True that. Q1 results were disastrous. Six of the last 7 quarters have seen decline in sales and profits. Margins are at their lowest in last 5 years at least, and capacity utilization has stagnated at around 66 % with the management continuing to blame Chinese dumping for depressed prices.
This may be true, so I asked the management what steps they are taking to derisk the business from this menace. I got a long-winded answer which – at the end of it implied – they plan to approach the government “at an appropriate time.” What strategy!
They have announced a capex of Rs.250 crores to be completed in 24 to 30 months, which will enhance capacity by another 20 %. But the company is struggling to utilize its existing capacity itself. Moreover, even after this expansion the company will remain at the mercy of the Chinese since their domestic capacity is far more than their domestic demand. So, I am skeptical of this expansion and think they should simply diversify their revenue streams beyond rubber chemicals, which will add strength to NOCIL’s business model.
If not, they can simply return cash to investors. The current free cash on balance sheet is around Rs.350 crores, plus the company will add another Rs.500 crore in the next 3 years at a minimum. This means we are looking at anywhere upwards of Rs.600 crores of surplus cash even after providing for the announced capex. This is a huge amount. Almost 2 % of share capital can be bought back each year easily. But the management shows no inclination to return cash, even the dividend payout is low in this context.
Of the Rs.350 crores of surplus cash on balance sheet today, almost Rs.240 crores are invested in NCDs. I wrote to the company asking for details about these debentures – which company, coupon, tenor etc. but they replied “this being a sensitive matter cannot be disclosed.” This is surprising, most other companies disclose their full investment portfolio in the Annual Report. I then enrolled as a Speaker for the AGM and asked again, but shockingly the Promoter simply ignored my question. You can draw your own conclusions, but this – coupled with the reluctance to return cash – makes me uncomfortable. It is possible that the cash is being used to fund other interests of the promoters.
Cyclical downturns or macro-economic headwinds are okay, but I am generally intolerant towards capital (mis) allocation. I have therefore exited the stock completely. NOCIL has a dominant position in the domestic markets, and growing business with global majors. With a debt free balance sheet, it is throwing out a lot of surplus cash. But the Promoter seems unwilling to step out of his comfort zone and take steps that will propel the business to the next level.
| Subscribe To Our Free Newsletter |
