What I had written about a company called Bartronics, in Oct 2007 in Moneylife:
Today there is 'speculation' about co winding up.... Surprising the co stayed on for six years!!
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25/10/2007 12:00 AM |
In a bull market nobody reads annual reports. If you do, you can come up with interesting stuff. Look at some details of a hot stock Bartronics
In today’s world, it does not pay to read the balance sheets of companies.
If you have that bad habit, you will not make money in the market. That was the quick lesson that came home to me very recently. I met someone who had purchased shares of a company called Bartronics India Ltd. and had received its annual report. Of course, he did not know anything about the company, except that he had made good money in a short time after buying the shares. Since he did not have any use for the balance sheet, I took it away for reading. I have great faith in annual reports and, to me, it is the first step to investing. It provides a window to the company.
After some searching, I found that the company was in the business of providing “AIDC Solutions” and was expanding into a segment relating to “RFID solutions”. AIDC is not explained anywhere. Using the Internet, I found that essentially the company provides hardware/software solutions in the Automatic Identification and Data Capture domain. RFID uses electronic cards with data embedded in it. The company was now expanding into making “smart cards”. Further, I got information that the company has tied up 70% of its “smart card” manufacture with a global supplier. What I could gather was that the company was basically one of the many global players in the industry and had nothing unique to offer; its business can be replicated easily. Then, I started to go into the financials and this is where things got really scary.
The company had gone on a capital-raising binge in the last year, through preferential offers to outsiders, warrants to promoters/ associates / others and some stock options to employees. However, at the end of the day, one does not know what the future capital is going to be. The annual report does not spell it out anywhere. As against the current capital of Rs17.82 crore, the fully diluted capital would stand at nearly Rs30 crore.
The operational numbers are befuddling. Against total sales of around Rs64 crore in the full year, the year-end debtors stand at over Rs71 crore! And the balance sheet says that debtors’ outstanding for less than six months is Rs49 crore. Interestingly, by seeking its quarterly results for the full year, I find that in the last two quarters of the year, Bartronics had notched up sales of Rs35 crore. Against total sales of Rs35 crore in six months to March 07, the company’s debtors’ outstanding for less than six months is Rs49 crore. Funny arithmetic indeed! Apart from this, the company had nearly Rs17 crore of debtors, which it has classified as “other than own sales”. No explanations are available regarding who these debtors are. If the company indulges its customers with so much time for payment, the business cannot be great, was my thought. Further, the company seems to have slipped on its numbers somewhere, or presumed (maybe rightly so) that today’s investors do not read annual reports. I also found that suppliers to the company were also in no hurry to collect. Against full year purchases of Rs41 crore, the company was still to pay Rs29 crore at the end of the year.
Bartronics proudly states that this is its 16th year of business. But I find that the cash flow of the company has been negative. I can also see no signs of any dividend payment which, to me, always looks fishy. For a reported profit of around Rs15 crore, the tax payout is just Rs90 lakh, which is another red flag.
In one of the schedules where the company gives a break down of its turnover, etc., either the printer’s devil has got in or there is some other goof up. The break down of sales is not completely available.
In the Directors’ Report, it is not clear at what price the warrants are issued. For instance, it says that it issued 4,630,000 convertible warrants of Rs10 each at a price of Rs1,210 per warrant. In the next para, it says that the aggregate amount of the issue is Rs6.02 crore. Try matching these figures. In another place, it talks about the same number of warrants at a price of Rs130 per warrant. You have to be either an insider or the company auditor to figure out what exactly has transpired.
I do not know which equity research houses cover this stock. I am sure many do; among its last publicly reported list of shareholders, I see many FII’s holding a large number of shares. I am sure they have also read the annual report and hope that they have full answers to the questions that the annual report raises. Let me end by saying that I have no view about investing in shares of Bartronics. I am merely trying to put together some pieces from the published annual report. Maybe Bartronics is a great company, but after reading the annual report, it is hard to conclude this.
This exercise illustrates that companies should make some effort in putting together their annual reports and answer as many questions as possible, without waiting for someone to ask. The annual report is not only a statutory document, but also an important communication to shareholders, existing as well as prospective. However, if my friend had read the annual report, he would have lost an opportunity to make easy money in this bull market!
Against total sales of Rs35 crore in six months to March 07, the company’s debtors’ outstanding for less than six months is Rs49 crore. Funny arithmetic indeed!