[ob-fuh-skeyt, ob-fuhs-keyt] Pronunciation Key - Show IPA Pronunciation –verb (used with object), -cat·ed, -cat·ing. | 1. | to confuse, bewilder, or stupefy. |
| 2. | to make obscure or unclear: to obfuscate a problem with extraneous information. |
| 3. | to darken. |
I love this word. I can't pronounce it without obfuscating both my listener and myself.
Since Manugraph is in my portfolio as part of magic formula pick (Good ROCE, Cheap price, small stake), it was interesting to read the annual report when it arrived in mail.
Typically it takes me few hours spent over couple of days to get bored with the content and move on. In the case of Manugraph, there were so many riddles that it took me a better part of the week.
In this FY, Manugraph acquired a company in the US which is almost similar in size to itself (in terms of revenue). I was expecting the management to comment on the acquisition at some length and answer questions such as:
- How are they going to pay for the acquisition?
- What impact does it have on balance sheet and income statement? What are the goals going forward?
etc.
No such luck - this important matter has been dealt within a couple of sentences. They did not even welcome the new team on-board and introduce them to shareholders. Sheesh!
That's where things get interesting. With calculator in hand, flipping back and forth between the balance sheets and income statements of Manugraph (standalone), DGM (acquired company) and Manugraph (consolidated), I could put together some of the pieces. Exactly my idea of a fun afternoon - Not!
-I think Manugraph has made the acquisition at a really good price - getting 250 Cr of topline for about 90 Cr.
- The debt has increased by about 100 Cr. Since there is 75 Cr of liquid investments on the balance sheet, this is not worrisome.
Most of the bad news is contained within the US operations:
- The rise in inventory is entirely due to US operations.
- The US operations is barely profitable.
If Manugraph manages to wring out some costs from the US operations and bring it somewhat in line with India operations, things could change.
Market today is not even remotely considering this possibility and has driven the price of Manugraph down to 52 week low. In fact, price is so low that today you can get in at half the price of insiders.
Did I say insiders? Yes, I did.
The annual report says that "9 Foreign nationals were alloted 3.98 Lakh shares at premium of 246 each on 20th December 2006". That is 10 Cr worth of investment.
Naturally, the identity of these foreign nationals is left as an exercise for the reader of the annual report. A quick visit to BSE site resolves this riddle. The knowledgeable foreigners are none other than Mr. Chris Lunt and others who were erstwhile directors of the US operations.
Looks like there is some motivation in place for US managers to fix their operation and turn it around.
There are many riddles like this throughout the report.
Is this obfuscation intentional? That riddle is solved if you look at the center spread. It has one of the silliest graphic I have seen in years - world map distorted by scaling it horizontally (only!) and superimposed on top are 3 planes going in different directions.
Instead of trying to scratch my head any further on what those planes mean, I think I will change my verdict:
Don't ascribe to malice what can be ascribed to stupidity.
A good buy at current price.
Manugraph CMP: 120, Current Market cap: 364 Cr Trailing PE: 7.8
7 comments:
Hi Ravi,
Interesting post. Just one quick question.
You says US investors (ex directors) to try and turn around the business ...
9 investors - 10 crores
each investor - 1 crore Rupees or 250,000 $$ ...
dont you think that this stake is too small for them to put in any serious effort .. ?
If I was one of the 9 who bought stake in Manugraph India, I would have thought that there is much more at stake for Indian promotors and I would have sat on the yatch :D
Please point out the flaws.
And second, can you also share more about your magic formula ... ?
Its been a while since I have even seen the market. Good I slept thru the SubPrime turbulence :)
Saurabh,
Good point.
Actually, only one of the investors (Chris Lunt - chief guy at the US operations) has the bulk of the stake of 2.79 Lakh shares. Others are minor as you rightly point out.
Chris is sitting on paper loss of 140 Rs per share i.e. about 1M USD on his original stake of 2 M USD.
That should be significant given that his entire company was bought over for USD 20 M.
Coincidentally, the US company had declared a special dividend of about USD 2M last year. I suspect (though obviously cannot prove) that all of this money was pumped into Manugraph india shares.
HTH
Hi ravi
i have a small holding in manugraph. i had a look at the 2006 AR and saw substantial value in the company. However i have had the following nagging doubts
- why was 2003 bad for the company
- why was the last quarter bad
- how is the accquisition performing and what are the plans
i have been checking their website and am frustated that the company has not loaded the AR for 2007 on the webiste or the edifar database. The price is a bargain, but the lack of transparency is very disturbing.
the management is not interested in sharing information. on top of that your review of the AR has not improved my comfort levels with the company (kind of made me more suspicious)
Rohit,
Last quarter was not bad if you are referring to the quarter ending June 07. PAT is 12.79 Cr which is Ok.
As you rightly point out the company is not at all shareholder friendly.
I would not recommend this company as a long term holding. It is a purely trade on the valuation concept. The only attractive part is price.
Hi Ravi,
Few doubts - is this biz recurring? Wat are the growth drivers ? Fy06 AR also mentions threat of chinese machinery.
March/june q were rather normal and doenst seem to have included DGM figures. Is the merger done?
Someone met the mgmt around Dec. He gave a feedback that Lunt was looking out to retire and enjoy duck-hunting, so he sold off. With this, i wonder, how well US would do, as pre-acquisition their margins were thin.
All are good questions. I have only few answers.
1) Lunt could not have sold out. His shares are locked-in and are listed as such if you take a look at latest shareholding.
2) The merger is done.
Other than such public information, only management could answer most of the the questions which you and Rohit and others have raised. Unfortunately, as we have seen, this management is not too eager to share information.
My investing thesis is based on price. For good or bad, this management has not changed in last 8 months. Though the price has dropped by half.
I am essentially betting on the 'reversion to mean'. The pricing is cheap by any valuation you look at such as P/E. There is not too much debt. The business continues to be profitable. At this price, downside risk is limited. As a small stake, that's all that I mainly care about.
Maybe market will revalue Manugraph , maybe it won't. Time will tell.
Sold off of DGM, not manu. In manu, his stake is almost zilch.
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