminates as well as MDF require a large amount of working capital especially because they need to keep
a large stock of finished goods as well as inventory.
The company needs to maintain a large stock of finished goods because it produces many designs and
keeping products of each design is important for immediately meeting the demand from the market.
Credit rating report by Infomerics, August 2019, page 5:
The company need to maintain sufficient finished stock inventory of its wide product array to
respond market demands in a time bound manner.
In addition, Rushil Decor Ltd needs to maintain a large amount of raw material inventory, especially for
those products, which are imported and therefore, take about 2-6 months to reach it after its order.
Working capital intensive nature of operations: RDL generally maintain inventory of about 3-
4 months to keep adequate stock imported raw materials such as decorative paper and
chemicals which have a lead time ranging from two to six months from the date of placement of
order.
Moreover, some raw material like cotton stalk is available in a particular season, which it needs to buy and
keep in stock for use throughout the year.
some of the raw materials like Cotton Stalk is seasonal in nature and hence we require substantial
working capital for its storage during off season.
Therefore, at the time of its IPO in 2011, Rushil Decor Ltd clearly stated that its business is working capital
intensive in nature.

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Our business demands substantial fund and non-fund based working capital facilities.
Moreover, within its two segments of laminates and MDF, laminates require a comparatively higher
working capital because the number of designs in the finished products of laminates is much higher than in
the MDF, which increases the inventory requirement of laminates division.
Conference call, November 2022, pages 5-6:
compared to MDF, the working capital is a little bit higher in terms of laminates where the designs
and other SKUs are very high, and in case of MDF is not so.
Next, coming to fixed-capital intensiveness while establishing manufacturing plants, the MDF division is
much more capital-intensive than laminates.
MDF plants need a longer construction period of 2-3 years, which is much higher than the construction
period of about 9-12 months for laminate plants.
Conference call, August 2022, pages 5 and 11:
if you put up any MDF plant, it normally takes 2 to 3 years. So it’s not very simple that it start
from tomorrow…for laminate you really don’t need more than nine months. I think within 12
months you can easily put up any plant in India.
In the case of MDF, the capital intensiveness of putting up a plant is so large that it acts as an entry barrier
for fresh players in the segment.
MDF market in India is 100% organised as this segment poses an entry barrier in terms of high
capital investments.
Due to large capital requirements, the MDF segment is dominated by large organized manufacturers with
a very low presence of small unorganized players, unlike the laminates segment, which is dominated by
unorganized players controlling about 60% of the market.
MDF being capital-intensive business, the threat from unorganised sector is almost negligible in
this segment
In fact, as per Rushil Decor Ltd, in the MDF segment, when smaller players establish their plants, they are
not able to sustain and shut shop quickly.
Conference call, July 2021, page 9:

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small sized capacities come very miniscule because there is lot of investment in setting these and
only organized players can do investment in this, so small capacities do come in the market, but
they are not able to sustain.
Also read: Asset Turnover Ratio: A Complete Guide for Investors
4) Wood panel industry goes through boom-and-bust cycles:
Rushil Decor Ltd has faced alternating periods of superior performance followed by subdued performance.
For example, its operating profit margin (OPM) was 10% in FY2015, which increased to 16% in FY2018,
then declined to 10% in FY2021 and thereafter increased to 18% in FY2023.
Such kind of cyclical highs and lows in the performance of Rushil Decor Ltd are primarily triggered by
three factors.
First, the demand for wood panels, both laminates and MDF depends upon the performance of the real
estate industry, which in turn is dependent on the general state of the economy in terms of growth and
surplus money available with the population along with the level of interest rates for home loans etc.
The fortune of the industry in India is linked to the real estate industry which is
inherently cyclical in nature.
Letter of offer for the rights issue, April 2023, page 47:
Our financial results are influenced by the macroeconomic factors determining the growth of the
Indian economy as a whole and real estate sector in particular.
Even in the real estate industry, the sale of new homes and offices has the maximum influence on the
demand for wood panels (laminates and MDF) produced by organized players like Rushil Decor Ltd.
New construction activities drive 85% to 90% of demand in the sector while the balance comes
from renovation and replacement.
The sale of new homes and offices fluctuates much more than the relatively stable demand from the
renovation of existing homes. Therefore, the financial performance of Rushil Decor Ltd experiences
significant cyclicity.
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The second factor leading to fluctuations in the performance of Rushil Decor Ltd is the long gestation period
required to commence new capacities of MDF, which is the largest contributor to its revenue.
As discussed above, MDF plants need a large investment and 2-3 years to complete. Therefore, during
periods of high demand for MDF, many large organized players announce capacity expansion plans.
However, after a period of 2-3 years when these plants become operational, the demand cycle from the real
estate industry has turned leading to low demand. As a result, the industry is left with an overcapacity at a
time of weak demand.
It leads to a crash in the prices of MDF. As a result, many weaker players go out of business leading to a
contraction in supply. Later, when the real estate cycle turns and demand recovers, it leads to an increase
in MDF prices. As the demand exceeds supply, large players again announce capacity expansions and the
cycle continues.
Rushil Decor Ltd faced the consequences of oversupply due to the bunching up of capacities in the MDF
segment during FY2019-FY2020 when players started a price war leading to the erosion of profit margins
of all the players. During this period, the company reported profit margins of 10% down from 16% in
FY2018.
During the year, new capacities were added in Thin and Thick MDF Industry which ultimately
result in aggressive price cuts…It was ultimately triggered to lower realisations and significant
margin pressure in the MDF segment. The price war in the MDF Segment
During FY2020, the overcapacity in the MDF segment was so much that nearly half of the production
capacity of MDF was lying unutilized.
capacity utilisation of the MDF produced in India reached 55% in the second half of the
year against 40% registered at the beginning of the year.
Moreover, even the laminates segment, which is comparatively light in requirement of fixed capital, also
goes through periods of overcapacity leading to a fall in profit margins. Rushil Decor Ltd faced cut-throat
competition due to overcapacity in the laminates segment in FY2015 when it reported losses.
The laminate Industry has entered into the orbit of the high competition. The market fights are set
to intensify with unstoppable capacity build up.
Therefore, an alternate period of bunching up of new capacities leading to oversupply and industry-wide
price wars leads to boom-and-bust cycles in the performance of Rushil Decor Ltd.
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The third factor leading to fluctuations in the performance of the company is its dependence on raw
materials linked to crude oil. It uses two key chemicals, Methanol and Phenol in its manufacturing process,
which are crude oil derivatives. Their prices fluctuate significantly in line with crude oil prices, which put
pressure on its profit margins leading to volatility in its performance.
Methanol and Phenol being the primary chemical requirements, their availability and price has
a significant impact on the operating margins of the company. Being a crude oil derivative the
prices…are highly volatile.
5) Steps by Rushil Decor Ltd to improve profit margins:
The company operates in a commodity business where customers can easily switch their suppliers.
Therefore, the industry witnesses intense price-based competition and manufacturers are not able to charge
premium pricing to earn a higher margin. As a result, companies focus on becoming cost-efficient
manufacturers to improve their profitability.
Along similar lines, over the years, Rushil Decor Ltd has also taken multiple steps to increase its operating
efficiency and reduce its costs. Let us see some of the cost reduction strategies adopted by the company.
5.1) Flexibility in production and usage of raw material:
Rushil Decor Ltd has made its plants flexible as they can produce many distinct products from the same
machines. This way, the company can increase the production of items that are currently in demand and
offer better profit margins.
Some of our manufacturing units manufacture multiple product range under one roof which
results in cost savings in terms of shared overheads and resources across different product
categories.
Along similar lines, the company has the flexibility to manufacture various products depending on the
relative cost of raw materials. i.e. out of two main segments of raw material: wood and chemicals, if prices
of wood are lower, then the company produces goods using more wood and vice versa.

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I would say 55%, 45%-50% is wood and chemical together. See, we have always option of making
that combination change. if the chemical price is higher, we can increase the wood. And if
the chemical price is down, we can decrease the wood.
Moreover, in the past, when the company used to make particle boards, then it could use the byproducts of
plywood manufacturing as raw material for particle board manufacturing, which reduced its operating costs.
The by-products from plywood manufacture constitute around 40 – 50% of the raw material for
the manufacture of particle board.
5.2) Cost reduction strategies:
Rushil Decor Ltd has used various steps to reduce its production costs like buying cheaper power from
energy exchanges instead of state govt./grid. In FY2020 alone, the company could save about ₹1.6 cr due
to the purchase of power from the open market.
company had purchased 1,18,51,482 units by open access power through INDIAN ENERGY
EXCHANGE, with this the company’s overall cost was reduced by Rs 0.69/- per unit…Therefore,
company got the benefits of ` 155 lakhs.
The company installed air ventilators running on wind instead of electricity to save on costs.
Installation of big air ventilators in some units, which run on wind speed and do not require
electricity.
The company installed rooftop solar panels to save electricity costs.
Company has installed solar panel at the corporate office of the company which results in
significant power and energy saving.
Company has installed roof-top solar panels at its manufacturing units for generation of power.
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The company also took steps like increasing the speed of the woodchipper unit, which saved electricity as
the unit was used for less time.
Increase in chipper machine speed which resulted into reduction of chipper operation
hours which ultimately resulted into energy saving of Approximately 32,000 KWH per year.
The company also did changes in its manufacturing process leading to higher production from its plants
resulting in lower overheads/per unit costs.
Process modification at MDF plant at Chikmagalur, Karnataka results in increase of MDF board
production to 27% and Lamination board production to 25% over the machine design
capacity that resulted in reduction of Power and Thermal energy cost
In the recent year, the company implemented a resin savings technology, which would help it in the
reduction of its raw material usage.
Conference call, August 2022, page 7:
we are also putting up some Resin saving technology also now from this quarter. So this will be
also help us to save some cost.
5.3) Usage of the latest technology of MDF production to reduce raw material
usage:
When Rushil Decor Ltd installed a new MDF manufacturing plant at Vishakhapatnam, then it used
continuous press technology instead of the static press technology used in its older plant in Chikmagalur,
Karnataka. The continuous press technology saves about 8-10% on raw materials adding to the company’s
profit margins.
Karnataka plant’s technology is of Static Press technology, in which the raw material
consumption is 8% to 10% higher than the Continuous press. And over here in Vizag the new
plant that we have set up, is of Continuous Press which is the world-based technology…there is
a saving of 8% to 10% from our old plant.
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5.4) Increasing production of MDF over laminates and further relying on

value-added MDF to increase profit margins:
Rushil Decor Ltd, previously, used to manufacture laminates and particle boards, which were low-margin
items when compared to MDF. Therefore, in 2011, the company came out with an IPO to fund the
construction of an MDF plant in Chikmagalur, Karnataka.
Entry into the MDF segment helped the company because it was a relatively low-competition segment with
comparatively high margins as it was an oligopoly market due to the dominance of large organized players.
Credit rating report by India Ratings, August 2017:
The improvement in the EBITDA margin resulted from increasing revenues from MDF…MDF
segment has been a key focus area for the company, since its commencement in FY12, being a high
margin and less competitive business compared with decorative laminates…Ind-Ra believes that
given the high margin due to the oligopolistic nature of the MDF business
Therefore, a focus on increasing the share of MDF in the overall revenue of the company helped it to
increase its profit margins. Moreover, within MDF, the company started production of value-added MDF
like prelaminated (pre-lam) MDF, which had a higher price with better margins.
Company has established new plant for manufacturing Pre Lam Medium Density Fiber Board
(MDF Board) at Chikmagalur, Karnataka
Over the years, the majority of the company’s production from the Chikmagalur, Karnataka plant was
value-added pre-lam MDF.
Our existing, which is pre-lam is 60% in our old Karnataka unit and we sell 40% raw board.
The value-added pre-lam MDF sells at a premium of about 45-50% premium (₹35,000 per CBM) over base
MDF prices (₹23,724 per CBM).
Conference call, February 2023, page 12:
our average realizations then it is maybe around Rs.23724 per CBM I am talking about AP
realizations and when we talk about 13% value added realization it is almost like Rs. 35000 per
CBM.
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Similarly, in the laminates segment as well, Rushil Decor Ltd is planning to enter the high-margin jumbo-
sized laminates. Until now, the lack of its presence in jumbo-sized laminates has led to low-profit margins.
we don’t have this specific size is one of the reasons for our low margins
6) High regulatory control on the wood panel industry:
Products like laminates and MDF use wood, which is a sensitive natural resource. Therefore, govt. keeps
tight control on issuing licenses for wood-panel manufacturers after considering the availability of wood
and distances between different wood units.
Thus, obtaining approval of setting up a wood-panel unit has become a big entry barrier for fresh players
in this industry.
Letter of offer for the rights issue, Sept 2020, page 118:
Government regulations represent a large entry barrier in the wood based interiors infrastructure
segment in India…are subject to, among other laws, environmental laws…Saw Mill Rules, the
State Forest Policy, and State Pollution Control Board…These complexities in obtaining new
licenses make it difficult for new players to enter the market.
In addition, the company faces high regulations because some of its raw materials are highly inflammable
creating concerns over the safety of workers.
Our key raw material used in our manufacturing process is highly flammable in nature.
At the same time, some of the raw materials like resins carry health risks for the workers.
Threat: Health concerns on resin uses;
As a result of these issues, govt. keeps tight control over wood panel manufacturers and any non -
compliance often leads to the closure of the units.
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In FY2019, laminates manufacturing units of Rushil Decor Ltd were closed for some period on the orders
of the Gujarat Pollution Control Board (GPCB) when these units did not adhere to air and water pollution
control regulations.
Company received closure notices from Gujarat Pollution Control Board (GPCB) to stop the
Manufacturing process of two Laminate Sheet manufacturing units…The manufacturing process
of both the manufacturing units were disturbed during the closure period
The credit rating agency, ICRA, highlighted a high regulatory risk faced by the company in its report for
its IPO in June 2011.
The grading is however constrained by the intensely competitive nature of the industry and
the vulnerability of the industry to changes in regulation by Central Empowered Committee
(CEC).
Therefore, the overall business of Rushil Decor Ltd is a commodity business with low negotiating power
over customers. The business is cyclical due to fluctuating demand from the real estate industry and home
improvement leading to alternating boom and bust phases. As a result, the company has witnessed its
operating profit margin (OPM) fluctuate between 10% to 18% during the last 10 years.
Also read: How to do Business Analysis of Real Estate Companies
Therefore, when an investor looks at the OPM of Rushil Decor Ltd at 18% in FY2023, then she should be
extra cautious in extrapolating the same in future. This is because, apart from the general cyclicity of the
wood panel industry, a few additional factors may put pressure on its profit margins in future.
The recent high-profit margin has been supported by the post-covid revival of demand in the home
improvement sector.
Post Covid-19, there has been a strong acceleration in the home decor industry.
In addition, there was a sharp decline in the competition from imports due to challenges in the sea trade
like the nonavailability of containers.
Conference call, February 2022, pages 6 and 21:
container what we used to pay USD 2,500 for 40 feet high cube. Now, today they are asking USD
12,000.
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import is not at all there. If I give you the data of Vietnam MDF import, it’s only 1,824 CBM in
this nine months, which is very low. Previously, it used to be like more than 1 lakh plus
Therefore, going ahead, as the pent-up demand of the post-covid period comes down and as the challenges
in sea trade are resolved, the wood panel industry may see lower demand and higher competition putting
pressure on profit margins.
Towards the end of FY2023, Rushil Decor Ltd has already started noticing pressure on the profit margins
due to a higher import of MDF.
During the quarter, realization in the domestic industry for the plain MDF were subdued and we
faced some challenges on account of higher imports…which impacted EBITDA margins
So, an investor should be cautious and do deep due diligence before projecting the recent superior
performance of any company in the future.
Over the last 10 years (FY2014-FY2023), except FY2020, the tax payout ratio of Rushil Decor Ltd is higher
than the corporate tax rate prevalent in India. The reduction in the tax payout ratio in the recent year is due
to a decline in the corporate tax rate announced by India in FY2020.
In FY2020, the tax payout ratio is negative due to the adjustment/remeasurement of deferred taxes as per
the changed lower tax rate.
Recommended reading: Deferred Tax Assets, Tax Payout (P&L vs. CFO): Queries
Answered
Operating Efficiency Analysis of Rushil Decor Ltd:
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a) Net fixed asset turnover (NFAT) of Rushil Decor Ltd:
Over the years, the NFAT of the company had stayed between 1 and 2, which represents a low asset turnover
indicating the capital-intensive nature of paper manufacturing. NFAT declined to 0.9 in FY2021 due to two
factors.
First, the company completed its new MDF manufacturing plant at Vishakhapatnam, Andhra Pradesh,
which had low levels of utilization in the initial period.
Second, the demand for wood panels as well as production had declined due to covid related lockdown.
As a result, in FY2021, the NFAT of Rushil Decor Ltd was lowest at 0.9. Thereafter, as the utilization of
the new plant has improved as well as incremental and pent-up demand for home improvement after covid,
the NFAT of the company improved to 1.4 in FY2023.
Going ahead, an investor should monitor the NFAT of Rushil Decor Ltd to understand whether it is able to
efficiently utilize its assets.
b) Inventory turnover ratio (ITR) of Rushil Decor Ltd:
Over the years, the ITR of Rushil Decor Ltd has been within 4-5 levels. It indicates that the company has
maintained its efficiency in inventory management.
ITR declined to 3.9 in FY2020 due to covid lockdown as the company was not able to sell its inventory in
the market. Post-pandemic, as the economy opened, its ITR improved to 5.2 in FY2022 and 4.9 in FY2023.
Going ahead, an investor should check the inventory position of the company to assess whether it manages
its inventory efficiently.
c) Analysis of receivables days of Rushil Decor Ltd:
Over the years, the receivables days of Rushil Decor Ltd have improved from 57 days in FY2015 to 44
days in FY2023. A reduction in receivables days shows that the company has collected its dues from
customers in time.
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During the period of the coronavirus pandemic, receivables days deteriorated to 63 days in FY2021 and 65
days in FY2022. This deterioration is in line with the stress that built up in the entire business ecosystem
during the Covid period.
Post Covid, the receivables days of the company improved to 41 days in FY2022 and 44 days in FY2023.
In the past, there have been instances when the company had to resort to legal options to recover its money
from its customers.
Sundry debtors considered good include ₹ 25,37,447/- for the recovery of which the Company
has initiated legal actions.
Going ahead, an investor should watch the trend of receivables days of Rushil Decor Ltd to assess whether
it continues to collect its receivables on time.
operations (cCFO) of Rushil Decor Ltd for FY2014-FY2023, then she notices that over the years (FY2014-
FY2023), the company has converted its profit into cash flow from operations.
Over FY2014-23, Rushil Decor Ltd reported a total net profit after tax (cPAT) of ₹217 cr. During the same
period, it reported cumulative cash flow from operations (cCFO) of ₹416 cr.
Learning from the article on CFO will show an investor that the cCFO of Rushil Decor Ltd is higher than
the cPAT due to the following reasons:

Going ahead, an investor should keep a close watch on the working capital position of Rushil Decor Ltd.
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The Margin of Safety in the Business of Rushil Decor Ltd:

of a Company
target growth.
Where,

An investor would notice that over the years, Rushil Decor Ltd had reported an SSGR in the single digits,
mostly at 2-3% whereas over the last 10 years (FY2014-FY2022), it has grown its sales at a rate of 14%
year on year.
Therefore, the company has grown its business at a pace more than what its business can support from its
profits. As a result, it has to frequently rely on additional capital i.e. debt and equity dilution to meet its
funds’ requirement.
Over the last 12 years (FY2011-FY2023), it has raised debt of ₹317 cr as its total debt increased from ₹89
cr in FY2011 to ₹406 cr in FY2023.
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In addition, the company has diluted its equity multiple times in the past.
• In June 2011, it came out with an IPO and raised ₹40.3 cr to fund the construction of its MDF
factory in Chikmagalur, Karnataka.
• During 2017-2018, the company raised ₹20 cr by issuing shares on a preferential basis to Mr
Suryakant Hiralal Parikh
• In FY2019, it raised ₹20 cr by preferential allotment and conversion of warrants to Mr Rakesh
Arora, Mr Manish Srivastava and Nilesh Parekh.
• In FY2021, the company raised about ₹25 cr via a rights issue.
• In May 2023, the company raised about ₹107.5 cr via another rights issue.
Therefore, overall, since FY2011, the company has raised a total of ₹530 cr (₹317 cr debt + ₹217 cr equity)
to meet its funds’ requirements.
Also read: Rights Issue and Revaluation Reserve: Queries Answered
The investor gets the same conclusion when she analyses the free cash flow position of Rushil Decor Ltd.
b) Free Cash Flow (FCF) Analysis of Rushil Decor Ltd:
While looking at the cash flow performance of Rushil Decor Ltd, an investor notices that during FY2014-
FY2023, it generated cash flow from operations of ₹416 cr. During the same period, it did a capital
expenditure of about ₹592 cr.
Therefore, during this period (FY2014-FY2023), Rushil Decor Ltd had a negative free cash flow (FCF) of
(₹176) cr (=416 – 592).
of ₹142 cr. As a result, the company had a total negative free cash flow of (₹293) cr (= -176 + 25 – 142).
Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.
As discussed earlier, Rushil Decor Ltd has used additional debt and equity dilution for meeting its funds’
shortfall.
Going ahead, an investor should keep a close watch on the free cash flow generation by Rushil Decor Ltd
to understand whether the company continues to generate surplus cash from its business and whether it
continues to use it largely to pay dividends to the shareholders.

FCF
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Additional aspects of Rushil Decor Ltd:

On analysing Rushil Decor Ltd and after reading annual reports, credit rating reports and other public
1) Management Succession of Rushil Decor Ltd:
Rushil Decor Ltd is promoted by the Thakkar family. Currently, Krupesh Thakkar, Chairman & Managing
Director (aged 52 years) and his son, Rushil Thakkar, Whole-Time Director (aged 30 years) are actively
managing the operations of the company.
Apart from the father-son duo of Krupesh and Rushil, their wives, Krupa Krupesh Thakkar and Rushvi
Rushil Thakkar also hold senior management positions of Senior Vice President – Business Development
and Senior Vice President – Administration and Human Resources respectively.
Our Promoter, Krupa Krupesh Thakkar holds the position of Senior Vice President – Business
Development and Rushvi Rushil Thakkar, the spouse of our Whole-time Director Rushil Krupesh
Thakkar holds the position of Senior Vice President – Administration and Human Resources in
our Company.
The presence of two generations of promoters in the company at the same time indicates that the company
has put in place a management succession plan in which the new generation of the promoter family is being
groomed in business while the senior members of the promoter family are still playing an active part in the
day-to-day activities.
Moreover, recently, promoters of other wood-panel companies like Century Plywood (Sajjan Bhajanka
owns 3.38% in Rushir Décor Ltd and Sanjay Agarwal owns 2.01% in Rushir Décor Ltd) have purchased
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stakes in the company. The promoter of another wood-panel company, Action Tesa, Mr Ajay Kumar
Aggarwal currently owns a 3.47% stake in Rushir Décor Ltd.
An investor may track the ownership of these competitors in the company to understand if there are any
significant developments on these lines like a takeover attempt or merger etc.
2) Remuneration of promoters of Rushil Decor Ltd:
While analysing the remuneration paid by the company to its promoter family members, an investor notices
some incidences, which need consideration while doing management analysis.
Immediately, after the company had come out with its IPO in June 2011, during the next year, FY2013, the
salary of promoters, Mr Ghanshyambhai A. Thakkar and Mr Krupeshbhai G. Thakkar increased by 100%
while during FY2013, sales and profits of the company had increased by 18% in FY2013.
In FY2015, both the promoters, Mr Ghanshyambhai A. Thakkar and Mr Krupeshbhai G. Thakkar received
bonuses even when the company had made losses during the year.
In FY2016, when Rushil Decor Ltd reported a net profit of about ₹7 cr after making a loss in FY2015, the
promoters increased their remuneration by about 100% to ₹82 lac each.
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In FY2019, when the net profit of the company declined significantly by about 55% from ₹31 cr in FY2018
to ₹14 cr in FY2019, the promoters increased their salary by 13.5%.
In FY2014, when Mr Rushil Krupeshbhai Thakkar, grandson of the founder promoter, Ghanshyambhai A.
Thakkar, joined the company at the age of 21 years, the terms of his appointment included an annual
increment of a minimum of 20%. Having a large minimum annual increment seems a very privileged offer
made by the company to the grandson of the promoter.
His annual increments will be at least 20% or such higher amount as may be determined by the
Board of Directors
Apart from the above, the company appoints a few close relatives of promoters like wives of CMD and
WTD, Krupa Krupesh Thakkar (salary of ₹57.73 in FY2022) and Rushvi Rushil Thakkar (salary of ₹15 lac
in FY2022) at senior management positions. An investor may do her due diligence to ascertain the value
added by each promoter family member to the company.
Advised reading: How to identify Promoters extracting Money via High Salaries
3) Rushil Decor Ltd reported debt as an inflow under cash flow from
operating activities:
While analysing the FY2021 annual report, an investor notices that the company has included an increase
in the current maturity of long-term debt (CMLTD) as an inflow under cash flow from operations (CFO).
An investor can ascertain it via the following steps.
In the cash flow statement for FY2021, the company has disclosed ₹21.39 cr as an inflow on account of
“Increase / (Decrease) in Financial Liabilities” in the CFO calculation.
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From the above information, an investor notices that the company has included ₹21.39 cr as an inflow on
account of “Increase / (Decrease) in Financial Liabilities” in the CFO.
The balance sheet of the company for FY2021 shows that the only item that can lead to an inflow of ₹21.39
cr is “other financial liabilities”. In FY2021, other financial liabilities of Rushil Decor Ltd increased by
₹20.86 cr from ₹10.08 cr in FY2020 to ₹30.94 cr in FY2021 (30.94 – 10.08 = 20.86).
In the above balance sheet, apart from other financial liabilities, there is no other section that indicates an
increase of ₹20 cr or more. Therefore, an investor can assume that the inflow of ₹21.39 cr shown in the
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CFO calculations under “Increase / (Decrease) in Financial Liabilities” is related to other financial
liabilities.
While ascertaining the component of other financial liabilities that has led to the inflow/increase of ₹21.39
cr in FY2021, an investor should analyse the detailed note number 22 to the financial statements.
In the other financial liabilities section, even though the total increase is ₹20.86 cr, the major component is
the increase in current maturity of long-term debt (CMLTD) of ₹21.5 cr, from ₹8.12 cr in FY2020 to ₹29.62
cr in FY2021 (29.62 – 8.12 = 21.5).
Therefore, the ₹21.39 cr of inflow shown by Rushil Decor Ltd in the CFO calculations under “Increase /
(Decrease) in Financial Liabilities” is fully contributed by CMLTD (₹21.5 cr), which is nothing but a debt
component.
Therefore, we may conclude that in FY2021, Rushil Decor Ltd has included debt as an inflow under cash
flow from operations, which had the impact of showing a higher CFO than it actually is.
We can crosscheck this finding by ascertaining the cash flow from the financing activities of Rushil Decor
Ltd for FY2021.
In the summary balance sheet for FY2021, an investor notices that the long-term (non-current) borrowings
(LTB) have decreased from ₹338.84 cr in FY2020 to ₹295.21 cr in FY2021 representing a decrease
(outflow) of ₹43.63 cr (= 338.84 – 295.21). Similarly, the short-term (current) borrowings (STB) show a
decrease (outflow) of ₹4.66 cr from ₹58.31 cr in FY2020 to ₹53.65 cr in FY2021.
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The data of LTB and STB showed in the summary balance sheet excludes the current maturity of long-term
debt (CMLTD). This is because, in the summary balance sheet, the CMLTB is shown under other financial
liabilities.
Cash flow from financing activities of Rushil Decor Ltd shows the data of outflow from the borrowings of
the company in FY2021 corresponding only to the outflow/decrease calculated above using only the LTB
and STB data from the summary balance sheet without factoring in the CMLTD.
The above cash flow from financing activities (CFF) table shows a net outflow from LTB of ₹43.63 cr,
which exactly matches the decrease in LTB calculated above from the summary balance sheet data.
Similarly, the outflow from STB in the CFF is ₹4.66 cr, which also matches the decrease in STB calculated
above from the summary balance sheet data.
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Please note that the LTB and STB data in the summary balance sheet excludes the current maturity of long-
term debt (CMLTD), which is shown under other financial liabilities.
Therefore, a comprehensive view from all the calculations done in the above discussion would show that
the data in the CFF only corresponds to the LTB and STB as per the summary balance sheet data. Therefore,
the CFF data misses the impact of the current maturity of LTD, which is an increase/inflow of ₹21.5 cr
included in the other financial liabilities.
At the same time, the calculations of the CFO include the impact of CMLTD through other financial
liabilities.
Therefore, the net impact of these accounting assumptions followed by Rushir Décor Ltd is that the
inflow/increase due to CMLTD of ₹21.5 cr is shifted from cash flow from financing activities (CFF) to
cash flow from operating activities (CFO).
This effectively inflates/increases the CFO by ₹21.5 cr and deflates/decreases the CFF by ₹21.5 cr.
As a result of these accounting assumptions, an investor should be extra cautious while analysing the
financial data presented by the company in its financial statements.
Advised reading: How Companies Manipulate Cash Flow from Operating

Activities (CFO)
4) Dividends offered by Rushil Décor Ltd seem to be funded by debt:
During the discussion on the margin of safety in the business of Rushil Decor Ltd, we noticed that the
company is growing its business at a speed more than what its operating cash flows can sustain. As a result,
it had to rely on additional capital via debt and equity dilution to fund its expansion projects.
The company is in a situation, where year on year, it is investing all its operating cash flow in its business
and the debt of the company is increasing to meet its capital expenditure with no money left as surplus to
distribute as dividends to shareholders.
An investor may infer that in such a situation, the money to be paid to shareholders as dividends is
effectively the debt taken by the company from lenders to transfer to the bank accounts of the shareholders
of the company.
We believe that the dividends distributed by any company should come from the free cash flows (FCF) of
the company after meeting the capital expenditure (capex) of the company from its operating cash flow. If
the company does not have a surplus free cash flow after meeting capital expenditure and it has to raise
debt to meet the capex, then it should not raise more debt to pay dividends to equity shareholders. Instead,
it should avoid paying dividends, control its debt levels and reduce its interest costs.
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Further advised reading: Steps to Assess Management Quality before Buying

Stocks
5) Related party transaction of Rushil Décor Ltd with promoters and their
entities:
Over the years, the promoters of Rushil Décor Ltd have engaged in numerous financial and business
transactions with the company. These transactions range from lending, deposits, rental properties,
investments, giving guarantees etc.
Let us analyse some of these related party transactions.
5.1) Loans taken by Rushil Décor Ltd from promoters:
Rushil Décor Ltd has a capital-intensive business model. Therefore, its funds’ requirements have always
exceeded the cash it could generate via operations. Therefore, it had to raise money from debt as well as
equity dilution.
When the company approached banks for funding its new MDF plant at Vishakhapatnam, AP, then its
lenders insisted that apart from debt from lenders, the promoters also put more money into the project. As
a result, the promoters gave loans of about ₹60 to the company to spend on the project.
Credit rating report by Infomerics, September 2020, page 3:
The promoters have supported the business by infusing funds as required in the form of unsecured
loans (Rs.60.39 crore outstanding as on March 31, 2020 out of which Rs.53.60 crore are
subordinated to the term loans
However, apart from such large loans at the insistence of lenders, almost every year, the promoters have
indulged in numerous lending transactions of small sums with the company. At times, the transactions are
very small, of a few lakh rupees, when compared to the size of the company’s business.
For example, see the below screenshot from FY2013 annual report, page 48:
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These small ticket lending transactions ranging from a couple of lakh rupees have continued between the
company and the promoters over the years like transactions in a cash credit account. For example, see the
below data from the FY2022 annual report, page 159:
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In such cases of small ticket loans, the company could hardly derive any significant benefit from these small
loans. Therefore, the purpose of these loans is not clear.
5.2) Taking properties on rent from promoters:
Apart from these lending transactions, there are numerous instances where Rushil Décor Ltd has taken
properties on lease/rent from promoters.
The company has taken the corporate office on rent from its CMD, Mr Krupesh Ghanshyambhai Thakkar.
As per the letter of offer for the rights issue in September 2020, page 158, the company was paying ₹5.5
lac rent per month for the office.
leave and license agreement dated February 15, 2020 with our Promoter Krupesh Ghanshyambhai
Thakkar for obtaining our Corporate Office … at a monthly rent of ₹ 5.51 lakhs.
However, within a period of about 3 years, the rent for the corporate office increased sharply from ₹5.5 lac
in September 2020 to ₹12.6 lac per month in April 2023.
Letter of offer to the rights issue, April 2023, page 39:
In addition, the company has also taken a warehouse on rent from the promoter, Mr Rushil Thakkar at a
monthly rent of ₹0.45 lac.
Letter of offer to the rights issue, September 2020, page 158:
agreement with Rushil Krupesh Thakkar…property situated at…Mansa, Dist. Gandhinagar…at

a monthly rent of ₹ 0.45 lakhs and for using it for storing finished products of the Company.
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Additionally, the company has taken land on rent from promoters for establishing a godown at Mansa,
Gujarat.
leave and license agreement with our Group Company and Promoter Group entity, Ratnatej
Infrastructure Private Limited…for obtaining the land situated at…Mansa district,
Gandhinagar…a monthly rent of ₹ 0.10 lakh…for setting up a godown
An investor may note that if the rent paid by the company to promoters is higher than the market rate, then
it is like shifting economic benefits from minority shareholders to the promoters. Therefore, an investor
should do due diligence on these lease/rental transactions.
5.3) Rushil Décor Ltd gave guarantees on behalf of promoter entities:
In addition, Rushil Décor Ltd gave guarantees on behalf of the loans taken by promoter group entities. As
per the RHP, June 2011, page 23, the company had given a corporate guarantee of ₹6 cr on behalf of
promoter entity, Vertex Laminate Private Limited.
Contingent liabilities: Corporate Guarantee of ₹ 2,00,55,357 (P.Y ₹ 6,00,00,000/-) Given by

company for loan taken by Vertex Laminates Pvt Ltd
5.4) Other business transactions with promoters:
In addition, Rushil Décor Ltd has entered numerous business transactions of sale of goods, services, renting
of brand names etc. with the promoters.
In 2014, the company sought approvals from shareholders to use the services of a promoter entity, Vertex
Laminate Private Limited for transporting material related to the new MDF factory at Chikmagalur,
Karnataka.
Company will use the transportation services of Vertex Laminate Private Limited…for supply from
its Medium Density Fibre Board manufacturing Chikmagalur
The brand name “Vir Studdio” used by the company for its experience centres is not owned by the company.
However, it is owned by promoters who take royalty from the company for using this brand name.
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our Company has entered into an agreement…with one of our…Promoter Group entities, Vir
Studdio Private Limited (One Person Company) for the use of their trade mark and brand name
―Vir Studdio on the payment of an annual royalty of ₹ 01 lakh per annum
We believe that an investor should be cautious and do a deeper due diligence about companies, which have
many related party transactions with their promoters. This is because each of the related party transactions
provides an opportunity for shifting economic benefits from minority shareholders to promoters.
6) Capital allocation decisions of Rushil Décor Ltd:
In the past, the company attempted to venture into different wood panel segments; however, at times, it was
not successful and lost the money of shareholders. For example, the company had to shut down its particle
board unit after it suffered consistent losses.
Rushil Décor Ltd started its particle board unit in 2009. However, after investing money, time and effort in
the unit until FY2015, it could not run this unit successfully.
The Particle Board manufacturing unit (“The Navalgadh Unit”)…was started in the year
2009…but laterly it started the negative contribution, which was ultimately impacting negatively
in the overall profits of the Company.
As a result, in FY2015, the company sold its particle board unit (Navalgadh Unit) at a loss of ₹6 cr.
company sold sizable fixed assets of its Navalgadh Unit in current year resulted in loss of ₹ 601.91
lacs.
In recent years, Rushil Décor Ltd started its wood polymer compound (WPC) board (also known as PVC
board) unit in FY2018 at its Chikmagalur, Karnataka unit.
Company has started the production of New Project of WPC Board at Chikmagalur, Karnataka.
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However, soon the company realized that the PVC board is too expensive for the market. Against the MDF
price of about ₹22,000 per cubic meter, the price of PVC board exceeded ₹50,000 per cubic meter. As a
result, the PVC board plant never achieved good utilization ratios and the unit kept on reporting losses.
Conference call, November 2021, pages 6 and 13-14:
Yes, it is very expensive see if you see the realization as against Rs 22000 of MDF this is turning
out to be around Rs 50000 plus
Right now I think it is operated at 14% to 15% capacity only…the loss we have incurred in it, it is
an investment.
As per the Q4-FY2023 results declared by Rushil Décor Ltd, the PVC board division made a loss of ₹1.87
cr in FY2022 and ₹0.64 cr in FY2023.
Going ahead, an investor should keep a close watch on the performance of the PVC board unit and see, if,
after more than 5 years in existence, it can turn profitable.
Additionally, during the construction of its MDF unit at Vishakhapatnam, AP, it suffered a cost escalation
of about ₹190 cr over its original estimated cost of ₹341 cr.
Credit rating report by CARE, July 2018, page 2:
new manufacturing unit for thin and thick MDF boards at Vishakhapatnam, Andhra Pradesh…The
total project cost is estimated at Rs.341 crore,
The cost overrun of ₹190 cr in the project seems a significant hit to the shareholders even though
considering covid pandemic has added to it.
We have experienced time and cost overruns while commissioning our manufacturing unit for thin
and thick MDF in the state of Andhra Pradesh…our Company also suffered a cost overrun of
approximately ₹ 19,034.63 lakhs.
Advised reading: How to Identify if Management is Misallocating Capital
7) Promoters increased their stake in the company via rights issues:
Rushil Décor Ltd raised money from the rights issue to repay its promoters, which effectively meant
converting the loan of promoters into equity at the price of the rights issue.
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Letter of offer for the rights issue, September 2020, page 34:
Out of the Issue proceeds, we intend to utilize ₹1,832 lakhs for part repayment or pre-payment of
unsecured loans availed by our Company from our Corporate Promoter
The right issue was at a price of ₹50 per share whereas during the period of the rights issue, September-
October 2020, the share price was in the range of ₹70-80.
In the rights issue, the promoters kept the right to subscribe to additional shares over and above their
entitlement.
Promoters and the members forming part of the Promoter Group…may apply for Additional Rights
Equity Shares, in addition to their Rights Entitlement
The right to acquire additional shares over and above their entitlement in the rights issue allows promoters
to increase their shareholding at a lower cost than the prevailing market price of its shares.
As a result of the allotment of shares in the rights issue in Q3-FY2021, the shareholding of the promoters
increased to 59.86% on December 31, 2020, from 53.24% on September 30, 2020. This is because, instead
of the original plan to convert ₹18.3 cr of debt into equity, which was their entitlement, they could convert
about ₹24 cr of debt into equity.
Credit rating report by Infomerics, August 2021, pages 2-3:
The promoters have converted subordinated unsecured loans to the extent of Rs.23.98 crore into
equity by way of right issue of shares in FY21.
We have illustrated more such ways by which promoters increase their shareholding in listed companies in
the following article: How Promoters use Loopholes to Inflate their Shareholding
Now, in April 2023, the company has come up with another rights issue where shares are to be allotted at
₹162/- per share against the prevailing market price of ₹250-300 in April 2023. Once again, the promoters
have kept the right to subscribe to additional shares over their entitlement.
Promoters and members of our Promoter Group may subscribe to…for additional Rights Equity
Shares,
The company mentioned that the purpose of the rights issue in April 2023 is majorly to convert promoters’
debt into equity shares.
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Out of this INR 107 crores total value of Right Issue, INR 56 crores approximately will be directly
adjusted in present outstanding of unsecured loan from promoters, which will be converted into
equity.
Conference call, August 2022, page 4:
right issue is basically for the purpose of not any specific expansion, we are just planning to;
the core objective of this particular right issues to reduce our debt.
The rights issue majorly for repayment of debt seemed in contrast to the strategy disclosed by the company
in its conference calls that it does not intend to repay its debt as the debt is very cheap.
Conference call, June 2022, page 11:
foreign currency is concerned, one of the loan is, we have got at rate of 0.85%, which is very good
rate…So we would not like to repay as of now in terms of the repayment,
The company maintained the same stance even until November 2022.
As of now, we don’t have any specific plans for early repayment.
Therefore, at one end, the company states that it does not want to prepay its loans because they are cheap.
On the other hand, it brings in a rights issue to convert promoters’ loans into equity at a discounted price
and simultaneously allows promoters a chance to acquire additional shares in the rights issue, which can
increase their shareholding at a discounted price.
Advised reading: Why We cannot always Trust What Management Claims
8) Selection of independent directors by Rushil Decor Ltd:
At the time of its IPO, in the RHP in June 2011, Rushil Decor Ltd highlighted that relatives of one of its
independent directors, Mr Narendra Kumar Jain Kabdi own a 9.55% stake in the company. These relatives
included the wife and sons of Mr Jain as well as his brother and his brother’s wife.
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An investor would appreciate that an independent director whose family members own almost 10% stake
in the company may not truly act as independent.
An investor may believe that until the time, the said director, Mr Narendra Kumar Jain Kabdi limited his
directorship only until IPO, it would have been ok as until IPO the company did not have numerous retail
investors from the public as shareholders.
However, in the company’s AGM in 2012, the said director presented himself for reappointment as an
independent director.
To appoint a Director in place of Shri Kabdi Narendrakumar Jain, who retires by rotation and,
being eligible, offers himself for re-appointment.
Finally, in March 2013, almost 20 months after the company came out with its IPO, Mr Narendra Kumar
Jain Kabdi resigned from the position of independent director of the company.
Shri Narendra Kumar Jain Kabdi resigned from the Directorship of Company with effect from 2nd
March, 2013.
In another instance, in 2020, Rushil Decor Ltd appointed one Ms Archee Darshanbhai Thakkar, aged 26
years as an independent director. The company highlighted that her skillset was that she could read and
understand basic financial statements.
Appointment of Miss Archee Darshanbhai Thakkar (DIN: 08603730) as an independent

Director of the Company for a First term of five consecutive years
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Miss Archee Thakkar has completed Inter stage of Chartered Accountancy Course and has ability
to read and understand basic financial statements i.e. balance sheet, profit and loss account, and
statement of cash flows.
An investor would appreciate that Rushil Decor Ltd could have done a better job at finding an experienced
independent director who could have much more value in the discussions in the board meeting from her
experience and skill rather than opting for a person who is just at the start of her career.
Looking at the above selection of independent directors, it seems that the company has a scope for
improvement in its selection of independent directors.
Investing?
9) Wrong information disclosed by the company in its statutory reports:
As accepted by the company in its letter of offer to the rights issue in Sept 2020 (page 30), on occasion, the
company had made wrong disclosures to the Registrar of Companies (RoC) in its annual reports.
There have been instances where inadvertently incomplete or incorrect disclosure have been made in
the director reports and annual reports filed by the Company with the RoC.
It is advised that investors should be extra cautious while reading the public documents submitted by the
company.
Also read: How to study Annual Report of a Company
10) Regulatory noncompliance by Rushil Decor Ltd:
An investor comes across numerous instances where the company did not properly comply with statutory
requirements. At times, it was penalized by the authorities. Let us see some such instances.
In May 2017, SEBI fined Rushil Decor Ltd stating that it used its IPO proceeds in a manner not in line with
the objective mentioned in the RHP. SEBI opined that the company used the IPO money to repay a bridge
loan whereas in the RHP it mentioned that it does not have any bridge loan.
SEBI order, May 12, 2017, pages 2-3:
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unsecured bridge loans of ₹7,06,00,000 (18.16% of the total issue size), were raised during Pre-
IPO period of March-June, 2011 which was not disclosed to the public. These loans were repaid
immediately upon receipt of IPO proceeds.
On the contrary, at page 59 of the Prospectus it was categorically stated that “Our Company has
not raised any bridge loan against the proceeds of this Issue.”
SEBI put a penalty of ₹700,000 on the company, which Rushil Decor Ltd paid.
In May 2021, BSE fined the company ₹4.2 lac for delays in the application for listing of rights issue shares.
The company paid the fine to BSE.
BSE limited had imposed fine of ₹4,20,000/- plus Applicable Taxes…due to not approaching the
BSE Limited for Listing application of 253760 Rights – Partly paid up equity shares within 20
days from the date of allotment
Once again, in December 2022, BSE pointed out the delay in intimation about the resignation of one of the
independent directors of the company.
BSE seeking clarification in respect of delay in reporting the resignation of our erstwhile
Independent Director, namely, Archee Darshanbhai Thakkar…no action has been taken by BSE
in this regard.
In May 2023, the company had to revise its Q4-FY2023 financial results twice as it repeatedly made
mistakes in the submitted results.
On May 4, 2023, the company released its Q4 results for the first time. Thereafter, on May 5, 2023, the
company came out with the first rectification where it highlighted that the results submitted the previous
day missed out details of loans given by it in the cash flow from investing calculations.
BSE filing, May 5, 2023, page 1:
we hereby inform that there was clerical error in Cash Flow statement line item printing submitted
to the Stock exchange as a part of Financial Result for the FY 2022-23.
Thereafter, on May 11, 2023, the company again revised its filing when National Stock Exchange (NSE)
pointed out that its results did not contain the report by the auditor as per the SEBI format.
BSE filing, May 11, 2023, page 1:
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In response to the direction received from NSE, we are submitting herewith the revised
Independent Audit’s Report in prescribed SEBI format
In its letter of offer for the rights issue in Sept 2020 (page 30), the company highlighted that on many
occasions, it delayed filing of reports to govt. authorities and on many occasions, it did not file the reports
at all.
there have been certain instances of delays in filing statutory forms as per the reporting
requirements…Further, there have been instances of non-filings of statutory forms with RoC
There have been occasions when the company did not apply for the approvals required for its operations.
In the letter of offer for its rights issue in September 2020, pages 290-291, Rushil Decor Ltd highlighted
that it has not applied for key approvals like the fire no-objection certificate, electrical safety approval
certificate, contract labour registration certificate, professional Tax (enrolment) certificates etc. for its
different manufacturing units.
Licenses / Approvals which are required but not yet applied for:
• fire no-objection certificate for all our manufacturing units;

• electrical safety approval certificate…for the DG set installed at our manufacturing units
• contract labour registration certificate…for our RHPL manufacturing unit situated in
Gandhinagar;
• professional Tax (enrolment) certificates…for our manufacturing units situated in
Chikmagalur and Gandhinagar;
In addition, in the same letter of offer for the rights issue, September 2020, page 40, the company
acknowledged that in the past, Govt. authorities have penalized the company for not taking/renewing
required approvals on time.
There have been instances in the past, where the statutory authorities have taken legal actions
against us for non – renewal or not availing certain licenses and approvals.
However, despite actions against the company for non-renewal of licenses, at the time of filing its letter of
offer, in September 2020, it still had many approvals which had expired; however, the company had not
filed renewal applications like registration under the Contract Labour (Regulation & Abolition) Act, quality
certificate and quality license by BIS etc.
Licenses / approvals which have expired and for which renewal applications have not been made:
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• The registration certificates issued under the Contract Labour (Regulation & Abolition)
Act…for our manufacturing units situated at…Gandhinagar and…Dhaulakuva, Mansa
• The quality certificate issued by the Bureau of Indian Standards for…our manufacturing
unit situated at…Mansa, Gujarat
• The quality license issued by the Scientist-C, Bureau of Indian Standards…for
Chikkamangluru, Karnataka
Along similar lines, when Rushil Decor Ltd came out for its IPO in June 2011, then in the RHP it highlighted
that as per the approval it received for the MDF plant at Chikmagalur in Nov. 2009, it had to purchase land
and place orders for its machinery within 6 months otherwise the license would have become invalid.
RHP, June 2011, pages 19:
Central Empowered Committee Permission: As per the letter dated November 7, 2009…The
Purchase / Lease of the land and order for the plant and machinery shall be placed within a period
of six months failing which the approval will automatically be deemed to have been cancelled.
However, at the time of RHP in June 2011 i.e. after more than 18 months from the approval letter, the
company was yet to place an order for 4 of its machineries.
RHP, June 2011, pages 19:
We have not yet placed orders for 4 Machineries aggregating ₹106.51 Lakhs constituting 2.34%
of total cost of Plant & Machinery required by us.
Similarly, there have been instances where Rushil Decor Ltd did not register its trademarks, logos etc. in
time, which exposed it to the risk of litigations about its brands.
Some of our trademarks & logo’s under our flagship are yet to be registered.
VIR PLYWOOD‘ not yet registered.
In addition to these, an investor may also remember the noncompliance by the company with the air and
water pollution regulations in its laminate manufacturing units, which we discussed above in the business
analysis. At that time, in FY2021, govt. had ordered the closure of its laminates manufacturing units.
Recently, two important functionaries of the company, its secretarial auditor and its internal auditors
resigned from the company in October 2022 and May 2023 respectively. Even though, the reasons cited by
them, the secretarial auditor for managing other secretarial work and the internal auditor for a better career
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opportunity in other organizations seem plausible. However, an investor should be cautious because, in
numerous incidences in other organizations, the resignation of key audit functionaries within a brief period
has led to negative surprises for investors.
Also read: 7 Signs to tell whether a Company is cooking its Books: “Financial
Shenanigans”
11) Scope for improvement in internal processes and controls at Rushil

Decor Ltd:
An investor comes across many instances which indicate that internal processes and controls of the
company have a scope for improvement. Let us see some of these instances.
From FY2007 to FY2011, Rushil Decor Ltd did not maintain proper records for its inventory of process
stock. As a result, the statutory auditor of the company highlighted it in its observations.
Audit Report of our Company has certain qualifications for the period 2006-07 to 2009-10: The
Company has not maintained proper records of Inventory in the case of process stock.
The Company has maintained proper records of inventory, except in the case of process stock
In FY2017, the company became a victim of hacking when some fraudsters disguised as a supplier from
China made it transfer money to their account.
while negotiating with one of the foreign suppliers, viz. Shandong Shunitian Chemical Group Co.
Ltd. one hacker has hacked the negotiation/conversation and accordingly mailed Proforma
invoice from fake email ID to the purchase department of the company and asked to pay 30% of
the Proforma invoice amount with specified bank details. Considering this, the company had paid
an advance of US $ 26,136 (INR 16.99 lakhs) on 16.12.2016 and while came to know about the
fraud…till the date of this audit report, no recovery has taken place
Similarly, in 2014, ₹6 lac of the cash belonging to the company was stolen during transport from the bank
to the company.
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A theft of Rs.6 lacs while carrying the cash from the bank account had taken place
In FY2013, the company did not deposit its professional tax due on time to govt. authorities and delayed it
for more than 6 months.
except professional tax of ₹1,16,140/- in respect of aforesaid dues were outstanding as at 31st
march 2013, for a period of more than six months from due date
Similarly, in FY2014, it delayed the payment of provident funds and TDS dues.
except for the minor delays in few instances of Deposit of Provident Fund and Tax Deducted at
Source, the Company is generally regular in depositing…
In FY2012 as well as FY2013, the company delayed payment of interest to its lenders and as a result,
reported interest accrued and due to lenders in its balance sheet.
In the letter of offer for the rights issue, April 2023, page 43, Rushil Decor Ltd highlighted to its investors
that it has lost some important documents like the lease deed and transfer of equity shares.
Our Company is unable to trace the lease deed…for the land situated at…Mansa District.
Gandhinagar, Gujarat. We are unable to trace the relevant documents for the transmissions and
transfer of Equity Shares done by our Promoters
Moreover, at times, it seems that while preparing the annual reports, the company needs a stronger maker
checker arrangement. This is because, at times, the annual report contains errors, which are avoidable. For
example, in FY2020 annual report, page 2, it described that the EBITDA has grown whereas, in actuality,
there was a decline in EBITDA.
While EBIDTA registered a growth of 11.59% from ₹ 45.14 Cr in 2018-19 to ₹ 40.45 Cr in 2019-
20
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All the above-mentioned instances indicate that the company needs to strengthen its internal processes and
controls so that it can take proper care of its documents and avoid falling into fraud etc.
In addition, at times, there were lapses related to safety precautions at the company’s plants, which led to
some accidents. In FY2014 annual report, Rushil Decor Ltd highlighted that it faces litigations for accidents
at Chikmagalur, Karnataka and Navalgadh, Gujarat plants.
There is a case…for accidents at Chikmagalur, Medium density fiber board manufacturing

plant…There is a case…for accidents at Navalgadh, Particle board manufacturing plant.
In FY2019, the company had an incident of fire at its Chikmagalur plant.
On 18/03/2019 fire broke out at the factory premises…Chikmagalur, Karnataka.
Therefore, the company might need to strengthen its safety processes to prevent such incidences that may
lead to economic as well as human loss.
As per the letter of offer for the rights issue in April 2023, page 34, the company faced financial loss when
customers returned its products due to quality issues.
During the nine month period ended December 31, 2022, Fiscal 2022 and Fiscal 2021, goods
amounting to ₹ 268.75 lakhs, ₹ 231.19 lakhs and ₹ 168.95 lakhs were returned to our Company
on account of defects, quality concerns…caused financial losses on account of the same
Therefore, Rushil Décor Ltd might need to work on its manufacturing processes to improve quality checks
so that defective goods are minimized and identified within the factory premises. Defective goods sent to
the market would impact the brand and customers’ trust.
An investor may read the example of National Peroxide Ltd, a Wadia Group company, where there was a
history of inadequate internal controls and later, a fraud came out indicating that the senior management
was siphoning off the money for almost 10 years. Later on, the company fired the senior management
including the managing director of the company.
An investor may read our detailed analysis of National Peroxide Ltd and the fraud due to weak internal
controls in the following article: Analysis: National Peroxide Ltd
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12) Large contingent liabilities of Rushil Décor Ltd:
In recent years, the company has received letter orders from Income Tax Dept and Commercial Taxes
(Audit) Departments demanding dues from the company.
In FY2020, the Income Tax Dept. had attached its unit in Gujarat.
Company has received an order u/s 281B of the IT Act, 1961…and accordingly the Company’s
unit situated at…Mansa, Dist. Gandhinagar, Gujarat 382 845 has been provisionally attached
In FY2023, the company received a notice from the Commercial Taxes (Audit) dept. demanding payment
of ₹190 cr.
Office of the Deputy Commissioner of Commercial Taxes (Audit), Government of

Karnataka…stating that our Company was liable to pay a tax of ₹ 19,016.36 lakhs
An investor may note that these are large contingent liabilities that may have a significant impact on the
financial position of the company. Therefore, an investor may contact the company directly to know the
status of these demands.
13) Frequent changes of credit rating agencies:
Over the years, Rushil Décor Ltd has changed its credit rating agencies in quick succession.
Until July 2018, the company employed CARE as its credit rating agency which in its report dated July 27,
2018, revised its outlook downwards from positive to stable.
CARE BBB+; Stable…Revised from CARE BBB+; Positive
Within two months, in September 2018, Rushil Décor Ltd received a credit rating of A- from India Ratings.
India Ratings Assigns Rushil Decor ‘IND A-’; Outlook Stable
However, in May 2019, i.e. within 8 months, India Ratings downgraded its credit rating by 3 notches from
A- to BBB-.
India Ratings Downgrades Rushil Décor to ‘IND BBB/Negative’
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After this sharp downgrade to BBB- by India Ratings, Rushil Decor Ltd switched its credit rating agency
to Infomerics and got a credit rating of BBB+, which was two notches higher than the rating given by India
Ratings.
IVR BBB + / Stable Outlook (IVR Triple B Plus with Stable Outlook)
Therefore, Rushil Décor Ltd might be a case where a company has switched its credit rating agencies to get
a better credit rating.
Also read: Credit Rating Reports: A Complete Guide for Stock Investors
The Margin of Safety in the market price of Rushil Decor Ltd:

Currently (June 22, 2023), Rushil Decor Ltd is available at a price-to-earnings (PE) ratio of about 10.6
based on earnings of FY2023. An investor would appreciate that a PE ratio of 10.6 appears low and seems
to offer a margin of safety in the purchase price as described by Benjamin Graham in his book The
Intelligent Investor. However, due to the recent sharp increase in profitability of the company due
to upcycle phase, the PE ratio may seem lower.
Analysis Summary
Rushil Decor Ltd has grown its business at a rate of 14% per annum over the last 10 years (FY2014-
FY2023). During this period, its profitability has followed a cyclical pattern as its OPM has fluctuated
between 10% and 18%. There are many reasons for cyclicity in its business performance.
First, the company depends on the real estate business and home improvement market for its business,
which follow general economic cycles of boom and bust. Second, the capital-intensive nature of MDF
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business with a long gestation period leads to the bunching up of new supply, creating oversupply and a
crashing of prices, which accentuates cyclicity.
Its products are commodities in nature with low switching costs for the customers. Therefore, it faces
intense price-based competition from Indian as well as foreign manufacturers. Imports are usually cheaper
because of low wood prices in countries like Indonesia etc. Even though, the govt. of India imposes anti-
dumping duty on MDF imports from some countries; however, it has not stopped competition from cheaper
imports.
To survive and grow in a tough industry, Rushil Decor Ltd has used many cost-efficiency measures to
reduce its power & fuel costs, flexibility in product manufacturing, upgrade technology and manufacturing
processes etc. However, still, in some segments like particle board and PVC board, it is not able to grow
profitably. It had to shut down its particle board division in the last decade.
The business of Rushil Decor Ltd is under tight regulatory control due to the environmentally sensitive
nature of raw materials (wood) and the release of toxic effluents. In the past, govt. temporarily closed its
laminates manufacturing units in Gujarat due to air and water pollution issues.
The capital-intensive business of Rushil Decor Ltd demands much more funds for growth than what it can
produce from its operations. Therefore, in the past, the company has raised more debt and equity to fund
its capital expenditure projects. As a result, it had reported a negative free cash flow (FCF) over the years.
However, despite a negative FCF the company had paid dividends to its shareholders, which in turn, are
effectively funded by debt, which may not be in the best long-term interests of the company.
Currently, two generations of the promoter Thakkar family handle the day-to-day operations of the
company indicating the presence of a management succession plan. However, promoters of some of the
competing companies have also bought a significant stake in the company, which may lead to some
corporate actions like mergers etc. Investors should track their shareholding levels closely.
The company seems to pay generous remunerations to promoter family members who have received
substantial increments even during the years when the company had seen a decline in profits. It includes
the condition of a minimum 20% increase in salary every year for Rushil Thakkar when he joined the
company in the last decade.
Some accounting assumptions followed by Rushil Decor Ltd e.g. including CMLTD, which is debt, into
cash flow from operating activities leads to an inflated CFO. Investors should be cautious while accepting
the reported numbers without adjusting for these assumptions. In its letter of offer for the rights issue in
September 2020, the company accepted that in the past, it had disclosed incomplete and incorrect
information in its annual reports filed with RoC.
Rushil Decor Ltd has entered into numerous transactions with promoters and related parties e.g. loans,
giving guarantees, taking promoter’s properties on rent, selling and purchasing of goods and services etc.
Investors should do deeper due diligence to understand the impact of these transactions.
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In the last 3 years, the company has come out rights issue twice, primarily to convert the loans given by
promoters into debt. These rights issues are launched at a discount to the prevailing market price. As
promoters get a chance to subscribe for a higher number of shares than their entitlement; therefore,
effectively, they can increase their stake in the company at a discount to the prevailing share price.
The selection of independent directors by the company leaves scope for improvement because, in the past,
it employed someone whose relatives had about a 10% stake, as an independent director. Recently, it
employed a young CA who could only read basic financial statements as an independent director though it
could have employed someone senior with substantial business experience.
The company’s internal processes and controls need improvement because there have been numerous
instances of delays in payments to govt. authorities, banks, lack of proper oversight leading to frauds in the
company, theft of cash, accidents in units, delays in taking renewals of required permissions etc. At times,
the company did not apply for necessary approvals.
Currently, the company is facing large tax demands, which if it had to pay, then may lead to a significant
impact on its financial position.
In the recent past, the company’s financial position faced challenges and the credit rating agencies
downgraded its rating. As a result, it changed its rating agencies repeatedly to get a higher credit rating.
Going ahead, an investor should keep a close watch on the cyclical changes in the business performance of
Rushil Decor Ltd and not get overly influenced by current significant improvement, which might be an
upturn phase of a cycle and reduced competition from imports due to challenges in the sea trade. In the
past, after significant improvement, its performance had declined sharply. An investor should always keep
this in mind.
The investor should also keep a close watch on its debt levels and if it had to do further equity dilution to
fund its expensive growth plans. She should be cautious while analysing its financial information and keep
a close watch for signs indicating weakness in controls and processes as well as its transactions with
promoters and related parties.
These are our views on Rushil Decor Ltd. However, investors should do their own analysis before making
I hope it helps!
Regards,
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Dr Vijay Malik
P.S.

Workshop Videos
Analysis Excel
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10) Websol Energy System Ltd

Websol Energy System Ltd is an Indian manufacturer of solar photovoltaic cells and modules.
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Over the years, Websol Energy System Ltd did not have any subsidiary; therefore, it has always reported
only standalone financials.
present.
In the case of Websol Energy System Ltd, as until now, the company has reported only standalone
financials; therefore, we have used the standalone financials in the analysis.
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Financial and Business Analysis of Websol Energy System Ltd:

In the last 10 years, sales of Websol Energy System Ltd have declined from ₹305 cr in FY2014 to ₹17 cr
in FY2023. Sales of the company have further declined to ₹1 cr in the 12 months ended September 30,
2023, i.e. during Oct. 2022-Sept. 2023.
Over the years, the sales performance of Websol Energy System Ltd has been very fluctuating. From
FY2015 to FY2019, sales declined from ₹356 cr to ₹69 cr. Subsequently, the decline continued and the
company has almost completely stopped its business since FY2023.
The operating profit margin (OPM) of the company has also fluctuated significantly over the years. OPM
was the highest 22% in FY2021 whereas it reported operating losses during FY2019 and FY2023. At the
net profit (PAT) level, Websol Energy System Ltd reported net losses in 5 out of the last 10 years.
To understand the business model of the company better, let us analyse the profit performance of Websol
Energy System Ltd over the last 28 years (FY1996-FY2023).
Over the last 28 years, the performance of Websol Energy System Ltd has been very erratic. Frequently,
sales declined over previous periods and more importantly, the company faced long periods of continuous
losses like FY1996-FY1999 and FY2012-FY2016.
The business performance of Websol Energy System Ltd has been very poor and cumulatively over the last
28 years (FY1996-FY2023), the company has lost money by reporting a net loss of ₹250 cr.
To understand the reasons for such performance of Websol Energy System Ltd, an investor needs to read
the publicly available documents of the company like annual reports from 1997 onwards, credit rating
reports, as well as its corporate announcements.
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influence the business of Websol Energy System Ltd. An investor needs to keep these factors in mind while
she makes any predictions about the performance of the company.
1) Intense competition among solar cells and module manufacturers:
Websol Energy System Ltd faces strong competition, especially from Chinese and Taiwanese
manufacturers, which have over the years increased their global market share by quickly installing large
solar cells and module manufacturing capacities.
In 2009, China and Taiwan controlled almost half of the world’s solar cell manufacturing capacity (49%),
which increased further to 59% in 2010.
Producers in China and Taiwan accounted for 59% of the global cell production in 2010 (49% in
2009).
The two countries have continuously added capacities in both solar cells and modules. In 2016, China and
Taiwan had 69% of solar module manufacturing capacity.
China and Taiwan account for over 69% of global module supplies.
In fact, China had created so much excess capacity over its domestic requirements that in FY2017, it could
complete its solar power installation targets for the full year within the first 6 months. Thereafter, large
Chinese cell and module manufacturers could only target foreign markets by resorting to dumping their
products at very low prices.
China achieved majority of its FY17 solar capacity addition target in the first half of the year itself,
leaving PV manufacturers with a large under-utilized production capacity that made it possible to
dump in other countries
heightened price erosion on account of increased product dumping by China comprised the main
challenges
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This severe competition from Chinese and Taiwanese manufacturers is in addition to the competition from
domestic, Indian manufacturers. In recent years, Indian govt. is focusing on significant additions to solar
power. Therefore, many corporate houses with strong financial positions have entered solar cells & modules
manufacturing, which has increased competition for Websol Energy System Ltd.
As per the FY2018 annual report of the company, page 20, about 18 companies manufactured solar cells in
India led by Tata Power and Indo Solar. However, recently, big groups like Reliance, Adani and JSW have
also entered into solar cell manufacturing, which will make this segment even more competitive.
• Tata Power to set up Mega Solar Manufacturing Plant in Tamil Nadu;

Signs an MoU with State Government for INR 3,000 crore investment
• Adani plans to build 10 GW solar manufacturing capacity by 2027
• Reliance, Tata Power and JSW Energy among 11 companies to get solar
cell manufacturing approval
2) Very low pricing power of Websol Energy System Ltd over its customers:
The intense competition in the solar cell manufacturing business has severely limited the negotiating power
of Websol Energy System Ltd over its customers. As a result, it is not able to pass on an increase in its raw
material costs to its customers.
In FY2006, Websol Energy System Ltd intimated to its shareholders that it could not pass on the increase
in raw material costs to its customers.
Webel-SL is engaged in a volume-driven business with relatively thin margins where cost
increases cannot be easily passed on to customers.
In FY2009, the company said that the market of solar cells and modules is completely a buyer’s market
indicating that suppliers do not have negotiating power.
upto sept 2008, it was sellers market. Now it is buyers market.
On the other hand, whenever raw material prices decline, it has to pass on the benefits to its customers by
reducing the prices of its solar cells and modules because the customers have plenty of options to choose
their suppliers especially large Chinese suppliers who have many cost advantages.
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In the FY2018 annual report, Websol Energy System Ltd highlighted that it has to match lower prices
offered by Chinese producers even if it means lower profits or losses.
Over the last few years, some of the largest Chinese manufacturers commissioned some of the
world’s largest solar cell and module capacities, a competitive positioning that made it possible
for them to sell at progressively lower costs. As a result, there has been a virtual meltdown in
realizations. This decline has made it imperative for manufacturers like us…to match Chinese
prices
Cheaper imports from Chinese players have been one of the main reasons for a very sharp decline in the
cost of solar power production in recent years. The bidding cost for solar power in India declined from
₹17.9 per unit in 2010 to ₹2.4 per unit in 2017.
The sharp reduction in solar cell and module prices has been one of the key reasons for the losses of Websol
Energy System Ltd as it could not reduce its production costs sufficiently. For example, in FY2010, the
company reported losses due to a fall in its product prices.
However, your company posted a loss in the last financial year, which…was mainly due to fall in
the prices of SPV cells and modules globally
In the past as well, there were multiple times when it could not sell its products at the prevalent prices in
many markets as its product prices were uncompetitive. For example, in FY2004, its sales declined as it
stopped sales in multiple markets due to a reduction in prices there.
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We discontinued supply to unremunerative geographies and consciously rationalised our turnover

from Rs. 3439 lacs in 2002-3 to Rs. 2750 lacs in 2003-4.
In FY2007, it stopped selling its products in Europe due to the same reasons.
Company reduced its European markets exposure in 2006-7, following a decline in end-product
realisations in that continent.
In recent years, imports from China as about 25% cheaper than the cells and modules produced in India,
putting significant pressure on Indian companies like Websol Energy System Ltd.
pricing differential between the landed cost of Chinese solar products and our price of 25%
An investor must keep a close watch on the solar cell and module prices going ahead as a decline in product
prices has the potential to disrupt the entire business model of Websol Energy System Ltd.
It is essential in light of large upcoming solar cell and module manufacturing capacities by big corporate
houses in India because, as per the company, every doubling of manufacturing capacity leads to a 22%
reduction in solar module prices.
price of PV modules reduced by 22% each time the cumulative installed capacity (in MW)
doubled.
3) Very high technology risk faced by Websol Energy System Ltd:
The technology to manufacture solar cells and modules has seen frequent changes over the years, which
have led to a drastic decline in the cost of solar power generation. Due to rapid advancements, Websol
Energy System Ltd has always been under pressure to improve the efficiency of its products.
Multiple times, it tried to increase its ability to use a higher size of solar wafers to 6 inches and then to 8
inches to improve efficiency and reduce its costs.
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adoption of the latest technology to process 6 inch wafers, your company has gained enormously
by way of reduction in production costs.
adoption of the latest technology to process 8 inch wafers, your company has gained enormously
by way of reduction in production costs
3.1) Increase in capacity of solar modules:
Similarly, over the years, it has continuously increased the capabilities of its solar cells to generate a higher
amount of energy. For example, in FY2003, Websol Energy System Ltd increased the capacity of its solar
modules from 90 watts to 120 watts.
we successfully evolved our product mix from 90-watt cells towards value-added 120-watt cells
By 2008, the company had increased the capacity of its modules to 220 watts.
We also developed 180 and 220 wattage products towards the latter part of the financial year.
However, despite its continuous efforts to increase the capacity of its solar modules, it was continuously
behind the industry and customers’ expectations as during FY2008, many of its competitors were already
producing 300-watt cells.
some Japanese manufacturers have extended to 300 watts…making it imperative for

manufacturers like us to graduate to higher wattages.
To meet the industry’s expectations, by FY2011, Websol Energy System Ltd started producing modules of
up to 245 watts.
On the module front, we increased wattage from 212 W to 245 W
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3.2) Increase in solar cell efficiency:
Similarly, the company was continuously under pressure to increase the efficiency of its solar cells. By
FY2006, it had achieved an efficiency of 15%.
During the year under review, the Company successfully enhanced its cell efficiency from 14% to
15%,
By FY2011, the company had improved its cell efficiency to 18.3%.
Improved and enhanced cell efficiency from 17.8 % to 18.3%
However, the latest technology in 2011 was able to provide an efficiency of up to 44%.
most efficient photo-voltaic technology available today is multi-junction concentrators. These are
three-junction and two-junction devices that currently offer up to 44% energy conversion
efficiency.
Nevertheless, by FY2018, Websol Energy System Ltd has further increased its cell efficiency to 18.8%.
Company shifted from four bus-bars to five, increasing its efficiency from 18.5% to 18.8% by using
multi-crystalline silicon cells
3.3) Increase in production yields:
Apart from a focus on the capacity of its solar modules and the efficiency of its solar cells, the company
had to continuously focus on increasing its wafer yield to improve its production efficiencies.
In FY2006, the company achieved a yield of 90% in its production process.
Increased wafer yield from 85% to 90%
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By FY2008, it had increased its yield to 94%.
we enhanced our yield from 85% (using reclaimed technology) to 94% (using solar-grade
material)
By FY2022, the company has further improved its yield to 96.5%.
During the course of the last financial year, the Company enhanced process yield from 95% to
96.5%, the highest in its existence.
3.4) Tie-up with foreign and Indian institutes of excellence:
During this journey of continuously improving its products, Websol Energy System Ltd took the help of
many foreign and Indian collaborators.
The company started its business in 1994 by sourcing technology from Helios, Italy.
company’s collaboration with Helios (from 1994 to 2001) enabled it to access the world’s best
technology
In FY2004, the company tied up with a German university (the University of Konstnz and Fraunhauffer
Institute in Germany) and a Japanese technocrat for technology.
Its R&D is supported by a university in Germany as well as a technocrat from Japan who advise
it on technology
This team led by the Technical Director appraises modern-day technologies in consultation
with University of Konstnz and Fraunhauffer Institute in Germany who advise the company to
invest selectively in upcoming technologies.
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In FY2018, Websol Energy System Ltd tied up with the Indian Institute of Technology, Mumbai and the
Indian Institute of Engineering Science and Technology (IIEST), Shibpur for product improvements.
Company is collaborating with IIT Bombay and IIEST Shibpur in order to fine-tune process and
increase yields.
However, despite all its best efforts, the company suffered significantly due to technology changes multiple
times either its choice of technology was wrong or what worked for the company initially, stopped working
later and it had to write off significant amounts of investments in the older technology. No wonder that in
its history, Websol Energy System Ltd defaulted multiple times to lenders, was declared a non-performing
asset and at one point in time, none of the banks was willing to give it a loan.
3.5) Significant write-offs due to the technology of Websol Energy System

Ltd becoming obsolete:
There were occasions when the company proudly intimated to shareholders the very superior benefits of its
existing technology. However, soon, it realized that what it once thought was the best technology has now
become a burden on it. As a result, it had to scrap and write off its investments in its existing production
technology.
For example, Websol Energy System Ltd started its business with reclaimed technology in which it used
silicon wafers, which were rejected by the semiconductor industry.
The company highlighted to shareholders that its semi-automatic plant working on reclaimed technology is
among the best in the world as it allowed it to have lower manufacturing costs, it could work with a wider
range of silicon wafers and easily switch between different cell sizes.
I would say that our biggest competitive edge is the expert use of the reclaimed technology, which
translates into a lower cost of raw material and a lower cost of conversion.
a prudent mix of automated and manual processes compared with the larger companies that are
largely automated…our process is more tolerant of raw material variations than the automated
giants…we can switch between cell sizes quicker, we can tweak our production lines faster to
produce a wider product variety.

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reclaiming technology enabled buyers like us to purchase and work with inferior-grade silicon
rejects from semi-conductor manufacturers.
However, the next year, FY2008, it realized that the semi-automatic plant based on reclaimed technology
was not proving to be as beneficial as it had thought. Therefore, in FY2008, it shifted from a semi-automatic
plant based on recycled/reclaimed technology to a fully automatic plant based on crystalline silicon.
Websol Energy System Ltd told its shareholders that its previous technology (recycled/reclaimed
technology) was challenging and costly. Therefore, it shifted its production technology.
We are moving from the challenging use of reclaimed technology to impart uniformity to solar-
grade raw material
previous technology which we installed was costlier in terms of conversion costs and productivity.
Nevertheless, in FY2008, the company shifted from using recycled/reclaimed silicon in semi-automatic
plants to using virgin solar-grade crystalline silicon in fully automatic plants.
We are moving from a combination of manual- automated technology to fully automated

technology.
We switched from the use of reclaimed to solar-grade raw material
Due to this switch, the company had to write off the significant investment done by it in getting
certifications for its previous technology.
a switch in our technology in the last quarter and the write-offs required to make for certifications,
which will reflect in our performance in 2008-09 and beyond
In FY2015, the company did a significant write-off of more than ₹50 cr of its assets at both its Salt Lake
plant as well as Falta plant.
The Company has recognized diminution in the value of certain fixed assets pertaining to the
erstwhile factory situated at Salt Lake and also installed at falta plant and as such discarded the
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obsolete / unusable fixed assets having the cost of ₹5759.10 Lacs and accumulated Depreciation
of ₹ 1988.07 Lacs.
In FY2017, it once again wrote off assets of about ₹11 cr.
During the year Company has Discarded its fixed asset i.e plant and machinery from its use having
gross value of ₹14.68 Crs. And written down value amounting to ₹11.03 Crs, thereby making
losses worth ₹11.03 Crores for the Company
After a few years, the company realized that the new technology that it had invested in was no longer useful.
As a result, it had to again switch its entire technology and scrap its entire existing plant & machinery.
FY2022 annual report, pages 7, 14 and 19:
Due to present technology becoming obsolete, no capex additions were done
During the current year and the next, the Company will graduate from the multi-crystalline
technology to Mono PERC and TOPCon…This decision is warranting a complete replacement of
the Company’s erstwhile equipment
Our Company is scrapping old machines
As a result, in FY2023, the company reported a decline of sales by about 90% over FY2022 and in the last
12 months (Oct. 2022 to Sept. 2023), the company has reported almost nil sales and significant losses.
The pace of innovation and upgrade of technology is significant in the solar power generation field. There
have been radical innovative ideas like solar fabric where even clothes like t-shirts, coats etc. can generate
solar power.
Solar fabrics Researchers are developing solar fabrics with a vision of including solar power in
each fiber. These solar filaments can be embedded into t-shirts, winter coats, or any other clothing
to keep warm, power the phone
In the past, there have been attempts to develop solar cells from plastic polymers and ink on aluminium
foils.
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certain companies declared their plans to produce solar cells using polymer plastics and solar-
absorbing inks printed on aluminum foil.
Also read: How to do Business Analysis of Solar Power Plants
4) Multiple instances of financial default by Websol Energy System Ltd:
Companies with modest financial strength like Websol Energy System Ltd that do not have the resources
to lead the research & development (R&D) in the industry, generate new technologies, and therefore, have
to follow the industry for technology, might always be behind the curve.
Such companies might continue to face situations where they make large investments in one technology
only to realize after a few years that the industry has moved on to another technology and as a result, would
have to scrap the investment in existing technology.
As a result, of such a shift in technologies as well as due to the loss of competitive advantages, Websol
Energy System Ltd faced severe financial weakness on multiple occasions leading to a default to lenders
and resultant bankruptcy.
First, in 1999, the company defaulted to its lenders ICICI and IDBI and was referred to the Board of
Financial and Industrial Reconstruction (BIFR). Both the lenders had to restructure their loans to the
company.
Company has made a reference to the Board of Financial and Industrial Reconstruction
I.D.B.l and I.C.I.C.I, have agreed to restructure the financial liabilities whereby interest rates
shall be reduced
Over FY2001 and FY2002, ICICI and IDBI agreed to take losses and entered a one-time settlement (OTS)
with Websol Energy System Ltd.
The company has entered in one time settlement with ICICI for all the dues as on 31st March 2001.
This has resulted in a net waiver of interest for Rs. 34.77 lacs
The company his entered into a settlement with IDBI for all the dues as on 31st March 2002. This
has resulted in a net waiver of interest & other charges amounting to Rs. 30.89 lacs.
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Thereafter, in FY2009, the company faced severe stress on liquidity. As a result, it could not pay its
suppliers, which led the suppliers to cash the letters of credit (LC) provided by Websol Energy System Ltd,
called LC devolvement.
Credit rating report by CARE, March 2009, page 1:
pressure on liquidity of the company leading to relatively low current ratio & few instances of L/C
devolvement
Also read: Credit Rating Reports: A Complete Guide for Stock Investors
Thereafter, in FY2012, the company again defaulted to its lenders and its lenders had to restructure their
loans. However, three banks refused to restructure their loans.
FY2012 annual report, pages 6-7 and 48:
we had to renegotiate debt as interest rates remained high. In March 2012, we underwent bank
restructuring in which our working capital loans were converted to term loans…The capex loans
were also restructured
three working capital provider Banks viz., Standard Chartered Bank, Dena Bank and HDFC Bank
and one term lender viz., EXIM Bank have not restructured the credit facilities.
In FY2013, the company was declared a non-performing asset (NPA) by lenders and it was referred to
BIFR.
these three working capital lenders as also the other two working capital lenders i.e., Allahabad
Bank and Federal Bank have classified your company’s borrowings as Non Performing Asset
(NPA)…and registered with the Board for Industrial and Financial Reconstruction (BIFR)
In FY2016, Allahabad Bank and Dena Bank sold their loans to Websol Energy System Ltd to asset
reconstruction companies (ARCs).
Allahabad Bank and DENA bank has been assigned to ARCs.
FY2016 was a particularly tough year for the company as one of its suppliers also filed a case against the
company to recover its money.
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A Creditor has filed a suit against the company before honourable high court at Kolkata for
recovery of ₹ 20 lacs.
In FY2017, the company entered a one-time settlement (OTS) of dues with its bankers, who accepted losses
on their amounts due.
During the year your company has settled all NPA bank accounts through OTS.
In light of such a poor repayment track record of the company, it does not come as a surprise to an investor
that banks refused to give loans to the company and due to a lack of banking facilities, it could not even
pay its regular undisputed statutory dues.
delay in payment of undisputed statutory dues mentioned…it is submitted that it was due to the
continuous adverse financial condition and no banking facility currently available to the Company
In FY2020, Websol Energy System Ltd defaulted in payments to the ARC to whom banks had assigned
their loans of the company. As a result, the ARC sold its properties and recovered the money.
Company has one lender Invent Assets and Reconstruction Co. Pvt. Ltd…The Company made
default in repayment of loan for the quarter ended December, 2019. The lender sold the non core
assets of the company and realized their installment for December, 2019 along with future
Installments.
In FY2021, the company again defaulted to its lender and did not make repayment even after a delay of 11
months.
Company has currently failed to make timely repayment of its principal outstanding of Rs 301.96
lakhs as against working capital loan repayable on demand from Invent Assets and Reconstruction
Co. Pvt. Ltd. which has been recalled by the lender via a letter dated 4th May, 2020 and is not yet
repaid by the company as on 31.03.21. i.e. period of default of 11 months.
Considering these continued periods of financial stress where many of the company’s lenders had to take
losses on the loans given by them to the company, an investor is fascinated to read the following statements
in its recent annual reports.
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Websol is possibly among only a handful of Indian solar energy product manufacturing companies
to be viable and profitable.
Endured through various market, policy and technology cycles. Liquid, profit-making and debt-
free today.
In a high-mortality business, your company has emerged as a competitive survivor
The under-borrowed Balance Sheet is expected to protect business sustainability
Nevertheless, in 2023, the company had planned to raise money by diluting its equity using preferential
allotment of shares. However, after getting the board and shareholders’ approval, it had to shelve the
proposal as it faced challenges in creating a “lien” on its shares, which were already pledged with lenders.
Q1-FY2024 results, August 2023, page 1:
We would like to withdraw the earlier preferential allotment of equity share proposal. The earlier
proposed preferential allotment…could not be completed within the time…majorly on account of
administrative difficulties in getting ‘lien’ on already pledged securities of the promoter group
entities.
5) Very high regulatory/government policy risk faced by Websol Energy

System Ltd:
The solar power industry is heavily dependent on the govt. and its policy decisions both for the sale of
power, production incentives as well as support/barriers via tariffs.
Originally, the demand for solar power was primarily driven by the subsidies offered by govt. on the use of
solar power both in India and overseas.
industry is largely dependent on government purchases and subsidy.
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In India, at the start of this millennium, the use of solar power was primarily limited to solar lights, lanterns
and water pumps where the purchase of equipment was subsidized.
usage is concentrated across home and street lighting, solar lanterns and water pumps for
irrigation.
India govt. incentivized the use of solar power by way of soft loans with subsidies on interest payments via
agencies like the India Renewable Energy Development Agency (IREDA).
In India the government initiated soft loan schemes to promote the use of solar energy. The soft
loan programme under an interest subsidy scheme is being implemented through India Renewable
Energy Development Agency (IREDA) and public sector banks
It was the regulatory push by agreements like the Kyoto Protocol, which increased the demand for solar
power and equipment benefiting Websol Energy System Ltd.
Company’s topline grew from Rs 56.63 cr in 2004-05 to Rs 68.18 cr in 2005-06, influenced by

an increased demand for the product following the acceptance of the Kyoto Protocol in February
2005
The growth in the use of solar power in major overseas markets like Europe was also supported by subsidies
from govt. As a result, when the European govts. cut down subsidies, around 10 years back, then, suddenly,
the demand for solar cells and modules in Europe declined. This was the time when China was adding
large-scale solar manufacturing facilities and as a result, the global market saw significant oversupply
leading to a crash in the prices of solar cells and modules.
Therefore, in FY2012, Websol Energy System Ltd had to sell its products at losses i.e. below the production
cost. This impact lasted many years as Websol Energy System Ltd consecutively reported net losses for the
next five years (FY2012-FY2016).
One, the market growth tapered and European subsidies declined and a slowdown on the continent
translated into staggered offtake. Two, low-cost Chinese products threatened the profitability of
most manufacturers, Websol included.
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there was a sharp downturn leaving a huge unsold industry inventory across a number of
European ports, which triggered a price meltdown. Your Company could not escape the situation;
it was compelled to reduce the price of some stock while it was in transit to below production cost.
Due to global oversupply, many countries like the USA, as well as Europe, put barriers like increased duties
on imported solar cells and modules, which impacted manufacturers in China as well as India like Websol
Energy System Ltd.
US has imposed anti-dumping duties on China, which owns 70% of the global PV capacity because
of its sheer size and governmental support.
In FY2018, the USA put a safeguard duty on the import of solar equipment from India, which impacted the
demand for companies like Websol. It contributed to the sharp decline in the financial performance of the
company in FY2018 when its sales as well as profits including margins declined significantly.
The Company needed to address the reality of US Safeguard Duty on export of solar cells and
modules from India
During such phases of oversupply and cheaper imports, Indian govt. has also supported its solar equipment
manufacturers by putting an anti-dumping duty on imports. In addition, it mandated the use of domestically
produced equipment for solar power plants in India.
Government department has already initiated the imposition of anti-dumping duty on imports of
solar cells and modules and has at the same time outlined the requirement of domestic
content under various solar schemes to revive the industry.
However, the life of companies like Websol Energy System Ltd was not easy even after the govt. support
because it led to a trade war between the USA and India where the USA wanted India to abolish its
requirement of domestic content.
The US has taken its battle to get India to open its solar market to the World Trade Organisation.
At the heart of the battle is the stipulation for “domestic content requirement” (DCR) in Phase II
of the JNNSM program…as it would discriminate against US exports.
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Govt. of India has implemented various other measures also to support solar equipment manufacturing in
the country like subsidies on capital equipment for making solar cells.
20% and 25% subsidy on capital expenditure has been announced for entities establishing cell
and module lines in Special Economic Zones (SEZ) and Non-SEZs, respectively.
In addition, the govt. also gave multiple tax incentives to promote the use of solar power.
Indian Government offers several tax and financial incentives to support the rooftop solar market
including a 30% subsidy for residential and institutional consumers, 80% accelerated
depreciation, 10-year tax holiday
Recently, the govt. is incentivizing the production of solar equipment in the country by providing
production-linked incentives (PLI).
government allocated Rs19,500 crore (USD 2.57 billion) for a PLI scheme to boost
the manufacturing of high- efficiency solar modules.
However, it is not that all the govt./regulatory decisions have been in the company’s favour. In FY2018,
the solar equipment industry was impacted by many tax increases.
Threats: Solar companies have been hit by several tax increases. From July 2017, developers have
had to pay 5% under the new GST regime on solar equipment, while some ports are charging an
additional 7.5% import duty on panels from abroad.
In fact, in FY2020, the company faced a strongly adverse regulatory environment and had to stop production
to avoid further losses.
The Company needed to address the reality of US Safeguard Duty on the export of solar cells and
modules from India, customs duty on imported solar energy equipment and the quantum of local
content in solar energy projects. In this challenging environment, the Company prudently selected
to stop manufacture…protected the Company from a larger financial burden.
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6) Continuous efforts by Websol Energy System Ltd to lower its operating

costs:
Due to continuous pressure on the pricing and demand of its products, Websol frequently reported losses
in its business. As a result, to strengthen its business, the company took many steps to reduce its operating
costs.
6.1) Increase the size of operations for the benefit of economies of scale:
One of the key strategies followed by solar equipment manufacturers globally is to increase their size so
that they can benefit from lower production costs due to economies of scale, which allows the spreading of
fixed costs over a larger number of units produced.
Websol Energy System Ltd also realized that in this intensely competitive industry where product prices
are on a very sharp declining trend if a company does not expand to reduce its operating costs, then it would
be very difficult for it to survive.
It is the management’s considered opinion that if it had not scaled its business, it would have
been marginalised in a business marked by rapidly increasing capacities. In effect, other faster-
growing companies would have achieved lower production costs and potentially out-priced the
Company…In staying small, the ability of the Company to absorb price declines would have been
lower, threatening its existence.
Therefore, Websol Energy System Ltd continuously attempted to increase its business size.
• In FY2003, it increased its manufacturing capacity from 2.5 MW to 5.0 MW.

• In FY2006, it increased the capacity to 10 MW.
• In FY2010, it increased its capacity further by 30 MW by installing a unit in Falta SEZ.
• In FY2011, it further increased its capacity to 60 MW.
• In FY2012, it increased its capacity to 120 MW
• In FY2017, the company increased its production capacity to 200 MW and
• In FY2018, it scaled its capacity to 280 MW.
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Moreover, currently, the company has scrapped its entire existing manufacturing capacity as its technology
has become obsolete and it is now expanding capacity to 1800 MW across multiple phases using the latest
technology (1,200 MW Mono PERC and 600 MW TopCON).
In addition to increasing its manufacturing capacity for lower costs, the company tried to improvise on the
process of capacity expansion to save on costs.
For example, in FY2003, when it expanded its capacity from 2.5 MW to 5.0 MW, it did not give a turnkey
contract to its foreign collaborator. Instead, it purchased critical equipment from abroad and then did the
fabrication of many equipment on its own and then implemented the expansion at a much lower cost.
company expanded its capacity (from 2.5MW to 5.0 MW) at a seventh of the original
cost?…we fabricated a number of our capital assets and complemented them with critical
imported equipment. This enabled us to reduce our project cost to the minimum
Moreover, the company improvised further on the utilization of space in its building and it could fit in the
plant with a manufacturing capacity of 10 MW in the space, which was originally supposed to fit in only
2.5 MW.
we succeeded in fitting a 10 MW capacity into a space originally designed for only 2.5 MW by
building vertically on our existing premises.
However, it seems that soon the company realized that its strategy of installing the manufacturing capacity
on its own is not working properly. Therefore, for its 30 MW expansion plan in 2008-2010, it handed over
a turnkey contract to Centrotherm Photovoltaics, a German company.
Centrotherm Photovoltaics has been entrusted the turnkey responsibility of commissioning our
expansion and accelerating the scale-up.
However, shortly after this unit was completed in FY2010, it suffered a major breakdown seriously
impacting the operations of the company.
Company has started the commercial production of its 30MW unit situated at Falta SEZ. However
a major break-down happened during the month of March and April 2010 thereby affecting
revenues of the last two quarters.
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6.2) Changes in raw material sourcing strategies:
Over the years, Websol Energy System Ltd has continuously faced challenges in sourcing raw materials.
At some times, it was sharply increasing the cost of raw materials and at other occasions, it was non-
availability of raw material.
The company had to scrap its existing machines with old technology and invest a large amount of money
in new technologies whenever the availability of raw materials became a challenge. For example, when it
shifted from recycled silicon technology to virgin-crystalline silicon technology in 2008-2010, one of the
reasons for the shift was scarcity of recycled silicon.
Company took a prudent call and decided to shift to a new technology as growing production
and accessing a larger quantity of recycled silicon wafers was not going to be sustainable.
However, on other occasions when the price of silicon wafers increased significantly, it took steps like
relying more on domestic suppliers instead of imported material, which could lead to saving in
transportation as well as storage costs.
60% of our raw materials are sourced from Gujarat, which translates to just a ten-day transit
period and a consequent reduction in working capital expenditure.
In the meanwhile, Websol Energy System Ltd also attempted to get into long-term sourcing agreements by
forming joint ventures (JV) with foreign suppliers.
To ensure a smooth supply of adequate quantity of Silicon Wafers, your Company has formed
a joint venture with Micro Power Trading Co. Pte Ltd, Singapore for the procurement of Silicon
Wafers under a contract entered into with the said Company for a period of three years
The company even envisaged backward integration and setting up a manufacturing plant under the
Singapore JV for slicing of silicon ingots.
A Joint Venture with M/s Micro Power Trading Co. Pte Ltd, Singapore during the year has been
formed for sourcing of Silicon Ingots and setting up a plant for slicing thereof to be used in the
manufacture of Silicon Wafers
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On other occasions, the company attempted to tweak the kind of raw material that it used so that it could
lower its manufacturing costs like relying on mono-like wafers focused on cheaper solar cells.
We ventured into the production of mono-like wafers, which are typically low-priced, to enter
the lower end of the market.
Company focused on reducing raw material costs by 10-15% through the use of alternative raw
materials.
The company also tweaked the quality of screens used in making solar modules, which helped in the
reduction of costs as it saved on the use of silver in the process.
Company upgraded the quality of screens used in manufacture. This helped moderate the
consumption of silver from 95 mg per wafer to 75 mg per wafer, generating savings of Rs1.5 crore.
Similarly, it used other strategies like using thinner silicon wafers (< 200 microns instead of 400 microns)
and reducing consumption of other chemicals to reduce production costs.
We fine-tuned process line equipment and tweaked operating practices to process thin
wafers (thickness below 200 microns from the previous 400 microns) using in-house
capability…We lowered the chemicals consumption, which enabled us to partially offset the
increase in raw material costs.
However, despite all these strategies to save on manufacturing costs over the years, Websol Energy System
Ltd found it difficult to compete with large overseas manufacturers who could sell their products at very
cheap prices. As a result, it had to repeatedly default to its lenders.
7) Changes in its delivery models in the business to stay relevant to

customers:
Over the years, Websol Energy System Ltd attempted to make many changes to its business model so that
it could provide more value to customers in order to stay relevant to the customer in light of intense
competition.
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For example, during FY2007 and FY2009, it set up offices across key markets in the USA and Germany
and planned to set up module assembly units in the US, Europe, Australia etc.
We have set up a representative office in Germany and United States
We expect to commission module installers across some of the key locations in the US, EU and
Australia, among others. We expect to ship the semi-knocked down unit (SKU) to these locations
from where the module will be assembled and despatched.
The company also attempted to create warehouses overseas and enabled just-in-time delivery of its products
to customers.
At Webel-SL, this service comprised the following: A just-in-time delivery helping international
customers manage their onward delivery, assembly and inventory costs.
Low transportation cost: The Company generated more than 95% of its revenues from exports
supported by warehouses in Europe to reduce logistics cost and accelerate product delivery.
The company even planned forward integration by becoming a solar farm-creating company.
we expect to evolve from a solar cell manufacturing company to one that is a cell manufacturing-
cum-solar farm-creating company…we intend to commission a solar farm by the end of 2012
It even attempted to create a retail business by selling smaller solar modules through outlets of Exide Ltd.
During the last year, we recognized that our long standing B2B business model, marked by
competitive pricing, would need to be adapted… to extend our focus from wholesale marketing to
wholesale-cum-retail marketing
The Company inked a contract with Exide to bolster retail revenues. Furthermore, the Company
is leveraging the widespread network of Exide to sell its own products at a fraction of the cost
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Websol Energy System Ltd also thought of becoming an engineering, procurement and construction (EPC)
company.
Company intends to enter the EPC segment of the business across the foreseeable future.
Nevertheless, when many attempts of the company to grow its business profitably were not working, it
started a contract manufacturing/tolling business for a Chinese solar equipment manufacturer where Websol
made cells and modules in the name of the Chinese company.
2011-12: Engaged in a tie-up with Renesola (China) for two years to produce cells and modules
in their name
8) Foreign exchange fluctuations have a serious impact on the company’s

business:
Websol Energy System Ltd’s business is highly exposed to foreign exchange fluctuations both related to
the Indian Rupee (INR) as well as, in the past, fluctuations between the US Dollar (USD) and Euro (EUR).
This is because, in the past, it used to rely entirely on imported raw materials as well as used to sell its entire
production to foreign customers.
we import all our raw material and export nearly all our production.
It was the same case for almost all Indian solar cell & module manufacturers as they chased higher product
prices in the export markets.
More than 70% of cells and 80% of modules manufactured in India are exported…Manufacturers
are mostly focused on export markets that buy SPV cells and modules at higher
prices thereby increasing their profits.
Websol Energy System Ltd’s excessive reliance on imports and exports exposed it to forex fluctuations. In
addition to fluctuations in INR with foreign currencies, it was also exposed to movements of USD-EUR as
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its raw material purchases (imports) were primarily billed in USD whereas its sales (exports) were primarily
billed in EUR.
Around 90% of the imports contracts are through Dollar and the rest in Euro. Whereas for exports
90% of the contacts are in Euro and the rest in Dollar
However, despite high forex exposure in USD and EUR currencies, it seems that the company’s hedging
strategy of entering into a forward contract for only a part of its exposure depending on its views about
favourable Euro movements did not prove successful.
Company enters into forward contracts to cover about 20-25% of the contract value when the
Euro is favourable.
This is because, on numerous occasions, the company suffered significantly due to forex fluctuations. For
example, in FY2012, Websol Energy System Ltd suffered a large forex loss of ₹60 cr.
Volatility in foreign exchange affected profitability with the result that we suffered a forex loss of
₹60 cr in 2011-12.
Similarly, in multiple years, the company’s sales and profit margins suffered due to adverse forex
fluctuations. Considering large forex losses as well as declining competitiveness, in recent years, Websol
Energy System Ltd has changed its entire business model from exports to domestic sales.
Company derived 100% revenues in FY2021-22 from within India
Nevertheless, despite such domestic focus, the company is still exposed to forex movements because even
in the domestic market, solar cells and modules are priced as per the landed cost of imports as well as
imported raw materials.
with the focus on domestic market, the domestic finished goods pricing will be based on the prices
of imported raw materials
Therefore, Websol Energy System Ltd comes across a company that is a market follower in technology and
due to modest financial strength has suffered significantly in competition from international large solar cell
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and module manufacturers. The company had tried hard to stay profitable by making changes in its business
model, raw material sourcing, products etc. However, it has suffered significantly due to rapid technological
and regulatory changes leading to financial losses, asset write-offs as well as defaults to lenders.
Currently, it is in the middle of another large change where for the last 1.5 years, it has been upgrading its
plant to new technology by scrapping its existing machinery. An investor should monitor whether it can
complete the project within time and budget and if it can sell its goods profitably to justify the investment.
Before opting for the new tax regime in FY2020, the tax payout ratio of Websol Energy System Ltd was
very low, almost nil up to FY2019. The major reason for the low tax payout ratio was accumulated losses
of about ₹379 cr during FY2012-FY2016 and minimum alternate tax (MAT) credits.
For example, in FY2017 and FY2018, the company reported a very low tax payout because almost all the
tax liability was set off against brought-forward losses in FY2017 and against MAT credits in FY2018.
However, since FY2020, the company has shown a tax payout ratio in line with the recent changes in the
corporate tax rates implemented by India.
Company has elected to exercise the option permitted under section 115BAA of the Income-tax
Act…Consequently, MAT Credit-Deferred Tax Asset lapsed
Also read: Deferred Tax Assets, Tax Payout (P&L vs. CFO): Queries Answered
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Operating Efficiency Analysis of Websol Energy System Ltd:
a) Net fixed asset turnover (NFAT) of Websol Energy System Ltd:
The net fixed asset turnover (NFAT) of Websol Energy System Ltd in the past years (FY2013-21) has
declined from 1.2 in FY2015 to 0.9 in FY2022 (the last full year of operations of plants). In addition to the
declining trend, an investor may also note that the NFAT of about 1 is low indicating a capital-intensive
business model.
business of solar PVC manufacture is capital-intensive
Due to the capital-intensive business model, the company required a lot of money to run and expand its
business. In addition, the company has made significant losses in the past indicating that its business has
not produced sufficient resources to fund its capacity expansions. As a result, the company could not pay
back its debt and was declared defaulter/NPA by its lenders.
In recent times, lenders took over its assets and sold them to recover their loans.
The Working Capital borrowing accounts of the Company continue to remain NPA…Allahabad
Bank…has taken symbolic possession of the Salt Lake land which was given as collateral security
Going ahead, an investor should keep a close watch on the progress of the currently under-implementation
project and see if the company can generate sufficient money from its profits to repay its debt taken from
IREDA on time.
b) Inventory turnover ratio of Websol Energy System Ltd:
Operations of Websol require a lot of investment in working capital. One of the reasons is a large inventory
requirement because in the past it needed to stock imported raw materials for the smooth running of its
operations. In addition, a long production cycle of solar cells and modules also requires a lot of investment
in working capital.
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The necessity to maintain a sizeable inventory of imported raw material to avoid disruption of the
operations…the need to maintain a stock of a diverse product range till they achieve the
economical level (container load) for exports…A production cycle of 120 days starting from raw
material purchase to sales receipts
business became progressively working capital- intensive as the year progressed on account of the
Company’s need to accumulate raw material
Another reason for the large inventory requirement of the company was its inability to secure a stable source
of sufficient quantity of raw material. The prices of silicon wafers fluctuated significantly and it faced
serious difficulties in securing supplies to the extent that it had to discard existing machinery and technology
when it could not get raw material supplies.
As a result, to secure supplies, it had to pay its suppliers in advance, which made its operations further
working capital intensive.
we are now making advance payments to secure our raw material availability.
At times, its operations suffered a breakdown, which led to the accumulation of inventory at its plant.
Also, during March-April 2010, the manufacturing activity was disrupted due to frequent
breakdowns accounting for higher inventory levels.
In FY2012, the working capital condition of the company had deteriorated to such an extent that it could
not even do business and had to deny orders. It faced inventory losses.
Despite rising demand, the Company had to deny orders because of absence of adequate working
capital. We expect inventory losses to stabilise by 2012-13
On other occasions, it was stuck with a large inventory when customers deferred picking up the orders.
Increase in the inventory turnover ratio was mainly on account of large inventory in the form of
modules which was not lifted by the customer.
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An investor would appreciate that if a company ends up keeping a large inventory, then there is a higher
probability that some of it will turn obsolete and will need to be written down.
Websol Energy System Ltd had to write down its inventory in FY2023.
Q4-FY2023 results, May 2023, page 9:
Exceptional items includes write down of inventory
Therefore, it seems that inventory management by Websol Energy System Ltd left a lot of scope for
improvement. Going ahead, an investor should monitor the inventory management of Websol Energy
System Ltd so that she can assess whether the company is utilizing its inventory efficiently or not.
This is important when an investor notices that, currently, the operations of the company are completely
stopped and the plant in which production will happen is still under construction; however, as per the
FY2023 annual report, the company has already stocked silicon wafers, silver paste and aluminium paste
even before it could get the loan from IREDA for the plant in May 2023.
To secure the uninterrupted flow of manufacturing lines, the Company acquired 2.29 Million
silicon wafers, 302 kg of silver paste, and 3790 kg of aluminum paste.
c) Analysis of receivables days of Websol Energy System Ltd:
Websol Energy System Ltd faced challenges in collecting its receivables. Originally, it used to rely mainly
on govt. orders, which led to delays in collections.
In India, the renewable energy industry’s long payment cycles are a result of the influence and
control of the Government.
As a result of long delays in payments, the company had to write off its receivables.
During 2003-4, we strengthened our balance sheet through a one-time write-off of bad debts
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To save on such bad debt, the company attempted to shift its business model from supplying directly to
govt. agencies, to now supplying to the contractors/integrators to govt. agencies in the hope that these
contractors being private parties will clear payments faster.
The company sells its products to these integrators as opposed to direct sales to government
agencies. This has enabled the company to enhance the quality of its income and turn around its
working capital faster
However, even after many years, the company still had challenges in collecting receivables on time. In
FY2015, the company was facing a lot of difficulties in collecting money from customers. In comparison
to the total sales of the company for FY2015 (₹356 cr), it had about 55% (₹195.5 cr) receivables
outstanding. Out of these receivables, about ₹107 cr were more than 6 months overdue and out of these ₹37
cr were overdue for more than a year.
Trade Receivables outstanding for a period exceeding twelve months: ₹37.7 cr.
Trade receivables outstanding for a period exceeding six months but upto twelve months from the
date they became due for payment: ₹69.6 cr.
Trade receivables outstanding for a period less than six months from the date they became due for
payment: ₹88.2 cr.
Looking at such difficulties in collecting money, it is no surprise for an investor to note that during this
period, the company was declared an NPA by its lenders and they had to take losses on their loans and had
to sell its assets to recover money.
Going ahead, an investor must keep a close watch on the receivables position of the company.
Therefore, Websol Energy System Ltd has a working capital-intensive business where it has large inventory
requirements and significant outstanding receivables. It also faces a write-down of inventory and
receivables (bad debt).
The Margin of Safety in the Business of Websol Energy System

Ltd:
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of a Company
target growth.
Where,

While analysing the SSGR of Websol Energy System Ltd, an investor would notice that over the years, the
company had a negative SSGR primarily due to loss-making operations and low net fixed asset turnover.
As a result, over the years, the company had to raise debt from lenders as well as raise money by diluting
equity from shareholders to fund its business requirements. Due to the inability of the business to generate
sufficient cash, it defaulted to its lenders and its shareholders (existing and new) had to repeatedly infuse
money into the company.
Over the years, there have been many occasions where it first raised loans from entities and then converted
them into equity shares.
Company issued Equity Shares of Rs. 203.32 lacs towards convertion of Unsecured Loans
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In FY2008, it raised about ₹120 cr by way of issuing global depository receipts (GDR: ₹54.4 cr) and foreign
currency convertible bonds (FCCBs: ₹66.3 cr).
Company funded its Rs. 186-cr expansion project through the issue of 11,183,330 GDRs (worth
Rs. 544 million) at USD 1.20 each, promoters’ contribution of Rs. 68.29 million and the issue
of FCCBs worth Rs. 663 million.
In FY2010, the company again raised about ₹75 cr by way of qualified institutional placement (QIP: ₹45.4
cr) and warrants (₹30 cr).
During the year under review your Company has raised capital of Rs.45.40 cr. by way of QIP and
further Preferential Warrants, convertible into equity shares, was also issued to the Promoter and
Strategic Investor, amounting to Rs.30.00 cr.
In FY2011, the company raised about ₹25 cr from related parties by way of unsecured loans.
taken unsecured loans from four companies as covered in the register maintained under section
301…the balancing outstanding as at the date of the balance sheet was ₹2503.73 Lacs.
In FY2022, Websol Energy System Ltd raised ₹6 cr by issuing warrants to its promoter.
Company has also issued convertible warrants for an aggregate amount of ₹600.00 lakhs to one
of its promoter on preferential allotment basis which were later on converted into 15,00,000
Equity Shares of the Company
In FY2023, the company allotted further shares to the promoter by converting its unsecured loan of about
₹11.75 cr and to an investor for ₹11.5 cr.
Corporate announcement at BSE, Nov. 2, 2022:
conversion of outstanding loan amount of upto Rs. 11,74,91,040/- by the Promoter allottee i.e.,
M/s. Websol Green Projects Private Limited and further infusion of funds of Rs. 11,54,52,000/- by
the other allottee i.e., M/s. India Max Investment Fund Limited, the Board of Directors in their
meeting held on today, i.e, 02.11.2022, have approved and allotted
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In Oct. 2023, Websol Energy System Ltd allotted shares for conversion of the loan of about ₹14.66 cr by
promoters and further equity infusion of about ₹23.52 cr by other investors.
Corporate announcement at BSE, Oct. 17, 2023:
conversion of outstanding loan amount of upto Rs. 14.66 crores by the Promoter allottees i.e., M/s.
Websol Green Projects Private Limited and M/s. S.L. Industries Private Limited and
further infusion of funds of Rs. 23.52 crores by the other allottees
Therefore, until now, the business of Websol Energy System Ltd has not shown any fundamental strength
to generate resources to meet its funding requirements. The company raised loans from banks and other
financial institutions, which it could not repay. As a result, the lenders had to accept losses, do one-time
settlements, and sell its properties to recover loans.
Therefore, lenders became cautious and hesitant to fund Websol Energy System Ltd, which left equity
dilution and unsecured loans from promoters as a major source of funds for the company and over the years,
it has had numerous rounds of equity dilution.

Additional aspects of Websol Energy System Ltd:

On analysing Websol Energy System Ltd and after reading annual reports, its credit rating reports and other
1) Management Succession of Websol Energy System Ltd:
Websol Energy System Ltd was originally promoted by West Bengal Electronics Industry Development
Corporation Limited (WEBEL) and Mr S L Agarwal in 1991 as WEBEL-SL Energy Systems Ltd. Later
on, in 2000, WEBEL sold its stake in the company to Mr SL Agarwal.
WEBEL-SOLAR was jointly promoted by Webel, a West Bengal state government

organisation, and S L Agarwal in 1991…In 2000, the former divested its stake in favour of the
latter.
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In FY2009, the company changed its name to Websol Energy Systems Ltd and thereafter, in FY2012, it
changed its name to Websol Energy System Ltd (from Systems to System).
Currently, Mr S L Agarwal (age 77 years) is the chairman and managing director of the company and last
year, his granddaughter, Ms. Sanjana Khaitan (age 26 years) joined the company as executive director and
CFO of the company.
The presence of younger family members in executive positions within the group, while the senior member
is still handling responsibilities, looks like a good succession plan. This is because the young member can
learn about the fine nuances of the business under the guidance of a senior member until the senior decides
to retire.
2) Remuneration of promoters of Websol Energy Systems Ltd:
In the past, there have been occasions when promoters of the company took a higher remuneration even
though the performance of the company was not great.
For example, during FY2012 to FY2016, the company reported continuous losses. In fact, during these 5
years, the company reported a net loss of about ₹379 cr and it was defaulting to its lenders. However, during
FY2015, the promoter of the company took a remuneration hike of 119% from ₹21.04 lac in FY2014 (page
10 of the annual report) to ₹46.16 in FY2015 (page 17 of the annual report). )Please note that there is a
totalling error in this table done by the company in its annual report, which we have highlighted later in this
article).
In FY2018, sales of the company had declined by about 38% from ₹296 cr in FY2017 to ₹183 cr and the
net profit of the company declined by about 93% from ₹79 cr in FY2017 to about ₹5 cr in FY2018.
However, in FY2018, the promoter took home a higher remuneration by 68% i.e. a remuneration of ₹64.02
lac (page 42 of the annual report) vs. ₹37.92 lac in FY2017 (page 30 of the annual report).
In FY2022, the net profit of the company declined about 80% from ₹49 cr in FY2021 to about ₹10 cr in
FY2022. However, the promoter’s remuneration by 66% from ₹86.25 lac in FY2021 (page 77 of the annual
report) to ₹129.51 lac in FY2022 (page 75 of the annual report).
An investor may also remember from the above discussion that these were the times when due to suboptimal
performance of the company, it was defaulting to its lenders due to nonpayment of dues.
In FY2023, the company reported a net loss of ₹24 cr because it decided to scrap all its existing plant &
machinery and started building a new plant with new technology by taking a loan from IREDA and equity
dilution. Therefore, in the last 12 months (Oct. 2022 to Sept. 2023), it did not report any operating income.
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However, in FY2023, the promoter’s remuneration increased further to ₹132.45 lac (page 150 of the annual
report).
Moreover, in the 2023 AGM of the company, it got approval for the appointment of the promoter’s 26-
year-old granddaughter as executive director for a salary of ₹1 cr per annum and there might be other
perquisites as decided by the board.
Salary: She shall receive a remuneration upto maximum of Rs. 1,00,00,000/- p.a.
Perquisite: For such amount as may be decided by the Board of Directors.
An investor may arrive at her own conclusion about this remuneration by considering the current size and
financial performance of the company and the experience/profile of the executive director.
Also read: How to identify Promoters extracting Money via High Salaries
3) Related party transactions of Websol Energy Systems Ltd with promoter

group:
Over the years, the company has entered into multiple transactions with the promoter group as well as with
others for the benefit of promoters.
For example, in the corporate announcement to BSE on April 3, 2023 (click here), the company disclosed
that it has provided a comfort letter for securing a loan against property taken by the company’s promoters
from LIC Housing Finance Ltd i.e. almost a guarantee to LICHFL that if the promoters are not able to repay
the loan, then the company will help repay them the loan to LICHFL.
Websol Energy System Limited (“the Company”) at its board meeting held on 3rd April, 2023 has
provided comfort letter in favour of LIC Housing Finance Limited for securing the loan against
property availed by Company’s promoters from LIC Housing Finance Limited.
In the FY2023 annual report, pages 148 and 149, the company disclosed that the letter of comfort is for
₹5.9 cr and are issued on behalf of Mrs Raj Kumari Agarwal who is the wife of promoter Mr S L Agarwal.
In FY2012, the company gave a loan to one of its related parties i.e. companies covered under section 301.
However, it seems that the borrowing company did not repay its loan and as a result, Websol Energy
Systems Ltd had to file a case in its efforts to recover the money.
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The Company has, during the period under report, granted unsecured loan to one party covered
under section 301 of the Companies Act, 1956…The receipt and payment of principal and
interest has not been regular as per terms of the loan given and taken. In case of loan given,
the company has initiated legal course.
An investor is intrigued that when the company’s own financial position is fragile that it from FY2012 to
FY2016, it continuously reported large losses and then defaulted to lenders and is making its ends meet by
raising money from debt and equity dilution, then why it is giving loans and guarantees/comfort letters for
promoters and other companies.
4) Most of the partnerships formed by Websol Energy Systems Ltd did not
last:
Over the years, the company entered multiple partnerships, business arrangements, joint ventures etc.
However, most of them did not survive with some breaking apart within a year.
4.1) Solar Energy Power Pte Ltd, Singapore:
In FY2006, the company invested in Solar Energy Power Pte Ltd (SEPPL), Singapore as a part of a joint
venture agreement to manufacture solar cells in Singapore and acquired a 49% stake in the company. It
seems that SEPPL even started commercial production from its unit. However, within a few months, in
June 2006, Websol Energy Systems Ltd got out of the joint venture.
Company deployed Rs 1.35 cr in a strategic investment to acquire a 49% stake in the Singapore-
based Solar Energy Power Pte Ltd., a joint venture agreement to manufacture solar energy cells
in Singapore. Following commercial operations in 2005-06, the Company decided to exit the
venture and focus completely on its Indian operations. In view of this, the Company disinvested its
complete stake in the joint venture in June 2006
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4.2) Micro Power Trading Co. Pte Ltd, Singapore:
In FY2008, Websol Energy Systems Ltd entered into a JV agreement with Micro Power Trading Co. Pte
Ltd (MPTCPL), Singapore for a long-term supply arrangement of silicon wafers for 3 years. The company
made a significant investment including equity, loans and advance payments to MPTCPL.
A three year contract has been entered into with the said M/s Micro Power Trading Co. Pte Ltd,
Singapore for supply of Silicon Wafers against which an amount of Rs.1,935.07 Lacs has been
paid as advance deposit.
However, within two years, in FY2010, Websol Energy Systems Ltd cancelled the JV and called back its
investment.
A Joint Venture with M/s Micro Power Trading Co. Pte Ltd, Singapore formed during the year
2008 for sourcing of Silicon Ingots/ Wafers has since been withdrawn and the Company
has initiated steps to call back the investment made in the Joint Venture.
4.3) Joint venture in Germany, Websol Energy System Europe KG:
In FY2012, the company made a joint venture in Germany, Websol Energy System Europe KG. However,
it cancelled the JV within FY2012 itself i.e. within a few months.
has investment in a Joint Venture situated in Germany during the period under report…The Joint
Venture has been called off prior to the date of the balance sheet
The company could not recover its investment in the JV and as per the FY2018 annual report, pages 74 and
75, it had to write off its investment in the JV.
4.4) Contract with Exide Industries Ltd to sell products to retail customers:
In FY2018, Websol Energy Systems Ltd entered a contract with Exide Industries Ltd to sell its products
via retail outlets of Exide.

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The Company inked a contract with Exide to bolster retail revenues. Furthermore, the Company
is leveraging the widespread network of Exide to sell its own products at a fraction of the cost
However, in the FY2021 annual report, the company intimated that the relationship with Exide has turned
bad and Exide has filed a case against the company. Also, it had to create a charge on its raw material and
Falta SEZ unit in favour of Exide to guarantee its performance obligations.
Contingent liabilities: Includes Rs 214.20 lakhs against claim of Exide Industries Ltd (to the extent
for which provision has not been made in the books) against an outstanding litigation.
Charge created for Rs 3000.00 lakhs over raw material and fixed assets lying at manufacturing
unit at Falta for performance obligation of an agreement entered into with Exide Industries Ltd
After multiple failed business arrangements and joint ventures, in FY2023, the company entered a new JV
with AMP Energy India Private Limited, Canada in which it plans to hold 51% and produce solar cells and
modules at its unit in Falta.
BSE announcement, Sept 7, 2022:
joint venture agreement executed with AMP Energy India Private Limited dated 31st August, 2022
Parties to undertake production of up to 1.2 GW of monocrystalline PERC solar cells and up to 1.2
GW of mono PERC modules
proposed shareholding in the new joint venture will be Company- 51% and AEI- 49%
AEI to offtake 50% of the production; 50% production to be sold in the market
An investor may contact the company directly to know the updated status of this JV and monitor its progress
closely in light of the very short life seen by its past joint ventures.
5) Weakness in the internal processes and controls of Websol Energy

Systems Ltd:
While reading the annual reports of the company, an investor notices numerous aspects that show a
weakness in the internal controls and processes of the company.
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5.1) Noncompliance with regulatory guidelines:
On multiple occasions, Websol Energy Systems Ltd did not comply with regulatory guidelines. For
example, in FY2016, the promoter of the company, Mr S L Agarwal faced the threat of being disqualified
as a director when the company did not convert its FCCBs, which matured in Feb. 2012 and were to be
converted by Nov. 2012 i.e. had a delay of more than 3 years. The auditor of the company highlighted this
issue in its report in the annual report.
Foreign Currency Convertible Bonds (“FCCBS”) which were to be redeemed or converted into
Equity Shares in the Company by November, 2012, but, due to fall in market price of Company’s
shares, the same were neither converted nor were redeemed and are still outstanding. Among the
then Directors, only Managing Director is still on the Board.
regards to disqualification of director (Mr Sohan Lal Agarwal), we hereby clarify that company
has already applied for RBI approval for conversion of the liability of FCCB holder into equity
shares of the company
Later, the company got the approval to redeem/convert the FCCBs into equity shares by May 1, 2021.
In FY2022, the company was non-compliant with many regulations, like it did not have the required 6
directors on the board for a part of the year, did not have a Chief Financial Officer (CFO) for a part of the
year, did not have a succession plan in place, did not maintain a digital database of certain people as
demanded by Securities and Exchange Board of India (SEBI).
The Board of Directors of the listed Company (top 2000) did not have 6 directors on the
Board from 2nd November, 2021 to 24th March, 2022, during the period under review
Company has not appointed Chief Financial Officer from 2nd November, 2021 to 31st March,
2022 during the period under review.
company has not drawn an orderly succession plan for the appointment to the Board of Directors
& Senior Management.
Board of Directors has not ensured that a structured Digital database is maintained comprising
of the names of such persons or entities as the case may be with whom information is shared under
the SEBI (PIT) Regulations.
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Subsequently, in the secretarial audit report released by the company to BSE on May 29, 2023 ( click
here), the practising company secretary (PCS) made multiple observations about the compliance status of
the company, like:
• The company has been advised to upgrade the standards of compliance (page 3)
• BSE issued an email on 11th March 2023 for non-submission of information required under
Regulations 46 and 62 of SEBI (LODR) Regulations 2015 on the BSE Listing Centre (page 4)
• Noncompliance with Regulation 32(1) of SEBI(LODR) Regulations, 2015 has been observed.
(page 5)
In addition, the auditor also highlighted that both stock exchanges (BSE and NSE) had put a penalty on the
company of ₹70,800/- each on the company as it did not have the required minimum 6 directors during the
year, which had violated SEBI (LODR) Regulations, 2015 (page 9).
Moreover, after a couple of months, when Websol Energy Systems Ltd released the annual report of
FY2023, the secretarial audit report contained in the annual report (pages 80 and 81 of the FY2023 annual
report) did not have any of these observations.
An investor may contact the company directly to understand the reasons why the observations about
noncompliances, which were a part of the secretarial audit report for FY2023 released by the company on
May 29, 2023, to BSE (click here), are not included in the annual report.
5.2) Poor maintenance of fixed assets records and supervision:
The company did not make proper supervision and records of its fixed assets.
Fixed Assets records of the Company are incomplete and are being currently updated
Even after 12 years, in FY2011, the fixed assets records of the company were incomplete.
Finally, in FY2012, Websol Energy Systems Ltd reported that its fixed asset records were proper.
The company is maintaining proper records showing full particulars, including quantitative
details and situation of fixed assets.
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However, from the very next year, FY2013, the fixed assets records of the company again became
incomplete.
In FY2016, the fixed asset records were still incomplete; however, Websol Energy Systems Ltd appointed
an external agency to help in maintaining its records.
company has appointed a firm of professional accountant to update the pending records of fixed
assets with the physical records
In respect of the Company’s fixed assets: (a) The records maintained by the Company are
incomplete and currently being updated
However, even after the next 3 years, the records were still incomplete and the auditor highlighted that it
could not guarantee whether there were discrepancies in the fixed assets as per records and the actual assets
on the ground.
physical verification of Fixed Assets is in progress. Therefore, we could not comment on

discrepancies, if any between the book records and the physical fixed assets.
In fact, in the FY2019 annual report, the statutory auditor of the company highlighted there are mistakes
about the depreciation calculation on fixed assets.
Company undertook reconciliation of its fixed assets as per books and as per fixed assets register
in 2017-18 and found mistake in calculation of depreciation i.e. the same was found to be
overcharged in the books of accounts in earlier years.
Fixed asset records stayed incomplete until FY2020 and then in FY2021, the auditor reported that the fixed
assets records are now complete.
The Company has maintained proper records showing full particulars including quantitative
details and situation of its fixed assets
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Considering the continued weakness on the part of the company to maintain records and verification of
fixed assets, an investor is concerned to note that the company had repeatedly written off and scrapped its
fixed assets citing that they have become obsolete/useless.
An investor thinks that Websol Energy Systems Ltd could have done a better job with the
records/monitoring of its fixed assets over the years.
5.3) Lack of a formal internal audit system:
For a significant part of the company’s history, Websol Energy Systems Ltd did not have a formal internal
audit system, which is a significant weakness.
Company does not have a formal internal audit system.
Until FY2010, the company did not have an internal audit system.
The Company does not have a formal internal audit system.
In FY2013, for the first time, the company appointed an external agency to conduct its internal audit.
With effect from 1st April 2012 an external entity has been appointed as the Internal Auditor of
the company and their first report is yet to be submitted
In addition, there have been numerous instances where the company did not pay its undisputed statutory
dues on time indicating either laxness in meeting its obligations or liquidity crunch that it could not generate
money even to pay its undisputed statutory dues.
In FY2023, the company used funds from short-term sources for long-term purposes, which usually is one
of signs of liquidity stress in the company and may lead to cash flow mismatches in the future.
company has used funds raised on short term basis aggregating to Rs. 200.00 Lakh for long-
term purposes.
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On multiple occasions, the auditor of the company could not independently verify the amounts due to
suppliers, due from customers and the amount of advances from customers shown by the company in its
financial statements.
FY2016 annual report, page 30
EMPHASIS OF MATTERS: We draw attention to the matter that the confirmations in respect of
balances of Sundry Debtors, Sundry Creditors and Advances from respective parties have not been
received in all cases.
confirmations in respect of balances of Sundry Debtors, Sundry Creditors and Advances from and
to various parties have not been received
confirmations in respect of balances of Sundry Debtors, Sundry Creditors and Advances from and
to various parties have not been received in all cases.
Investing?
5.4) Errors/discrepancies in the data presented in the annual reports of

Websol Energy Systems Ltd:
Across many annual reports of Websol Energy Systems Ltd, there are numerous instances where data
presented by the company has errors like totalling in tables, repetition of paragraphs, copying & pasting of
data from older reports without updating the data for the current year, providing information
unrelated/nonrelevant to the particular section etc.
For example, in FY2015 annual report, on page 17, in the section “Remuneration to Managing Director,
Whole-time Directors and/or Manager”, the company mentioned that the total remuneration of MD, Mr S
L Agarwal is ₹2,206,771.00, whereas if an investor totals the items under 1 (a) 972,000.00 + 1 (c)
972,000.00 + (5) 2,672,771.00, then it comes out to be ₹4,616,771/-
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In the FY2023 annual report, while discussing the mitigants to the technology risk faced by the company,
instead of detailing how it prevents its technology from becoming obsolete, the company wrote about its
internal audit system and how it ensures compliance with regulations.
In FY2023, the company’s production was only 12MW, a decline of 94% over FY2022 as it reported sales
of ₹17 cr in FY2023 against sales of ₹213 cr in FY2022 and reported a loss of ₹24 cr in FY2023 against a
profit of ₹10 cr in FY2022. However, an investor is intrigued when she notices that the company has termed
its performance in FY2023 as “impressive.”
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In the secretarial audit report of Websol Energy Systems Ltd, the auditor has continuously stated from
FY2018 to FY2021 that in every year, the company issued ₹47,02,667 equity shares on conversion of
FCCBs whereas during those years, the number of shares issued by the company in each year were different.
We further report that during the audit period the Company has issued 47,02,667 equity shares in
lieu of conversion of FCCB’s
An investor notices that in each of these 4 years (FY2018-FY2021), the secretarial auditor mentioned in its
report that Websol Energy Systems Ltd issued 47,02,667 shares by converting FCCBs. While reading the
annual reports in detail, the investor found out that only in FY2018, the company issued 47,02,667 shares
by converting FCCBs. After that each year, it issued a different number of shares.
For example, in FY2019, it issued 23,51,334 shares by converting FCCBs.
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The Company had Foreign Currency Convertible Bonds (‘FCCBs’) amounting to US$ 12.00
million, out of which FCCBs of the value US$ 2.14 million has been converted into 23,51,334
Equity Shares of the Company during the year
In FY2020, the company issued 15,67,556 shares by converting FCCBs.
million, out of which FCCBs of the value US$ 1.43 million has been converted into 15,67,556
Equity Shares of the Company during the year as per the rates approved by regulators and
shareholders.
In FY2021, the company issued 5,48,645 shares upon conversion of FCCBs.
Million, out of which FCCBs of the value US$ 0.50 Million has been converted into 5,48,645
Equity Shares of the Company during the year as per the rates approved by regulators and
shareholders
Therefore, an investor is perplexed to see that the secretarial auditor’s report has just copied and pasted data
from previously issued reports without verifying the important actual developments regarding the issuance
of equity shares. Moreover, it seems that no one at the company could check this error before approving
the annual reports for publishing and releasing them in the public domain.
We believe that the company and the secretarial auditor, both, leave room for improvement in their internal
controls and processes like maker-checker controls.
Similarly, in the FY2021 annual report, on page 39, the company highlighted that it has deleveraged and
that it has a whopping “₹1,271 cr” of long-term debt on its books.
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An investor is intrigued to see that in the financial statements for FY2021, Websol Energy Systems Ltd has
disclosed a total debt of about ₹35 cr, which is after defaulting and restructuring with lenders who had to
sell its properties to recover their money. Also, during these years, the company highlighted that it could
not pay its undisputed statutory dues on time because it did not have any banking facilities.
Therefore, it seems that the data of ₹1,271 cr of debt on Websol Energy Systems Ltd in the FY2021 annual
report, seems an error, which the company did not rectify before publishing the annual report.
On similar lines, in the FY2023 annual report, the company allotted 21,56,880 shares to Websol Green
Projects Private Limited (10,87,880 shares on conversion of its loan) and India Max Investment Fund
Limited (1,069,000 shares for fresh investment/cash).
However, the table in which the company disclosed this information contained a heading for some data
about disputes of the company related to statutes and the forum where the dispute is still pending.
In the above incident also, it seems that the company overlooked the rectification of such errors before
publishing the annual report in the public domain.
There are more instances in the annual reports indicating a lack of oversight like in the FY2019 annual
report, on page 10, it forgot to write the actual data of net worth, cash balance and debt. Instead, it just
mentioned square brackets [ ].
After looking at multiple instances of trivial errors in the presentation of information in the annual reports,
an investor is left wondering whether she should be sceptical of the information provided in the company’s
annual reports as even the auditors’ reports are found copying and pasting data from old reports without
verifying the real developments in the audit period.
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5.4.1) Showing interest payment as an outflow under CFO instead of CFF:
In its annual report, from the earliest available annual report of FY1997 to FY2017, Websol Energy System
Ltd has included interest paid as an outflow under cash flow from operations (CFO) instead of the usual
practice of showing interest payments as an outflow under cash flow from financing activities (CFF).
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From FY2018, the company has shown interest paid as a cash outflow under cash flow from financing
activities.
An investor may contact the company directly to understand the reasons why it classified interest payments
under cash flow from operations from at least FY1997 to FY2017.
6) Certain business decisions of Websol Energy System Ltd:
An analysis of the annual reports of the company brings the following decisions undertaken by the company
to the notice of the investor.
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6.1) Very frequent back-to-back multiple changes in the financial year:
Apart from a few changes in its name, the company made frequent changes in the length of its financial
year as well.
The company reported FY2010 with a 15-month duration i.e. from April 2009 to June 2010. The very next
year, FY2011, the company reported the financial year of 9 months i.e. July 2010 to March 2011. The very
next year, FY2012, the company reported results for 15 months i.e. April 2011 to June 2012. Once again
in the immediate next year, FY2013, the company reported financials for 9 months i.e. July 2012 to March
2013.
An investor may contact the company directly to understand the reasons for such rapid back-to-back
changes in the length of the financial year.
6.2) Large nonoperating/other income reported by the company in FY2017

and FY2021:
In FY2017, Websol Energy System Ltd reported a nonoperating income of about ₹71 cr and in FY2021,
the company reported a nonoperating income of ₹60 cr. These amounts are large as they contributed
significantly to the net profits of ₹79 cr and ₹49 cr in FY2017 and FY2021 respectively.
In FY2017, the nonoperating income of ₹71 cr constituted primarily the benefit that the company received
during the one-time settlement (OTS) with the lenders and with FCCB investors only for their interest
portion and forex changes, which it recognized in the profit & loss statement.
Income From waiver of Interest and Exch Fluctuation from bank settlment and FCCBs Settlement:
₹7,091.10 lac
So, this gain reported by the company was primarily the loss accepted by the lenders and FCCB investors.
An investor may note that the above-mentioned amount is only related to the interest forgone by lenders
and investors. Additionally, the lenders and FCCB investors also faced a big loss on their principal amount
of about ₹188 cr, which the company recognized as a benefit directly on its balance sheet.
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In FY2021, Websol Energy System Ltd reported a nonoperating income of ₹60 cr out of which a major
component was ₹69 cr of sundry balances that it wrote back, which were otherwise payable to other parties
for trade payables and borrowings. It means that this ₹69 cr was originally to be paid by the company to its
various suppliers and lenders; however, now, it no longer has to pay these and therefore, it is reported as an
income in the P&L statement.
Sundry baalnces written back amounting to Rs 6909.76 includes various credit balance, those
were payable to various parties for trade payables and borrowings.
Even in the other years, the company has reported similar nonoperating income by writing back its sundry
balances, which otherwise it had to pay to other parties, which ultimately it determined that it is not going
to pay.
For example, in FY2013, it wrote back sundry balances of ₹7.38 cr (page 35 of the annual report).
In FY2018 and FY2019, the company again wrote back sundry balances of ₹5 cr and ₹13.75 cr respectively.
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Therefore, an investor would note that over the years, some of the large contributions to the company’s
reported profits are writebacks of interest expenses, sundry balances i.e. the money it had to pay to others
etc. and it ended up not paying them.
The Margin of Safety in the Market Price of Websol Energy System

Ltd:
Currently (December 18, 2023), Websol Energy System Ltd has made losses of ₹21 cr in the last 12 months
(Oct. 2022-Sept. 2023). Therefore, any price-to-earnings (PE) ratio is meaningless for its valuation.
We generally use the PE ratio to find the margin of safety in the purchase price as described by Benjamin
Graham in his book The Intelligent Investor.
stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price
Analysis Summary
Overall, Websol Energy System Ltd seems a company that has struggled to keep up with the rapid advances
in technology in the solar cell and module manufacturing industry. Due to rapid changes, time and again,
its technology kept becoming obsolete forcing it to abandon its existing plant & machinery, scrap it and
then invest in expensive new technology.
Such repeated instances of starting with new technology from scratch demanding large investment as well
as intense, cut-throat, price-based competition from very large foreign players had almost priced out Websol
Energy System Ltd from the market on multiple occasions. The company does not seem to have a
As a result, on many occasions, the company had to completely shut down its manufacturing operations to
save on losses. Even now, the company has scrapped its plant that made solar cells from multi-crystalline
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silicon and is installing a new plant based on new technology, which has led to a complete shutdown of its
operations for almost the last 6 quarters.
The company attempted to deal with rapid technological advances and a sharp decline in prices of solar
cells and modules by making many changes in its products and processes including raw material sourcing.
It tied up with multiple Indian and foreign universities and technocrats; however, it could not avoid losses.
Overall, since FY1997, the company had a cumulative loss of about ₹250 cr until FY2023.
Due to weak financial performance, the company has multiple times defaulted to its lenders, in the past, it
was reported to BIFR, entered a one-time settlement with lenders and the lenders had to accept losses on
their loans, which the company reported as “nonoperative income” and an increase in capital reserves.
The company is highly dependent on govt. regulations and policy decisions for its business, like anti-
dumping duty on cheaper imports, incentives to renewable energy, and mandatory domestic content
requirements in solar power plants being installed in India. Its business was impacted when US-China had
a trade war and Chinese companies flooded global markets with their excess production. It was affected
when the US and India had a trade war and the USA took India to the World Trade Organization against
Indian domestic content policy.
Websol Energy System Ltd tried to become a subcontractor to Chinese solar equipment manufacturers by
making modules in their name to keep its business running. It even attempted to enter into the retail business
by alliance with Exide. It attempted to enter into the EPC business multiple times. It even started solar cell
manufacturing as well as a silicon wafer-making facility in Singapore. However, most of these initiatives
failed and it could not create a strong business model.
The company has suffered on account of the capital-intensive business of solar equipment manufacturing.
Its business could never generate sufficient funds to meet its operating and growth requirements. Its
inventory management and receivables collection efficiency left scope for improvement as it faced
inventory and receivables write-offs. Due to the continuous need for capital infusion, it had to raise money
repeatedly by equity dilution via FCCBs, GDR, warrants, preferential allotment, and unsecured loans from
promoters that were converted into shares.
Until now, the promoter, Mr S L Agarwal, aged 77 years, was running the company. Now, his
granddaughter, aged 26 years, has joined the company. It remains to be seen whether she can turn around
the company.
In the past, there were occasions when the promoter took home a higher remuneration despite the declining
performance of the company. Investors should monitor the remuneration of promoters going ahead. The
company has given a comfort letter to LICHFL on behalf of promoters and in the past, one related party
did not pay the loan given by the company and the company had to seek legal course to recover its money.
An investor should keep track of related party transactions of the company with its promoters.
The company had shown numerous instances of weakness in internal processes and controls like
noncompliance with regulatory guidelines, maintenance of records of fixed assets, internal audit function,
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delays in payment of undisputed statutory dues, errors in the data presented in annual reports etc. An
investor should double-check the data before relying on it for analysis.
Going ahead, an investor should closely monitor the progress of its ongoing plant installation, its JV with
AMP, and policy measures in the solar power industry.
These are our views on Websol Energy System Ltd. However, investors should do their own analysis before
I hope it helps!
Regards,
Dr Vijay Malik
P.S.

Workshop Videos
Analysis Excel
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How to Use Screener.in "Export to Excel" Tool

Screener.in is one of the best resources available to equity investors in Indian markets. It is a website, which
provides investors with key information about companies listed on Indian stock exchanges (BSE and NSE).
We have been using screener.in as an integral part of our stock analysis and investments for the last many
years and have been continuously impressed by the tools offered by it that cut down the hard work of an
investor. Some of these features, which are very useful for equity investors are:
• Filtering of stocks based on multiple objective financial parameters. Investors can share these
parameters in the form of “Saved Screens”.
• Company information page, which collates the critical information about a company on one single
page including balance sheet, profit & loss, cash flow, quarterly results, corporate announcements,
links to annual reports, credit rating reports, past stock price movement etc. A scroll down on the
company page provides an investor with most of the critical information, which is needed to make
a provisional opinion about any company.
• Email alerts to investors for new stocks meeting their “Saved Screens”
• Email alerts to investors on updates about companies in their watchlist.
All these features are good and have proved very beneficial to investors. However, there is one additional
feature of screener.in, which we have found unique to screener.in. This feature is “Export to Excel”.
“Export to Excel” feature of screener.in lets an investor download an Excel file containing the financial
data of a company on the investor’s computer. The investor can use this excel file with the data to do a
further in-depth analysis of the company.
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The most important part of the “Export to Excel” feature is that it allows the investor to customize the Excel
file as per her preferences. The investor can create her own ratios in the excel file. She can arrange the data
as per her preferred layout in the excel file and when she uploads her customized excel file in her account
at screener.in, then whenever she downloads the “Export to Excel” sheet for any company, she gets the data
of the company in her customized format with all her own ratios auto-calculated and presented to her in her
preferred layout.
The ability to get the financial data of any company in our customized format with our key ratios and
parameters auto-calculated has proved very useful to us in our stock analysis. “Export to Excel” feature of
screener.in allows us to analyse our preferred financial ratios of any company at the click of a mouse, which
makes it very easy for us to make a preliminary view about any company within a short amount of time.
Sometimes within a few minutes.
We have been using the “Export to Excel” feature for the last many years and it has become an essential
part of our stock analysis. It has helped us immensely while doing an analysis of different stocks and while
providing our inputs to the stock analysis shared by the readers of our website. Investors may read the
“Analysis” articles at our website on the following link: Stocks’ Analysis articles
Over time, more and more investors have started using the “Export to Excel” feature of screener.in and as
a result, we have been getting a lot of queries about it at the “Ask Your Queries” section of our website.
These queries have been ranging from:
• Why is there a difference between the data provided by the screener and the company’s annual
report?
• How does screener calculate/group the annual report data in the “Export to Excel” tool?
• What is the source of the data that screener.in provides to its users?
• How to customize the “Export to Excel” file?
• How to upload the customized file in one’s account at screener.in
We have been replying to such queries based on our understanding of screener.in, which we have gained
by using the website for multiple years and based on our learning by listening to the founders of screener.in
(Ayush Mittal and Pratyush Mittal) in June 2016 at the Moneylife event in Mumbai.
In June 2016, Moneylife arranged a session, “How to Effectively Use screener.in” by Ayush and Pratyush
at BSE, Mumbai in which Ayush and Pratyush explained the features of screener.in in great detail. This
session was recorded by Moneylife and has been made available as a premium feature on their private
YouTube channel.
The recorded session can be accessed at the following link, which would require the viewers to pay to view
it:
https://advisor.moneylife.in/icvideos/
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(Disclaimer: we do not receive any referral fee from Moneylife or Screener.in to recommend the above
video link to the session by Ayush and Pratyush. For any further information about the video, investors
may contact Moneylife directly)
As mentioned earlier that we have been replying to investors’ queries related to the “Export to Excel”
feature on the “Ask Your Queries” section of our website. However, in light of repeated queries from
different investors, we have decided to write this article, which addresses key aspects of “Export to Excel”
feature of screener.in.
The current article contains explanations about:
• The financial data provided by screener.in in its “Export to Excel” file and its reconciliation with
the annual report of companies
• Steps to customize the “Export to Excel” template by investors
• Steps to upload the customized Excel file on screener.in so that in future whenever any investor
downloads the “Export to Excel” file of any company, then it would have the data in the customized
preferred format of the investor.
Financial Data
The “Export to Excel” file of screener.in contains a “Data Sheet”, which contains the financial data of the
company, which in turn is used to calculate all the ratios and do in-depth analysis. As informed by Ayush
and Pratyush in the Moneylife session, screener.in sources its data from capitaline.com, which is a
renowned source of financial data in India.
The data sheet contains the data of the balance sheet, profit & loss, quarterly results, cash flow statement
etc. about the company.
We have taken the example of a company Omkar Speciality Chemicals Limited (FY2016: standalone
financials) to illustrate the reconciliation of the data provided by screener.in in its “Export to Excel” file
and data presented in the annual report.
Read: Analysis: Omkar Speciality Chemicals Limited
Let’s now understand the data about any company, which is provided by screener.in.
Balance Sheet:
This is the section, where investors get most of the queries as screener.in groups the annual report items
differently while presenting the data to investors. Let’s understand the data in the balance sheet section of
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the “Data Sheet” of the “Export to Excel” file taking the example of FY2016 data of Omkar Speciality
Chemicals Limited:
Balance Sheet Screener.in "Data Sheet"
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Balance Sheet (Annual Report FY2016)
• Equity Share Capital: It represents the paid-up share capital taken directly from the balance sheet
(₹20.58 cr.).
• Reserves: It represents the Reserves & Surplus taken directly from the balance sheet (₹160.87 cr.).
• Borrowings: It represents the entire debt outstanding for the company on March 31, 2016 (₹185.76
cr.). It comprises the following components:
o Long-Term Borrowings: ₹79.23 cr taken directly from the balance sheet.
o Short-Term Borrowings: ₹95.49 cr. taken directly from the balance sheet.
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o Current Liabilities of long-term borrowings: ₹11.04 cr. taken from the notes to the
financial statements. This data is included as part of “Other Current Liabilities” of ₹15.89
cr. under “Current Liabilities” in the summary balance sheet. In the annual report of Omkar
Speciality Chemicals Limited, “Current Liabilities of long-term borrowings” can be found
in Note No. 7 on page 89 of the FY2016 annual report.
o Sum of these three items: 79.23 + 95.49 + 11.04 = ₹185.76 cr. Investors might find a small
difference for various companies, which might be due to rounding off.
• Other Liabilities: It represents the sum of the rest of the liabilities (₹79.52 cr.) like:
o Deferred Tax Liabilities: ₹8.04 cr. taken directly from the balance sheet
o Long-Term provisions: ₹2.42 cr. taken directly from the balance sheet
o Trade Payables: ₹50.52 cr. taken directly from the balance sheet
o Other Current Liabilities net of “Current Maturity of Long-Term Debt”: ₹15.89 - ₹11.04
= ₹4.85 cr. is considered in this section.
o Short-Term Provisions: ₹13.69 cr. taken directly from the balance sheet
o Sum of these items: 8.04 + 2.42 + 50.52 + 4.85 + 13.69 = ₹79.52 cr. Investors might find
a small difference for various companies, which might be due to rounding off.
• Net Block: It represents the sum of Tangible Assets (₹ 77.75 cr) and Intangible Assets (0.15 cr.)
taken directly from the balance sheet. The total netblock in the “Data Sheet” is ₹77.90 cr, which is
the sum of the tangible and intangible assets.
• Capital Work in Progress: It represents the paid-up Capital Work in Progress taken directly from
the balance sheet (₹112.67 cr.).
• Investments: It is the sum of both the Current Investments and the Non-Current Investments
presented on the balance sheet. The Current Investments are shown under “Current Assets” in the
balance sheet whereas the Non-Current Investments are shown under “Non-Current Assets” on the
balance sheet.
o In the case of Omkar Speciality Chemicals Limited, there are no current investments,
therefore, the “Investments” (₹13.91 cr.) in the “Data Sheet” of “Export to Excel” file is
equal to the Non-Current Investments in the balance sheet (₹13.91 cr.)
• Other Assets: It represents (₹242.25 cr.) the sum of rest of the assets:
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o Long-term Loans and Advances: ₹26.53 cr. taken directly from the balance sheet
o Inventories: ₹61.78 cr. taken directly from the balance sheet
o Trade Receivables: ₹102.26 cr. taken directly from the balance sheet
o Cash and Cash Equivalents: ₹6.63 cr. taken directly from the balance sheet
o Short-term Loans and Advances: ₹44.14 cr. taken directly from the balance sheet
o Other Current Assets: ₹0.89 cr. taken directly from the balance sheet
o Sum of these items: 26.53 + 61.78 + 102.26 + 6.63 + 44.14 + 0.89 = ₹242.23 cr. The
difference of ₹0.02 cr. in this sum and the figure in the “Data Sheet” of ₹242.25 cr. is due
rounding off.
It is important to note that certain additional items, if present in the balance sheet, are usually shown by
screener.in as part of “Other Liabilities” or “Other Assets” depending upon their nature (Liability/Assets).
E.g. “Money Received Against Share Warrants” is shown as a part of “Other Liabilities” in the “Data Sheet”
in the “Export to Excel” file.
Profit and Loss:
Let us now study the reconciliation of the profit and loss data of the company provided by screener.in in
the "Data Sheet" of "Export to Excel" and the annual report:
Profit & Loss Statement Screener.in "Data Sheet"
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Profit & Loss Statement Annual Report FY2016
• Sales: It represents only the “Revenue from Operation” of ₹300.02 cr. taken directly from the P&L
statement.
• Raw Material Cost: It represents the sum of Cost of Material Consumed (₹167.09 cr) and Purchase
of stock in trade (₹73.42 cr.) taken directly from the P&L statement.
o Sum of these two items: 167.09 + 73.42 = ₹240.51 cr. Investors might find a small
difference for various companies, which might be due to rounding off. In the case of Omkar
Speciality Chemicals Limited, the difference is ₹0.01 cr.
• Change in Inventory: ₹12.93 cr. taken directly from the P&L statement: “Changes in Inventories
of Finished Goods, Work in progress and Stock in Trade”.
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o It is to be noted that if the inventories have increased during the period, then this figure
would be negative and if the inventories have decreased during the period, then this figure
would be positive.
o A negative figure (increase in inventory) indicates that some material was purchased whose
cost is included in the Raw Material Cost, but this material is yet to be sold as finished
goods because this material is still lying in inventory. That’s why this cost is not the cost
for this period and thus deducted from the expenses of this period.
o A positive figure (reduction in inventory) indicates that some amount of finished goods
sold in this period were created from the raw material purchased in previous periods.
Therefore, the raw material cost of the current period does not include the cost of these
goods whereas the sales of this period include the revenue from these sales. That’s why the
cost is added to the expense of this period.
• Power and Fuel, Other Mfr. Exp, Selling and admin, Other Expenses: together constitute the
“Other Expenses” item of the P&L statement. The breakup of “Other Expenses” is present in the
notes to financial statements in the annual report.
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o Sum of these four items in the “Data Sheet”: 1.45 + 4.74 + 4.08 + 5.87 = ₹16.14 cr. is equal
to the “Other Expenses” figure in the P&L statement. Any small difference might be due
to rounding off.
o Many times, there are 10-30 items, which come under “Other Expenses” in the annual
report and it becomes difficult for investors to segregate, which of these items are grouped
by screener under “Other Mfr. Exp” or under “Other Expenses” or under “Selling and
admin” etc. E.g. in the case of Omkar Speciality Chemicals Limited, the Power and Fuel
costs of ₹1.45 cr. seem to include both the “Factory Electricity charge” of ₹1.28 cr. and
“Water Charges” of ₹0.17 cr.
o Therefore, an investor would need to put some extra effort into the analysis in case the
“Other Expenses” item is a large number.
• Employee Cost: ₹12.93 cr. taken directly from the P&L statement
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• Other Income: ₹8.89 cr. taken directly from the P&L statement. For some companies, it might be
shown as non-operating income in the P&L statement.
• Depreciation: ₹4.28 cr. taken directly from the P&L statement.
• Interest: ₹16.52 cr. taken directly from the P&L statement.
• Profit before tax: ₹33.37cr. taken directly from the P&L statement.
• Tax: It represents the sum total of all the tax-related entries in the P&L statement including all
credits, debits and previous year adjustments. E.g. for Omkar Speciality Chemical Limited, the tax
for FY2016 (₹11.16 cr.) represents the sum of:
o Previous year adjustments of ₹0.50 cr.
o Current Tax of ₹6.99 cr.
o Deferred Tax of ₹5.81 cr.
o MAT Credit Entitlement of negative ₹2.14 cr. This effectively adds to the profit of the
company for the period.
o Total of all these entries: 0.50 + 6.99 + 5.81 – 2.14 = ₹11.16 cr. is equal to the “Tax” in
“Data Sheet” in screener.in. Investors might find a small difference for various companies,
which might be due to rounding off.
• Net profit: ₹22.21 cr. taken directly from the P&L statement.
• Dividend Amount: It represents the entire dividend paid/declared/proposed for the financial
year without considering the dividend distribution tax. We may get to know about this figure
from the Reserves & Surplus section of the annual report. E.g. for Omkar Speciality Chemical
Limited, the dividend amount (₹3.09 cr.) in the “Data Sheet” of screener.in has been taken from
the reserves & surplus section of the annual report on page 88:
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Cash Flow:
• The data for three key constituents of the cash flow statement i.e. Cash from Operating Activity
(CFO), Cash from Investing Activity (CFI) and Cash from Financing Activity (CFF) are taken
directly from the cash flow statement in the annual report
• Net Cash Flow is the sum of CFO, CFI and CFF for the financial year.
• Sometimes, investors may find small differences in the data, which might be due to rounding off.
Cash Flow Statement Screener.in "Data Sheet"
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Cash Flow Statement Annual Report FY2016
Quarterly Results:
Quarterly Results Screener.in "Data Sheet"
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Quarterly Results March 2017, Company Filings to Stock Exchange
• Sales: it represents the revenue from operations from the quarterly results filing of the company.
E.g. for Omkar Speciality Chemical Limited, the sales of ₹91.56 cr. in the March 2017 quarter
represents the revenue from operations from the March 2017 results of the company.
• Expenses: it represents all the expenses from the quarterly results filing except finance cost and
depreciation. “Expenses” in the “Data Sheet” of screener.in includes the exceptional items if any
disclosed by the companies in their results. E.g. for Omkar Speciality Chemical Limited, the
“Expenses” in the data sheet of the amount of ₹135.84 cr. is the sum of:
o Cost of material consumed: ₹50.09 cr.
o Purchase of stock in trade: Nil
o Changes in Inventories of Finished Goods, Stock in Trade, Work in progress and Stock in
Trade: ₹12.75 cr.
o Employee benefits expense: ₹2.11 cr.
o Other expenses: ₹7.68 cr.
o Exceptional Items: ₹63.21 cr.
o Total of all these entries: 50.09 + 12.75 + 2.11 + 7.68 + 63.21 = ₹135.84 cr. is equal to the
“Expenses” in “Data Sheet” in screener.in. Investors might find a small difference for
various companies, which might be due to rounding off
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• Other Income: (₹5.47 cr.) taken directly from the quarterly Statement. For some companies, it
might be shown as non-operating income in the quarterly statement.
• Depreciation and Interest: are directly taken from the “Depreciation and Amortization Expense”
of ₹0.99 cr. and “Finance Costs” of ₹5.14 cr. in the quarterly statement.
• Profit before tax: Loss of ₹55.89cr. taken directly from the quarterly statement.
• Tax: It represents the sum total of all the tax-related entries in the quarterly statement including all
credits, debits and previous year adjustments. E.g. for Omkar Speciality Chemical Limited, the tax
for the March 2017 quarter (positive change of ₹11.59 cr.) represents the sum of:
o Current Tax of negative ₹5.37 cr. This effectively adds to the profit of the company for
the period.
o Previous year adjustments of negative ₹6.75 cr. This also effectively adds to the profit of
the company for the period.
o MAT Credit Entitlement of ₹1.14 cr. This also effectively adds to the profit of the
company for the period.
o Deferred Tax of ₹1.67 cr.
o Total of all these entries: -5.37 – 6.75 – 1.14 + 1.67 = - ₹11.59 cr. is equal to the “Tax” in
“Data Sheet” in screener.in. The negative tax effectively adds to the profit of the company
for the period.
o Investors might find a small difference for various companies, which might be due to
rounding off.
• Net profit: Loss of ₹44.29cr. taken directly from the quarterly statement.
• Operating Profit: represents sales – expenses (as calculated in the description above). E.g. for
Omkar Speciality Chemical Limited, the operating profit for March 2017 quarter (loss of ₹44.28
cr.) represents the impact of:
o Sales of ₹91.56 cr. less Expenses of ₹135.84 cr. = Loss of ₹44.28 cr.
With this, we have come to the end of the current section of this article, which elaborated the reconciliation
of the data presented by screener.in with the annual report and quarterly filings of the companies. Now we
would elaborate on the steps to customize the default “Export to Excel” template sheet provided by
screener.in.
Customizing the Default “Export to Excel” Sheet

Customizing the “Export to Excel” template and uploading it on screener.in in the account of an investor is
the feature, which differentiates screener.in from all the other data sources that we have come across.
We have used premium data sources like CMIE Prowess, Capitaline during educational and professional
assignments in the past as part of the subscription of MBA college and the employer. These premium
sources as well as other free sources like Moneycontrol etc. provide the functionality of data export to excel.
However, the exporting features of these websites are primitive, which provide the data present on the
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screen to the investor in an Excel or CSV file on which the investor then needs to separately apply the
formulas etc. to do the analysis, which is very time-consuming.
Screener.in is better than the above-mentioned sources in terms that it allows investors to customize the
Excel template and upload it on the website. The next time any investor downloads the data of any company
from the screener.in website, the downloaded file has the data of the company along with all the formulas
put in by the investor auto-calculated, which saves a lot of time for the investor in doing in-depth data
analysis.
Steps to customize:
Once the investor downloads the data of any company by clicking the “Export to Excel” button from the
screener.in website, then she gets the data of the company in the default Excel template of screener.in.
The default Excel template contains the following six sheets:
• Profit & Loss

• Quarters
• Balance Sheet
• Cash flows
• Customization and
• Data Sheet
The “Data Sheet” contains the base financial data of the company, which has been described in detail in the
above section of this article. It is not advised to make any change to this sheet otherwise all the data
calculations might become erroneous.
"Customization” sheet contains the steps to upload the customized sheet on the screener website in an
investor’s account. We will discuss these steps in details later in this article.
Rest of the sheets: Profit & Loss, Quarters, Balance Sheet and Cash Flows contain the default ratios along
with formulas etc. provided by the screener.in team for the investors.
An investor may change all the sheets except the Data Sheet in any manner she wishes. She may delete all
these sheets, change formulas of all the ratios, put in her own ratios, create entirely new sheets and create
her own preferred ratios and formulas in the new sheets by creating direct linkages for these new formulas
from the base data in the “Data Sheet”. The investor may do any amount of changes to the excel sheet until
she does not tinker with the Data Sheet.
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Given below is the screenshot of the “Profit & Loss” sheet of the default “Export to Excel” template
provided by screener.in
Given below are the changes that we have done to the “Export to Excel” template to customize it as per our
preferences by creating a new sheet: “Dr Vijay Malik Analysis”
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(For large resolution image of this sheet: Click Here)
Further Reading: Stock Analysis Excel Template (Screener.in): Premium Service
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The above-customized template helps us to do a very quick assessment of any company on the checklist of
parameters that we use for stock analysis. This is because this customized template provides us with our
preferred ratios etc. in one snapshot like a dashboard, which makes decision making very quick and easy.
Readers would be aware that we use a checklist of parameters, which contains factors from Financial
Analysis, Business Analysis, Valuation Analysis, Management Analysis and Margin of Safety calculations.
The customized template screenshot shared above allows us to analyse the following parameters out of the
checklist in a single view:
Financial Analysis:
• Sales growth
• Profitability
• Tax payout
• Interest coverage
• Debt to Equity ratio
• Cash flow
• Cumulative PAT vs. CFO
Valuation Analysis:
• P/E ratio
• P/B ratio
• Dividend Yield (DY)
Business Analysis:
• Conversion of sales growth into profits

• Conversion of profits into cash
• Creation of value for shareholders from the profits retained: Increase in Mcap in last 10 yrs. >
Retained profits in last 10 yrs.
Management Analysis:
• Consistent increase in dividend payments

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Margin of Safety:
• Self-Sustainable Growth Rate (SSGR): SSGR > Achieved Sales Growth Rate
• Free Cash Flow (FCF): FCF/CFO >> 0
Operating Efficiency Parameters:
• Net Fixed Asset Turnover Ratio (NFAT)

• Receivables Days
• Inventory Turnover Ratio
The ability to see the above multiple parameters in one snapshot for any company for which we download
the “Export to Excel” file, allows us to have a quick opinion about any company that we wish to analyse.
It saves a lot of time for the investors as she can easily determine, which companies have the requisite
strength that is worth spending more time on them.
We believe that to fully benefit from the great resources available to the investors today, it is essential that
investors should use screener.in to the fullest and therefore must customize their own “Export to Excel”
templates as per their preference and upload it to their accounts at the screener.in website.
Uploading the Customized “Export to Excel” Sheet on Screener.in Website
The “Customization” sheet of the default “Export to Excel” template file provided by screener.in contains
the steps to upload the customized Excel file on the screener.in website. We have described these steps
along with the relevant screenshots below for the ease of understanding:
• Once the investors have customized the excel file as per their preference, then they should rename
it for further reference. The excel file that we have used for illustration below is our customized
excel template, which is named: “Dr Vijay Malik Screener Excel Template Version 3”
• Once the investor has saved her customized excel file with the desired name, then she should visit
the following link in the web-browser: https://www.screener.in/excel/. She would reach the
following screen:
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• It is required that the investor is logged in the screener.in website before she visits the above
link. Otherwise, the browser will direct her to the login/registration page like below:
o If the investor is directed to the above page to register and she does not have an account
on screener.in website, then she should create her new account by providing her details
on the above page and clicking “Register”
o However, if she already has an account on screener.in, then she should click on the
button “Login here”. In the next page, the investor would be asked to provide her
email and password to log in and after successfully logging in, the website will take
her to the Dashboard/home page of screener.in
o Now the investor would have to again visit the page: http://www.screener.in/excel/ to
upload the customized Excel. To avoid this duplication, it is advised that the investors
should visit the page: http://www.screener.in/excel/ after they have already logged in
the screener.in the website.
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• Once the investor is at the Excel upload page, then she should click the button: “Choose File”
• Upon clicking on the button “Choose File”, a new pop-up window will open. In the newly opened
window, the investor should browse to the folder where she had saved her customized excel sheet
and select it:
• Upon selecting the customized Excel file of the investor, in our case the file “Dr Vijay Malik
Screener Excel Template Version 1.6 (Unlocked)”, the investor should click on the button “Open”
in this pop-up window.
• Upon clicking the button “Open”, the pop-up window will close and the investor would see that
on the web page, there is a summary of the name of her customized excel file near the “Choose
File” button.
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• The presence of the file name summary indicates that the correct file has been selected by the
investor for the upload.
• Now, click on the button “Upload” on the webpage.
• Clicking on the “Upload” button will upload the excel file customized by the investor in her
account on the screener.in website and take her to the homepage/dashboard of the screener.in
website.
From now on whenever the investor downloads the data of any company from screener.in by clicking the
button “Export to Excel”, then she would get the data in the format prepared by her in her customized Excel
file containing all her custom ratios and formulas, formatting and the layout as selected by her.
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This concludes all the steps, which are to be taken by an investor while uploading her customized excel file
on the screener.in website.
Updating/Changing the already uploaded customized sheet:
• In future, if the investor wishes to make more changes to the excel file, then she can simply do all
the changes in the Excel file without making any changes to the “Data Sheet’ and save it.
• She should then repeat the above steps to upload the new excel file in her account on the screener.in.
• Uploading the new file will overwrite the existing template and henceforth, screener.in will provide
her with the data in her new Excel file format upon clicking the “Export to Excel” button for any
company.
Removing the customizations:
• However, in future, if the investor wants to delete her customized excel file and go back to the
original default excel template of screener, then she again would need to visit the following
link: http://www.screener.in/excel/ and click on the button “Reset Customization”
• Upon clicking the button “Reset Customization”, the web page will ask “Are you sure you want to
reset your Excel customizations?”
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• If the customer is sure about deleting her customized excel file, then she should click on the button
“Confirm Excel Reset” on the web page.
• Clicking the “Confirm Excel Reset” button will delete the customized Excel file from the
investor’s account and reset the excel file to the default Excel template file of screener described
above.
• From now onwards, whenever the investor downloads the data of any company from screener.in
by clicking the button “Export to Excel”, then she would get the data in the default Excel format of
screener.in.
There is no limit on the number of times an investor can upload her customized excel file or change it or
delete it by resetting the customization. Therefore, an investor may do as many changes and iterations as
she wants until she gets her preferred excel sheet prepared, which would help her a lot in her stock analysis.
With this, we have come to an end of this article, which focussed on the key feature of the screener.in
“Export to Excel”, the reconciliation of the financial data in the “Data Sheet” with the annual report,
quarterly results file etc. and the steps to customize the Excel file and upload the customized Excel file in
the investor’s account on screener.in.
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Premium Services
At www.drvijaymalik.com, we provide the following premium services to our readers:
1. Dr Vijay Malik’s Recommended Stocks

2. Peaceful Investing - Workshop Videos
3. Stock Analysis Excel Template (compatible with Screener.in)
4. E-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing”
5. "Peaceful Investing" Workshops
The premium services may be availed by readers at the following dedicated section of our website:
https://premium.drvijaymalik.com/
Brief details of each of the premium services are provided below:
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1) Dr Vijay Malik’s Recommended Stocks

Subscribers of this service get access to a list of stocks with buy/hold/sell recommendations that we believe
provide a good opportunity to grow shareholders’ wealth.
We have selected these stocks after doing an in-depth fundamental analysis covering financial, business,
valuation, management, operating efficiency and the margin-of-safety analysis.
Over time, we have received multiple feedback and queries from our subscribers like:
• Can we let them know our reasons for buying or selling any stock?
• Can we inform them which stocks are in buying range or outside the buying range?
“Recommended Stocks” provide an answer to such queries as these stocks have buy/hold/sell
recommendations as well as a crisp investment rationale, which will be updated whenever we change our
views about any stock.
What a subscriber will get in this service:
• A list of fundamentally good stocks, which we believe have the potential to build wealth for
shareholders. There will be a crisp investment rationale explaining our views about the company
backing our recommendation.
• The stocks will be labelled as:
• Buy: where we believe that the stock presents a good investment opportunity at the current
price.
• Hold: where we believe that the stock price has risen above comfortable valuation levels;
however, the stock does not deserve to be sold.
• Sell: where it is advised to reduce the exposure from the stock; mostly because we believe
that the fundamentals of the company have deteriorated and the stock has lost our confidence.
Rarely, it may be due to overvaluation; however, please note that it would be a rare
occurrence.
• Under Review: at times, a stock may be put under review when a significant event has taken
place and we need some time to form our view about the stock.
• Once a month email from us commenting on the ongoing market scenario especially from the
perspective if something significant has taken place leading to a change in views from a long-term
investing perspective. Please note that it will not be a general mailer/newsletter describing the
economic situation. There might be situations where according to us nothing significant has
happened to change our views and the email may just state that.
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• To get an idea of the monthly email, you may read our letter of July 2022: Our Investing
Philosophy, Interest Rates and Inflation (July 2022)
• As a new subscriber, you will get access to all the previous monthly letters written by us.
• Even though we may mostly communicate with you via monthly emails; however, please note that
we will continuously monitor the Recommended Stocks and communicate via email whenever our
views about the stocks change whether positively or negatively.
What a subscriber will NOT get:
• Any separate detailed voluminous research report will not be provided for stocks. The short
investment rationale and updates present on the “Recommended Stocks” page will be the only
reading material available to the subscribers.
• Any target price for the recommended stocks will not be provided. This is because we believe in a
long-term investment horizon stretching over decades throughout boom and bust phases of markets
and the economy and do not believe in selling stocks over short-term price or business performance
changes. We do not provide any return expectations. Good stocks are expected to provide good
returns over a long period of time. We continuously monitor the stocks and usually sell when the
fundamentals of the company deteriorate. Whenever any stock deserves selling, then we will update
the same on the page and send an email update to the subscribers.
• Regular quarterly or annual reviews of stocks after results will not be provided. This is because
instead of quarterly/annual reviews, we monitor stocks continuously and will update the subscribers
whenever our views about the company change. If our views about the company stay the same,
then we may not provide any updated review about the company even for many quarters. On the
contrary, if our views about the company change, then we will immediately update the subscribers
and not wait for the quarterly or annual results declaration by the company. The aim is to
communicate with subscribers only when there is something necessitating a change in our views
and not inundate the subscribers with regular reviews etc.
• Reviews based on every corporate action, event etc. will not be done. Most of the events/corporate
actions may not change our views about the companies; therefore, we do not provide any
updates/reviews based on very corporate actions/events. However, please rest assured that we
continuously monitor the companies and in case there is any significant event/action, then we will
provide a review/update.
• No on-demand/on-request updates on the recommendations would be provided. We would update
the recommendations on our own when our views change.
• One-to-one discussion about the “Recommended Stocks” with subscribers will not be done.
• Replies to subscribers’ queries about the “Recommended Stocks” will not be provided. If there is
any development about the stock where we believe that an update needs to be provided, then we
will provide it on our own.
• Any advice about allocation to the stocks in the list will not be provided. Subscribers need to take
this decision on their own.
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Instructions to subscribers:
• It is a subscription service. The access to “Recommended Stocks” will expire after the subscription
period gets over unless a renewal is done.
• Please note that once this premium service is availed, then there is no provision of any refund of
fee or cancellation of service during the period of subscription.
Frequently Asked Questions

Q: How many stocks are currently there in the “Recommended Stocks” list?
On June 19, 2024, the list contains 9 stocks. The latest information about the number of stocks and
recommendations is available only to subscribers.
Q: Do you advise any minimum capital for investment in “Recommended Stocks”?
We do not provide any guidance about any minimum capital for investment. An investor needs to make
this decision on her own.
Q: How often do you add new stocks or remove existing stocks from the recommended stocks list?
Adding new stocks: We follow a very stringent stock-selection process. Only when a stock clears our
parameters, then we add it to the recommended list. My experience shows that usually, I add one new stock
in a year. This is the pattern for the last many years. However, it may or may not stay the same in the future.
Nevertheless, as the stock prices are very volatile; therefore, buying opportunities keep on arising within
the existing stocks in the recommended stocks’ list. We will monitor the stocks continuously and update
the recommendation whenever our views about the stocks change.
Selling existing stocks: We follow a very long-term investment horizon, which extends into decades.
Therefore, we keep very strict stock selection criteria. As a result, for most of the stocks we select, we do
not need to sell them and the stocks will continue to be in the recommended stocks until they stay
453 | P a g e

fundamentally good. Only when any stock loses our confidence, then we remove it from the list. Our
experience indicates that we may remove a stock every 2-3 years; however, it may or may not stay the same
in the future.
Q: Do you prefer any sector or market capitalization segment etc. while making stock
recommendations?
We prefer to find stocks, which show growth opportunities with good profit margins where the companies
can finance the growth from their profits without raising a lot of debt or equity. In this process, we do not
differentiate stocks based on any market cap. Whenever we find any good stock meeting our stringent
selection process, then we add it to the recommended list irrespective of its market cap. It has been our
experience that most of the time, such stocks belong to the mid or small-cap segment. However, it is not an
intentional focus on mid or small caps and we tend to focus on the fundamental qualities of the stocks
without ignoring any market cap segment.
We follow a bottom-up approach for stock selection. Therefore, we do not prefer any sector when we make
a stock selection.
Regards,
Dr Vijay Malik
P.S. Please note that the information received through this premium service is for the sole use of the
subscriber and is not to be shared with anyone else.
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2) Peaceful Investing - Workshop Videos
This service allows access to the videos of full-day fundamental investing workshop elaborating our stock
analysis approach “Peaceful Investing”.
The workshop covers all the aspects of stock investing like how to shortlist and analyse stocks in detail,
which stocks to buy, what price to pay, how many stocks to buy, how to monitor the stocks, when to
sell a stock etc. The workshop focuses on key concepts needed for stock analysis both for a beginner and
seasoned stock investor using live companies as examples.
Peaceful Investing - Workshop Videos has been launched primarily with two objectives:
1. To allow the investors across the world to watch the complete full-day “Peaceful Investing”
workshop ONLINE on their laptop/mobile phone at any time & place of their convenience at their
own pace, as many times as they can, during the period of subscription.
2. To allow an opportunity for past participants of “Peaceful Investing” workshops to revise the
workshop and refresh the learning.
You can watch a FREE Sample Video (16 min) of the workshop where we have discussed the basics of
balance sheet along with fund flow analysis on the following link:
Peaceful Investing - Workshop Videos
Subscription to this service provides access to the videos of the full-day workshop having a total duration
of about 9hr:30m.
These videos are divided into the following subsections for easy access and revision:
1. The Foundation:
• A) Introduction to Peaceful Investing (24m:31s)
• B) Demonstration of Screener.in website and its Export to Excel Feature (28m:56s)
• C) Using Credit Rating Reports for Stock Analysis (38m:11s)
2. Financial Analysis:
• A) Analysis of Profit & Loss Statement (1h:12m:37s)
• B) Analysis of Balance Sheet (27m:14s)
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• C) Analysis of Cash Flow Statement (27m:24s)

• D) Combining Different Financial Statements (22m:40s)
3. Business & Industry Analysis (21m:55s)
4. Valuation Analysis (20m:17s)
5. Margin of Safety Assessment: Deciding what price to pay for a stock (1h:08m:03s)
6. Management Analysis (1h:15m:07s)
7. Portfolio Management: (How to monitor the stocks, How many stocks to own, When to sell, Stocks
which are ideal for Part-Time investors) (51m:54s)
8. Q&A (1h:24m:38s)
We believe that a person does not need to have an educational background in finance to be a good stock
investor and the workshop has been designed keeping this in mind. The workshop explains the financial
concepts in a simple manner, which are easily understood by investors from a non-finance background.
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3) Stock Analysis Excel Template (compatible with Screener.in)

We use a customized excel template to analyse stocks as per our preferred parameters by using the data
downloaded from the screener.in website. The template acts as a dashboard of key analysis parameters,
which help us in making an opinion about any stock within a short amount of time (sometimes within a few
minutes). We have used this excel template and the analysis output in many stock analysis articles published
on this website.
You may read about various stock analysis articles written by analyzing companies using the excel template
in the "Author's Response" segments on the following link: Stock Analysis Articles
In the past, many readers/investors have asked us to provide a copy of this excel file. However, until now,
we have not put the excel template in the public domain for download. We have always advised investors
to customize the standard screener excel template as per their own preferences and their learning about
stock analysis from different sources. Customization of excel template on her own can be a very good
learning exercise for any investor.
However, due to repeated requests for sharing the excel template, we have decided to make the customized
excel stock analysis template, which is compatible with screener.in and provides stock data as a dashboard,
as a paid download feature.
Investors who wish to get the customized excel stock analysis template may download it from the following
link:
The structure and sample screenshots of the stock analysis excel template file are as below:
1) Analysis sheet:
This sheet presents values of more than 40 key parameters in the form of a dashboard. These parameters
cover analysis of profitability, capital structure, valuation, margin of safety, cash flow, creation of wealth,
sources of funds, growth rates, return ratios, operating efficiency etc.
Having a quick look at these parameters in the form of the dashboard helps in a quick assessment of the
company, its historical performance and its current state of affairs.
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Screenshot of large resolution output of the Analysis Sheet: Click Here
2) Instructions sheet:
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This sheet contains details about the steps by step approach to getting started with this sheet on the
screener.in website, change in settings for Microsoft Excel to resolve common issues and other instructions
for the buyers.
Screenshot of the Instructions Sheet: Click Here
See the step by step guide for uploading the excel sheet on Screener.in with screenshots: How to Use
Screener.in Export to Excel tool
3) Version history:
This sheet contains details about the changes/updates made in each of the new versions of the sheet.
Users'/Investors' Feedback about this Stock Analysis Excel Template:
The stock analysis excel template was initially made available for download on July 11, 2016. Hundreds of
investors have downloaded the same and quite a few of them have provided their inputs about the excel
template. Here are some of the responses sent by the users of this template:
“This is a great tool for getting down to the heart of a company's financials.
When I was doing my MBA at NYU I had a valuation professor who encouraged everyone in the class of
60 to make their own customized sheet similar to what you've made. I was a fan of Buffett so I remember
keeping some of his metrics in view and creating a sheet! Of course, yours is head and shoulders above
anything else I've seen - kudos!”
- Uday (via email)
The excel template is quite useful. It makes things easy for us in not doing the hard labour and calculating
all vital data for each company separately.
- Ashish
“Thank you Dr. Malik. The tool is indeed very useful and super-fast to use. God bless you for creating it!
Please use this as part of your training to perform financial analyses of different types of companies in
different performance contexts across industries. I am sure others will also love it.”
- Harsh (via email)
"Dear Sir, I have downloaded the excel. It's simply AMAZING, EFFORTLESS and AWESOME. Kudos
to you and your team for wonderful creation.”
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- Vikram (via email)
“Very good tool created for Stock analysis. Very helpful. Thank you sir”
- Jiten (via email)
For further details please read this article:
Stock Analysis Excel Template (Screener.in)
P.S: Please read all the instructions on the payment page, carefully before making the purchase of the excel
template.
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4) e-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock

Investing"
This book contains our key stock investing articles covering all aspects of stock investing including stock
selection, portfolio management, monitoring, selling etc.
Who should read this e-book:
Any person interested in learning a simple step by step approach of analysis of companies, their business,
financials, and management. The reader of the e-book will learn
• to analyse whether a company is financially strong or not and whether it has business strength to
sustain its growth.
• to find out any red flags in the company’s performance.
• to identify whether the management of the company is shareholder-friendly or not. Also whether
the management is taking the money out of the company for personal benefits.
• our method of deciding the ideal price to pay for any company.
• how to monitor stocks in the portfolio and how to decide about selling the stocks.
Reviews about the book:
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Table of Contents
The “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing” book contains the following
articles:
1. Getting the Right Perspective towards Investing

2. Choosing the Stock Picking Approach suitable for you
3. Why I Left Technical Analysis And Never Returned To It!
4. Shortlisting Companies for Detailed Analysis
5. How to conduct Detailed Analysis of a Company
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6. Understanding the Annual Report of a Company

7. How to do Financial Analysis of a Company
8. 7 Signs to tell whether a Company is cooking its Books: “Financial Shenanigans”
9. Self-Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company
10. How to do Valuation Analysis of a Company
11. Hidden Risk of Investing in High P/E Stocks
12. How to earn High Returns at Low Risk – Invest in Low P/E Stocks
13. 3 Principles to Decide the Investable P/E Ratio of a Stock for Value Investors
14. How to do Business & Industry Analysis of a Company
15. Is Industry P/E Ratio Relevant to Investors?
16. Why Management Assessment is the Most Critical Factor in Stock Investing?
17. Steps to Assess Management Quality before Buying Stocks (Part 1)
20. 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing
21. 7 Important Reasons Why Every Stock Investor should read Credit Rating Reports
22. Final Checklist for Buying Stocks
23. 5 Simple Steps to Analyse Operating Performance of Companies
24. How to Monitor Stocks in Your Portfolio
25. Understanding & Interpreting Quarterly Results Filings of Companies
26. How Many Stocks Should You Own In Your Portfolio?
27. Trading Diary of a Value Investor
28. When to Sell a Stock?
29. 3 Guidelines for Selecting Stocks Ideal for Retail Equity Investors
30. How to Use Screener.in “Export to Excel” Tool
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5) e-Books: Business Analysis Guides

These ebooks contain guidelines to do business analysis of companies belonging to different industries.
After reading these ebooks, an investor will learn which factors influence the business of companies in
these industries. You will learn to identify what makes a company stronger than others in these industries.
This knowledge will help you in selecting fundamentally strong companies for investment.
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6) “Peaceful Investing” Workshops

“Peaceful Stock Investing” workshops are full-day workshops (9 AM to 6 PM) held on selected Sundays.
The workshops are focused on stock selection and analysis skills, which would make us much more
confident about our stock decisions. It ensures that our faith would not shake with day to day market price
fluctuations and we would be able to reap the true benefits of stock markets to fulfil our dream of financial
independence.
The workshops focus on the fundamental stock analysis of stocks with a detailed analysis of various sources
of information available to investors like annual reports, quarterly results, credit rating reports and online
financial resources.
You may learn more about the workshops, pre-register/express interest for a workshop in your city by
providing your details on the following page:
Pre-Register & Express Interest for a Stock Investing Workshop in Your City
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Disclaimer & Disclosures
Registration Status with SEBI:
I am registered with SEBI as a Research Analyst.
Details of Financial Interest in the Subject Company:
Currently, on the date of publishing of this book, June 19, 2024, I do not own stocks of any of the companies
discussed in the detailed analysis articles in this book.
This book contains our viewpoint about different companies arrived at by studying them using our stock
investing approach “Peaceful Investing”.
The opinions expressed in the articles are formed using the data available at the date of the analysis from
public sources. As the data of the company changes in future, our opinion also keeps on changing to factor
in the new developments.
Therefore, the opinions expressed in the articles remain valid only on their respective publishing dates and
would undergo changes in future as the companies keep evolving while moving ahead in their business life.
These analysis articles are written as one-off opinion snapshots at the date of the article. We do not plan to
have continuous coverage of these companies by updating the articles or the book after future quarterly or
annual results.
Therefore, we would not update the articles or the book based on the future results declared by the
companies.
Therefore, we recommend that the book and the articles should be taken as an illustration of the practical
application of our stock analysis approach “Peaceful Investing” and NOT as a research report on the
companies mentioned here.
The articles and the book should be used by the readers to improve their understanding of our stock analysis
approach “Peaceful Investing” and NOT as an investment recommendation to buy or sell stocks of these
companies.
All the best for your investing journey!
Regards,
Dr Vijay Malik
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Copyright © Dr Vijay Malik. All Rights Reserved.

Company Analyses (Vol. 11)

Live Examples of Company Analysis using “Peaceful Investing” Approach

Copyright © Dr Vijay Malik. All Rights Reserved.

Copyright © Dr Vijay Malik.

All rights reserved.

This e-book is a part of services of www.drvijaymalik.com

Printed in the Republic of India

Copyright © Dr Vijay Malik. All Rights Reserved.

Important: About the book

All the best for your investing journey!

Regd. with SEBI as a Research Analyst

Copyright © Dr Vijay Malik. All Rights Reserved.

IMPORTANT: ABOUT THE BOOK ............................................................................................................................ 4

1) RELAXO FOOTWEARS LTD .................................................................................................................................. 6

2) LINDE INDIA LTD .............................................................................................................................................. 52

3) DR REDDY’S LABORATORIES LTD ...................................................................................................................... 95

5) ABBOTT INDIA LTD ......................................................................................................................................... 167

7) SESHASAYEE PAPER AND BOARDS LTD .......................................................................................................... 220

8) RAMCO INDUSTRIES LTD ................................................................................................................................ 270

9) RUSHIL DECOR LTD ........................................................................................................................................ 318

10) WEBSOL ENERGY SYSTEM LTD ..................................................................................................................... 368

HOW TO USE SCREENER.IN "EXPORT TO EXCEL" TOOL ...................................................................................... 425

PREMIUM SERVICES ........................................................................................................................................... 450

DISCLAIMER & DISCLOSURES ............................................................................................................................. 466

Copyright © Dr Vijay Malik. All Rights Reserved.

1) Relaxo Footwears Ltd

Company website: Click Here

Financial data on Screener: Click Here

Copyright © Dr Vijay Malik. All Rights Reserved.

Further advised reading: Standalone vs Consolidated Financials: A Complete Guide

Copyright © Dr Vijay Malik. All Rights Reserved.

Copyright © Dr Vijay Malik. All Rights Reserved.

Financial and Business Analysis of Relaxo Footwears Ltd:

1) Intense competition in the Indian footwear segment:

Credit rating report by ICRA, December 2023, page 2:

FY2017 annual report, page 36:

Copyright © Dr Vijay Malik. All Rights Reserved.

FY2015 annual report, page 31:

Credit rating report by ICRA, July 2022, page 1:

Conference call, November 2023, page 13:

Conference call, November 2022, page 15:

FY2009 annual report, page 9:

Also read: How to do Business Analysis of a Company

Copyright © Dr Vijay Malik. All Rights Reserved.

Conference call, Nov. 2021, page 12:

FY2014 annual report, page 9:

Conference call, Nov. 2023, page 10:

Credit rating report by ICRA, August 2019, page 3:

Copyright © Dr Vijay Malik. All Rights Reserved.

Conference call, Nov. 2022, pages 4 and 18:

Conference call, Nov. 2022, pages 2, 4:

Conference call, May 2022, page 18:

Copyright © Dr Vijay Malik. All Rights Reserved.

Conference call, May 2022, pages 4 and 17:

Gaurav Dua:…There’s a limit to pass on the price to the end consumer.

Conference call, Nov. 2021, page 3:

FY2004 annual report, page 35: