By Hrishikesh Dubey
In the last couple of months, auditors of many firms stepped down prematurely, citing perplexing reasons that range from inadequate information shared by the company, to ‘pre-occupation’, ‘mutual exits’, ‘health concerns’. In some other cases, the audit firm simply ceased to exist.
While the Ministry of Corporate Affairs has already initiated investigations into these auditor resignations, such incidences not only leave the future of the company uncertain but also leave investors in the lurch because of massive erosion in share prices due to the negative media attention.
A case in point is the Vadodara-based beverage maker Manpasand Beverages that has been bearing the heat of media and the market since Deloitte Haskins resigned as the Company’s auditor, just a few days before the company was scheduled to announce their annual results.
The investor fraternity, including high net worth and institutional investors along with media, are at a war of words over who is responsible for the erosion of shareholders’ wealth, as the share price of the company has tumbled by over 60% during this period. The company announced their results almost a month later and reported a decent set of numbers.
On Tuesday, August 7, 2018, Manpasand Beverages (MANB IN) held an analyst meeting to address concerns that have been raised against the company over the last couple of months. This was the company’s first address to a forum of investors since the resignation of their longstanding auditors ahead of the results in May end.
Dhirendra Singh, the Chairman and Managing Director of Manpasand Beverages, spoke with conviction about his journey at the homegrown beverage company that he founded and nurtured over the years, his ‘Make in India’ dream, and his vision for the company in the years to come. He also put into perspective some of the investor concerns around the resignation of auditors, fixed deposits as Overdrafts and questions about fictitious sales.
The robust numbers that Manpasand Beverages has reported in its annual and Q1FY19 results, coupled with the company’s expansion plans, a recent tie-up with Parle products for joint distribution of their products and the vision of its promoters, serves as an assurance for investors about the positive growth trajectory of the company in the long run.
The company reported a 38% jump in profit at Rs 100 crore; while sales grew 34% to Rs. 984 crore. For the fourth quarter ended March 31, 2018, the Company reported a net profit of Rs. 43 crore, higher by 36.4%. Net Sales for the quarter stood at Rs. 393 crores, up by almost 40%. Despite the robust numbers, the share prices of the company have not recovered since and are seeing a sharp descent.
However, among all these developments, the market appears to have largely ignored the Company’s expansion spree. During 2017-18, the Company had already announced new plants at Varanasi, Vadodara, Sri City in Andhra Pradesh and one near Bhubaneswar in Odisha. The third plant at Vadodara has already started, while the one in Varanasi and Sri City will be up in next six to eight months. The foundation stone was laid for the plant near Bhubaneswar last month and the fourth plant is also expected to be commissioned by next year. Close to Rs. 500 crore have been invested so far in these plants and the Company expects to incur another Rs. 100 crore this fiscal to complete its expansion.
An increased capacity expansion is in line with the increased demand for the company’s products. The expansion plan is undertaken to also ensure that it is able to distribute its products in India’s most remote geographies, which explains their tie-up with Parle Products.
The company’s heavy investment plan has led to a decrease in the free cash flow generated, and a declining return on equity. This has been pointed out as a negative by prominent institutional brokers. However, on the flip side of the lower free cash flow is the positive future impact on the top-line and bottom-line due to the expansion.
In a recent interview to a business channel, the company’s promoter also mentioned they are aiming at doubling the revenue and profitability in the next year or two. Until last year, the company was claiming that it is a zero debt company. This year, however, the Balance Sheet showed borrowings of nearly Rs 100 crore. This perplexed the investors and shareholders alike. However, deeper investigations reveal that the company has borrowed to meet working capital requirements and this debt is not in the form of term loan or working capital from banks. Rather it is an overdraft facility, which is likely to be repaid from the operating cash balances going forward. Allegations of deception are premature since the company has not defaulted on its payments.
The company’s increased cash conversion cycle is another reason of worry for investors. This is likely to be a short-term phenomenon and may be reversed as new capacity is introduced in the coming months.
At a fundamental level, the increase in net worth and profitability is a positive. It helps explain why the company continues to invest in capacity expansion. At the moment, the stock definitely looks undervalued. Smart investors may wish to analyse the company’s fundamentals to make a considered decision on where they see the stock price heading.