too early to comment on promoter integrity...lets see their results and dividend payout

Given the recent price action, I started reading about this company and am listing down some thoughts in no particular order, hence please excuse the seeming randomness.

The brand has very strong recall. Bulk of the sales are from sewing machines and a small portion from small home appliances. Sewing machine volumes grew by 20% in FY13 and other appliances by 318% over a small base. Price inflation was 6% contributing to the 26% growth in sales turnover. Overall the sewing machines market is growing at 3% (source company annual report) but organised players are very few and taking market share away from unorganised.

Am not an accounting expert so am a bit unclear on this issue. The company accounted for deferred tax asset in the P&L as profit for the years ending June 11, 12 and 13, which increased reported profits. Deferred tax assets are generally recognised over a period of time, and accounting for the entire value in one year indicates aggressive accounting. However, for the quarters ending Sep-13, Dec-13 and Mar-14, the company has accounted for deferred tax payment @ 33-34% and reported the net profit after this payment. This seems to imply that they have become a full tax paying company in FY14 (their financial year ends in June). This coupled with dividend payment declared last year provides some comfort on the authenticity of the financials and cashflows.

There is an amount of 23 crore that the company had written back to the accounts in 2010 (being 90% of the outstanding creditors) as the BIFR scheme had proposed settlement of unsecured creditors at 10% of the outstanding. The unsecured creditors filed an appeal in the Appellate Authority and the same is pending. In case AAIFR fully/partly judges in favour of the creditors and increases the amount to be paid to them, the company will have an additional liability, for which no provision has been created yet. Further, the company has some tax disputes amounting of some 2.5 crore disclosed under contingent liabilities not provided for. These are some of the red flags I could come across.

The Netherlands based company which owns 75% seems to have good pedigree and owns operating profitable subsidiaries in Srilanka, Pakistan, Bangladesh and Thailand. The CEO of India has been with the group for more than 25 years and has been elevated across different levels.

Bulk of their business is currently trading as they have large level of stock in trade and their Jammu plant was closed till recently. This is also evidenced by the operating margin of 3-4% for the last few quarters. I guess this could reduce after the start of their Jammu operations, but there is no history to go by. A bulk of their receivables is due from their private group company (also a subsidiary of the Netherland parent) through whom they conduct the trading business (receivable days have increased from 12 to 25 days). I would assume the amount to be entirely recoverable given the common group ownership.

Historically they seem to have relied a lot on contract manufacturing (before things turning bad), which could pick up steam as their operations stabilise (Symphony had displayed similar trends in relation to increase of the level of contract manufacturing as the years progressed once they exited BIFR).

The company revalued land, which added to the reserves and had a part to play in their networth turning positive. Given that this was under the aegis of BIFR, this can be considered acceptable. The promoters converted part of their ECB into equity (albeit at FV of 10 Rs and not at any premium) and have been infusing funds to manage working capital.

The company has grown its sales at average of 19% in the last 3 quarters and assuming it continues this for Q4 (June ending) also, it can clock sales of apprx. Rs 57 cr and net profit of about Rs 1.7 cr translating into EPS of 1.55 and PE of 22-23 on trailing FY14 basis. However, there seems to be informed buying going on in the stock which could indicate improved prospects.

Will wait for their June Q results and perhaps also their FY14 annual report before taking an investment call.