Prof Sanjay Bakshi’s mastery in stock investing theory cannot be disputed. He is a staunch believer in the theory that buying stocks with a “moat” or a competitive edge will benefit investors immensely in the long run even if they pay a hefty premium for such stocks.
Sadly, the Prof’s stock picks are not living up to the high expectations reposed in them. At least three of the Prof’s favourite stocks, Kitex Garments, Vaibhav Global and Ashiana Housing, are presently reeling under poor performance and are close to their 52-week lows.
Kitex Garments shocked everyone today by slumping 13% on the back of poor Q3FY16 results. The stock has lost 35% in just the last month. The stock touched an all-time high of Rs. 1070 on 6th July 2015. At the CMP of Rs. 473, there is a whopping loss of 56%.
It is notable that the Prof was uncharacteristically bullish about the prospects of Kitex Garments. In a note titled “The Importance of Unconventionality”, the Prof came out with all guns blazing in favour of Kitex Garments. He said:
“As gigantic customers like Carter’s, Toys “R” Us, Gerber, and The Children’s Place divert more of their sourcing requirements to Kitex, I expect the company’s revenues and earnings to grow manifold over the next decade.
Despite its tiny size, the company enjoys significant power over its much larger customers which is reflected in improvement in its profitability and working capital situation. EBITDA margins have improved from 16% in 2008 to 24% in FY14. Working capital turns have improved from 4x to 11x over the same period. In FY14, Kitex delivered a 60% pre-tax return on equity with no net debt.”
The Prof also made it clear that more bucks can be harvested from Kitex Garments and that he has no intention of cashing out: He wrote:
“As I write this, the current market price is Rs 492 per share. I have no target sell price, and I haven’t sold a single share. Moreover, I feel good that I invested in this pro-social, and yet highly profitable business – a combination I absolutely love.”
Unfortunately, the Prof did not voice any concerns or risk factors about the stock. Instead, he raised a rhetorical question in the note “What could prove me wrong in this investment?” which was supposed to be answered by his elite students in class and to which the members of the public would have no access.
It is notable that the Prof’s unbridled bullishness about Kitex Garments was/is in sharp contrast with the caution expressed by the analysts of valuepickr forum.
The valuepickr forum, co-founded by Donald Francis and Ayush Mittal, boasts of a large number of razor-sharp and knowledgeable members, each of whom keeps a red alert to ensure that junkyard stocks don’t slip through the tight cordon.
Donald Francis raised the pertinent question whether Kitex Garments was really that hot an investment opportunity given that “We have many businesses which are capable of growing 20-25% CAGR for next 3-5 years – where we do not have these issues – transparency, consistency and strong visibility for next 2-3 years.”
He also asked “What remains in the puzzle is how come Kitex is doing 20% EBITDA margins when the norm is 10%? is this sustainable? why?”
He also explained that “The key to proper in-depth research is not to take anything for granted. And to question anything that prima facie does not add up”
Other members shared similar concerns about Kitex Garments. krishere expressed his worry about Kitex’s “funny math”. He pointed out that the projections made by the MD didn’t quite add up.
krishere also voiced what he called are his “major five concerns” about Kitex.
Donald also issued a clear cut “warning to novice investors” that “What doesn’t add up – are big gaps between stated and what seems to be the current picture”.
Dhiraj Dave homed in on what he called “concerns about management conduct”, one of which had to do with a huge cash balance which was mysteriously not earning much interest.
The issue of the alleged cash balance in Kitex’s balance sheet came up for frequent discussion with several members exclaiming that it is “very odd” that the cash was being allegedly held abroad in apparent contravention of FEMA regulations. sumi00 called it “sort of stupid behaviour which led to blow up of many mid-caps’ balance sheets during the last crisis”. “They should have transferred to India and invested in mutual fund if they really want to get higher returns” he opined.
varadharajanr was also skeptical. He called it “illogical” that a company would keep Rs. 199 crore in an interest free deposit. “I feel something does not add up here” he added in an ominous tone.
PP1 was not at all impressed by Kitex Garments. “Some brokers, and others have been pumping up the stock, I suspect….” he said and later added bluntly “There is no moat here, I am afraid.”
varadharajanr pursued the issue of the cash balance like a blood hound “I have been only focussed on this over the last two days and I am convinced that the Rs. 200 Cr. cash raises several questions” he said and proceeded to raise several red flags. varadharajanr was bold enough to liken Kitek with the scam-tainted Satyam “the Rs. 200 Cr. cash is a “phantom” cookie jar. Seems like satyam redux – through a merger with KCL, (so like satyam maytas merger), wipe out the cash and keep the scheme going” he said. He added that he was “very very nervous” about Kitex Garments.
Ayush Mittal, the co-founder of the forum also sent out a clear warning: “given the points raised and short-comings in the company, this investment call can go wrong – so everyone please be careful and do your homework” he said.
vivekbothra also sounded a warning: “Caution here : Managment has not always walked the talk, you can go through last five years AR to verify that”.
The specter of the huge cash caused so much concern that one intrepid member even called up the auditor to “dig more into the truth of the 200 crore cash“. Of course, the auditor assured him that everything was hunky-dory though he was described as being “very nervous”.
The cash issue raised its ugly head again during the Q2FY16 results. The management’s assertion that it was waiting for the rupee to touch Rs. 67 to a dollar was mocked and termed as a red flag. “Mgmt is crazy over the cash issue…I doubt the Corporate governance of the company” abhishek90 said while chiragjain1976 called it a “totally foolish thing to do”. richdreamz was also suspicious of the management’s reluctance to come clean on the issue of the cash balance.
The rumors that something is amiss with regard to the cash balance of Rs. 200 crore got some credence when Boby Michael, Kitek’s General Manager (Finance) and Chief Financial Officer resigned with “immediate effect” on 7th January 2016. Rajesh_R voiced the concern of everyone on the forum “CFO resignation effective immediately doesn’t seem right. Could this be more of a non-performance or personality clash or some financial mess up esp. related to 200 crores cash?” he pondered.
Meanwhile, before the management could offer any clarification on why the CFO resigned in the abrupt manner, the Q3FY16 results have been announced which caused the stock price to tank 13%.
Some members at the valuepickr forum were openly distraught at their loss while others kept a brave face. KS16 mourned the huge loss that he had suffered “All I can say is that from here, I will never take any concall update or guidance in face value. In India, anything goes and people can talk anything, pull wool over one’s eyes, wash their mouth and move on….” he wept.
The punters at MMB were equally distraught at the huge loss facing them.
“Mr jacob cannot be trusted anymore-period. We are taken for a ride.” “Unfortunately Mr Jacob talks too much. He claimed full year revenue is secured INR 600 cr . Now GOD knows what will happen. Q4 cannot be magical to have INR 250 cr rev. So the questioning is -Did he bull shit in CNBC after Q1 results” mossad demanded to know.
Man111 smelt a rat in Kitex Garments “Resignation of CFO and GM Finance smell foul in the company. Most important is the cash flow is very much interesting” he said.
Now, there is an important investing lesson embedded in the Kitex Garments episode. We have to see whether Prof Sanjay Bakshi unravels the lesson for us sooner or later!