Skip to main content

Avon Corporation


Avon Corporation is in the business of manufacturing weighing machines.  It went public in 2008 and is listed on the BSE.

The company has displayed apparently impressive growth in revenues and profits with modest leverage.

The good news ends there.

A closer examination of the listing prospectus and subsequent annual reports indicates that the company has bled cash from operations over the last seven years.  Profits seem to be tied up in ‘Other Debts’ and ‘Advances to Suppliers’.  One is forced to ask why the company’s debtors cannot pay in time for relatively small-cost items such as weighing machines and what the necessity is for such large advances to suppliers.  Moreover, there is no mention of the significant class of raw materials used in manufacturing – as is common practice with other public companies. 

Apart from this, management appear to have diversified into an unrelated business of desigining ‘Activity Monitoring Software’.  Neither the extent of this activity nor its purpose is clear from the annual report.

A damning disclosure in the annual report is the availing of loans worth 1.2 crores by key management personnel from the shareholders’ pockets.  Management haven’t had the decency to mention the interest rate at which they’re taking shareholders’ money.

One point I can’t resist mentioning is an apparent editorial gaffe in the ‘Management Discussion’ section of the annual report.  It states on p37 ‘Another major source of company’s products demand is X, which mainly depends on the Y.  Failure of Y will definitely affect the demand of Company’s products.’

What?  Is management using boiler-plate templates to communicate with shareholders?  Even if they were, they should’ve taken care to edit them since it’s now become a public joke!

Another observation is the pervasive use of grandiose language to describe the company and its prospects – a lack of substance in the communication is evident and should serve as a large warning sign to outside investors.
Labels:

Comments

  1. cool coolJuly 1, 2011 at 3:12 AM

    Didn't you notice that such a lot of money is being used for such a small level of trading turnover. Obviously, most of the funds have been siphoned away.

    ReplyDelete
  2. The Conservative InvestorJuly 4, 2011 at 10:11 AM

    Thanks for your comment. Yes - you raise a good point - you'd expect a higher turnover to total capital ratio for a relatively high-volume/low-margin business such as this. That ratio stood at only about 1:1 (per 2010 balance sheet).

    ReplyDelete

Post a Comment

Popular posts from this blog

On The Radar: India's Small-Cap Equities (Concluded)

We have been running a series of articles titled ‘Under The Radar: India’s Small-Cap Equities’ beginning in December 2011 - and followed up twice - with the last article in December 2013. We would like to conclude this series after updating the small-cap index level and returns, comparing it to our expectations ex-ante, and analysing the current scenario.  Following this, we have also outlined where we may take this blog in the future. The small-cap index closed at 11,087.07 on December 31 st , 2014.  This compares to a level of 6,150.65 in our last article – resulting in an advance of over 80% to date. This is a handsome absolute return by any standard, particularly compared to Indian government bonds, which yielded around 8-9% for the period.  This justifies the conclusion at the end of our previous article that “small-caps in India offer among the most attractive bargains during any time since 2006 and certainly in the entire Indian stock market today”. Of cour
1 comment
Read more

Lakshmi Energy

Lakshmi Energy is in the business of processing and distributing rice to domestic and export markets.   It is also engaged in generating biomass fuel. The company has reported growth in revenues and operating profits over the last five years reporting about 200cr in operating profits on about 1200cr of revenues in the last financial year (ending 30 th September, 2010).   It operated with a relatively high net debt load of 780cr as at that date. The business, however, generates weak operating cash flows as a result of high investment in its working capital. The business is subject to adverse changes in government regulations/policies on procurement pricing, non-Basmati exports etc.   It is monsoon-dependent, subject to adverse changes in foreign exchange rates (for exports) and prone to heavy competition in its operations. Dividends have been on a declining trend for the last five years (probably as a result of above cash flow problems).   Management appear to be making a valiant
2 comments
Read more

Under the Radar: India’s Mid-Cap and Small-Cap Equities

Indian stock markets have been one of the worst performers in 2011 – worse than their BRIC peers, worse than the rest of Asia and far worse than the US with the leading indices declining about 25% during the year.  Foreign investors in India have also suffered substantial declines of nearly 20% in INR currency value. There appear to be several reasons for the market’s dislike for Indian equities in 2011, which include persistent inflation (including food inflation, which constitutes the major proportion of the typical Indian household), political paralysis (e.g. rollback of foreign investment in retail etc.) and global concerns about the solvency of several Eurozone countries. As a result, estimated GDP growth for the next financial year has been revised downwards from about 8% earlier in the year to about 6% now - with many market commentators wondering whether this rate of growth is India’s ‘new normal’.  This is still, however, substantially higher than global average.
2 comments
Read more