It's only words and words are all I have to take your heart away!

Behavioral finance is a widely talked about subject across geographies these days. The premise of an investor being loss averse rather than risk averse and taking emotionally optimal decisions rather financially optimal ones have been more than vindicated over countless bull and bear cycles. More so, the redundancy of the Rational economic man and the emergence of bounded rationality only add fuel to the importance of understanding different cognitive and emotional biases that reside within investors.

Stock prices are nothing but the common ground of the buyer's and seller's bias. What might be cheap for the buyer is definitely expensive for the seller and when the two sets of bias net each other out, we arrive at the quoted price of the security at a given point in time. 

News and developments about a company's operations occupy a substantial portion of any investor's thesis for his investment as he develops a heuristic. The initial conviction of his idea then comes from this heuristic and keeps on growing with time as more news comes into public domain. This process, when repeated over a sustained period of time takes the investor into a parallel universe - which is entirely the creation of his initial anchor developed after reading the first bit of news. 

 

It's common knowledge that an investor cannot earn more than the company - in simple words, your investment grows in sync with the earnings of company you're invested in.( Of-course, there are deviations in the short term.)

Now, let's have a look at a sequence of  images below - I'm not revealing the name of the company yet.

then this,

and finally this

 

The first panel pits growth in Market cap against growth in Net Income. The second panel is a graphical depiction of P/E Multiple v/s Market cap and the third panel pits RoIC against the same. Notice the common trend in all of the three - it's the market cap that wins the race against everything else - an investor's dream! (Isn't it?)  

"Enough of financials, they never portray the complete picture!" 

Now, let's look at some news snippets - 

The initial heuristic here is the first bit of news that mandated implementation of the Anti Braking System for all Commercial Vehicles in India. Careful selection of phrases - "Cusp of an up-turn" , "margin lucrative" and "significant upside for revenues and earnings" provide further impetus to the psychological profile of the investor. Besides, the company would now start reaping the benefits of softer commodity prices. 

The end result?

Price reaction just after the news break - from 30th June to 1st August

So here we are, faced with this immensely lucrative opportunity of investing in a company that has 85% of the Braking system market , catering to an industry that is 'on the cusp of a visible turnaround.' 

But do subsequent numbers support our view?

 

:(

But you know what? Our initial assessment can't be wrong. The CV Cycle will turnaround and there are much better days ahead in store!

 :)

So here we stand at a juncture where earnings haven't caught up and the market cap of Mr Company is seemingly touching new heights daily.

Something needs to give in? Please? Or maybe not?

Yes, Mr Company did see light at the end of the tunnel as pent-up replacement demand for the new ABS fitted series of Commercial vehicles did propel earnings growth for most of FY'16 albeit with very little margin improvement

That brings us to FY'17 and with Q4 earnings on their way, Mr Company has clocked in 226cr of Profits before taxes which compares to 271cr earnt in FY'16. What's interesting to note is that the company has clocked in ~1600cr odd of revenues which hence translates to margins of nearly 14.5% . Assuming the company ends FY'17 with revenues of 2100cr and profits of 290-300cr , it would represent a profit CAGR of 6.7% in profits and 14.4% of revenues for the past 5 years!

Hey, but revenues have doubled! It's just a matter of time before profits catch up! Have you read the latest news on Mr Company?

What we've just witnessed is a very common behavioral trap that many investors(including us) fall into - the anchoring trap. In this case, the anchor was formed when Mr Company's revenues were earmarked for fierce growth, earnings were expected to sky-rocket and margins were touted to explode , given the mandate of ABS Implementation, softening of the commodity cycle and higher share of 'value added products.'  Talk of India becoming the epi-center of global growth added a little spice to the dish as well. However, the anchor that was formed in 2014 wasn't re-visited even though Mr Company continued to throw up underwhelming numbers. 

Access to articles that  under-lined only the positives of the company coupled with the trap of searching for positive news has over time led to a burgeoning bias within investors that come what may, Mr Company cannnot falter!

Let me now introduce to you, Mr Company - WABCO India

A quick google news search on the company threw up the following results - the first four updates itself lay down the anchoring trap -

10,000? Lovely! I have a potential multibagger!

Working within the realms of bounded rationality and keeping traps and psychology aside, a simple analysis of the P/L Statement of Mr Company throws up simple conclusions for the visible under-performance 

• COGS as a % of revenue has constantly inched up, indicating a total lack of pricing power

  

• Miscellaneous expenses? What are these miscellaneous expenses?

• And the one that hurts the most

(Note - every line item is expressed as a % of revenue)

A large portion of investor returns from owning the Wabco stock has been from speculative growth of the company's market cap , with earnings providing very little support. Sanity prevailed in FY'16 , but was it too little?

As discussed, over a sustained period of time, the growth in market cap always complements growth in earnings of the company. Here, in the case of Wabco we see a dicotomy developing between two complimentary factors due to certain biases that have resided in investors which hence lead them towards taking emotionally optimal decisions rather than financially optimal ones.

What we've tried to highlight is exactly this phenomenon and this shouldn't be taken as a buy or a sell recommendation in any way. I have no vested interest in the afformentioned company.

Intrasoft Technologies Limited- e conundrum

This post is a presentation of facts on a company Intrasoft Technologies, listed on the Indian bourses.

What brought Intrasoft Technologies Limited (ITL) to our attention was the amazing growth rates and relative undervaluation compared to peers like Infibeam. ITL has grown revenues at a CAGR of over 75% over last 5 years and net profits at a CAGR of 18 % over last 10 years and has a 10 year ROE of 11% (screener.in). However even after posting revenues of almost Rs 1000 crores (TTM basis FY17) it trades at a market value of just 500 crores while its peer Infibeam corporation with much lower revenues (TTM FY17 Rs 396 crores) trades at a market cap of over Rs 5000 odd crores. This despite the fact that Intrasoft operates in a much larger US market, while Infibeam is a player in the much smaller Indian market.

Below we present some facts on ITL

1.       123 stores Inc. is a subsidiary

2.       Talks of a proprietary ERP platform

3.       Ranked #262  on Internet Retailer Top 500 Guide in 2016

a.       Ranking in United States according to Alexa is 158600

b.      Global ranking according to Alexa is 538902 down by 85000

4.       Information given on only two people managing the company, Arvind Kajaria (Managing Director) and Sharad Kajaria (Wholetime director)

5.       Apart from other two directors could find information on only one CFO, Mr Mohit Kumar Jha

6.       Three Independent directors

a.       Rupinder Singh PR & Event marketer

b.      Anil Agarwal: Interactions with stock broker and member of Calcutta Stock Exchange

c.       Savita Agarwal: Chartered Accountant

7.       All of the above are Calcutta based

8.       Auditor Information

a.       2016: Walker and Chandiok

b.      2015: KN Gutgutia & Co.

c.       2014: KN Gutgutia & Co.

d.      2013: KN Gutgutia & Co.

e.      2012: KN Gutgutia & Co.

f.        2011: KN Gutgutia & Co.

9.       Company Secretary Information

a.       2016: Pranvesh Tripathi

b.      2015: Rakesh Dhanuka

c.       2014: Rakesh Dhanuka

d.      2013: Rakesh Dhanuka

e.      2012: Rakesh Dhanuka

f.        2011: Deepak Agarwal

10.   Exceptional Gain in FY16 of Rs 60.76 crores on account of sale of shares from Intrasoft Beneficiary Trust of which Intrasoft Technologies is beneficiary

11.   Exceptional loss of 26.34 crores on account of writeoff of Software under development which management feels is of no use going forward

12.   Investment in debt mutual funds of Rs 52 crores which is pledged against Standard Chartered letter of credit of Rs 32 crores

Intrasoft Tech started off in the mid 90’s taking cognizance of the technological boom, prevalent in the market during those times. It started as a e greeting company changing the way people greet each other using internet as a medium which it continues to do even now.

After more than two decades this standalone business of the company does revenues of Rs 29 crores, a CAGR of 11% since 2005

If you thought that revenue growth has been abysmal just wait till you read the numbers on the bottomline front. After removing for other income component (non recurring income) Profit before taxes have grown at the same rate (13%). PBT as of 2016 stood at 2.86 crores in 2016 vs 1.86 crores in 2005. More so the fact that over a decade the company has not been able to improve its efficiency and conducts a business which has poor operating performance (net margins of sub 1%) and no scale as revenues have remained stagnant for over a decade

I tried to check the reason for the poor margins in the standalone business and could find two reasons which leave a lot of questions

·         Employee costs as a percentage of sales had varied between 15-20% of sales for most of the decade but since 2014 they have increased to 50 percent of sales. Over 2013 employee expenditure is up 3.5 times while sales have not shown a commensurate increase

·         Selling & Marketing expenses constitute between 15-20% of the sales head. However what is interesting is that under the head Marketing Expenses while advertisements contribute only 1 percent, the rest is categorized under the head Other Selling Expenses which has no explanation whatsoever

·         Overall bottomline performance has been abysmal to say the least. Peak profits before tax(PBT) was touched in 2012 Rs 9.83 crores. Since then, employee costs have gone up 4 times while sales are up by just 33 percent

·         The company has very aptly used Other Income to show higher profits. Even when one tries to understand what constitutes Other Income it has been “Sale of Investments” which has continued for the past 7-8 years

Decoding the consolidated entity

·         While the standalone business seems confusing, it’s the consolidated entity that’s appalling

·         The company owns a business in USA under the name 123 stores which sells to consumers in USA.(Now we all know who they are competing with here (Amazon) so let’s just not discuss the future longevity of this business)

·         The company portrays itself as a marketplace where it sells own goods and others goods and also sells goods under other marketplaces so there you have a very simple business

·         When one tries to analyze the cost heads we can see that it is not just a market place but also buys goods and sells them. However, what is striking here is that even when raw materials constitute on an average 65-70 percent of sales it holds very minimal inventory. This is a little difficult to understand considering how can it sell inventory at a faster rate than the global FMCG majors

·         Since 2014 it has spent a cumulative of Rs 160 crores on software development expenditure. For a business that does Rs 700 odd crores in revenues that’s some serious software which they seem to be building

·         Once again cumulative selling expenditure since 2014 has been 150 odd crores of which rs 2 crores has been on advertisement while the major chunk is again under the head “Other Selling Expenses”

·         Now, while the consolidated business has seen its revenue jump from Rs 40 odd crores in 2011 to Rs 717 crores in 2016 (Almost 20 times), the Profit before taxes (PBT) excluding other income has declined from Rs 7 crores in 2011 to Rs 5 crores (100 out of 100 for efficiency)

·         Again another point to note is that the company booked Rs 34 crores of other income in 2016 on a net basis which was a result of gain on sale of treasury shares of Rs 60 crores while they also booked a loss on devaluing software development expenditure of Rs 26 crores (All the chunky software development expenditure seems to be going only one way)

If we focus away from the numbers we have to commend Intrasoft Technologies for the fact that it has grown from a company with just 40-50 odd crores in revenue and just an e greeting business to a full fledged online retailer in the United States of America doing revenues of over Rs 700 crores. All this within a span of 5 years with just two people at helm, Arvind Kajaria & Sharad Kajaria.

How they have achieved this feat is amazing considering the talent they have at helm of the company where they give no information of any person heading their business. There seems to be no professional CEO or Managing Director for the domestic business or the international business. Only the two promoters handling the domestic business and the international operations from three offices spread across Kolkata, Mumbai and the USA.

However they have eminent personalities on the board of directors which includes a

 Mr. Rupinder Singh who is an event marketer

Mr. Anil Agarwal who is a member of Calcutta Stock Exchange and has regular interaction with brokers and

Ms Savita Agarwal who is a Calcutta based Chartered Accountant

The above boards of directors are all Kolkata based and seems to have helped immensely in setting up the business and growing the revenues 20 times over last 5 years.

Thus we can see that the two Kolkata based promoters with help of three Kolkata based board of directors have set up a multimillion dollar revenue business in the United States of America with seemingly no help from anyone else. The only mention of any other person in the company is the CFO Mr. Mohit Kumar Jha.

Snippets from 2016 AR

1.       Ok so they seem to be the only people with “proprietary technology” to automate supply chain

2.       Since when did minimizing errors lead to a scalable business? I though a large market and an efficient company is a prerogative for a scalable business

1.       Talks of being profitable with no discussion of profits but only highlights revenue growth

2.       Seems to have developed some proprietary ERP software with no management bandwith to show in a parallel manner

3.       Significant achievements by the company with very little management personnel

I will be going through the balance sheets and cash flow statements in the second post on this company. As of now these are the findings from a detailed analysis of the company Intrasoft Technologies Limited.

I will be checking a few more things for this company but prima facie a lot of stuff just doesn’t seem to add up. This is just a post containing facts from the public domain. I could be horribly wrong in my assesment and this should not be used as any advice on the given company. Its just a depiction of some facts done for personal work. This is not a post to advice buy and sells recommendations. I am not a SEBI Research Analyst. I don’t have any position in the Intrasoft Technologies