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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.
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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

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