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Monday, August 26, 2013

Jayant Agro: Factor of 3!! Under Reporting Profits at standalone levels

I was just trying to read through the latest Annual Report year 2012-13 of Jayant Agro Organics 
you can get a copy of the Annual Report from Company website here (Link)

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Looking at the stand alone Income Statement for Jayant Agro Organics


Year Ending March 2013
Total Revenue: 1228.21Cr
Cost of Material Consumed: 504.03Cr

Value Add Margin: (1228.21-504.03) = 724.18Cr
Value Add Margin as percentage of sales: 724.18/1228.21 = 58.96%

Net Profit Reported: 27.73Cr
Net Profit Margin as percentage of sales: 27.73/1228.21 = 2.25%

Jayant Agro has a Value Add Margin as percentage of sales of: 58.96% 
while Jayant Agro  reports a net Profit Margin as a percentage of 2.25%
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Looking at another of my Best Buy Recommendations GAEL Annual Report (Link)
Income Statement for Gujarat Ambuja Exports:




Year End March 2013
Total Revenue: 3014.07Cr
Cost of Material Consumed: 2069.10Cr

Value Add Margin: (3014.07-2069.10)= 944.97Cr
Value Add Margin as percentage of sales: 944.97/3014.07 = 31.35%

Net Profit Reported: 113.35Cr
Net Profit Margin as percentage of sales: 113.35/3014.07 =  3.76%

Gujarat Ambuja Exports(GAEL) has a Value Add Margin as a percentage of sales of: 31.35% 
while GAEL reports a Net Profit Margin as percentage of sales of: 3.76%
=============================

GAEL margin reporting looks true.. while Jayant Agro margin reporting looks suspect.. 

Well the answer is just a step below..


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Jayant Agro 2013:
Cost of Material Consumed: 504.03Cr
Purchase of Stock in Trade: 502.43Cr
Stock in Trade as % of Cost of Material Consumed: 502.43/504.03 = 99.68%

Jayant is carrying as "Stock in Trade" inventory equal to 99.68% of its full year's cost of material consumed.
Next year's Cost of Good Sold = Zero (as its already included in this year's expense)
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GAEL 2013:
Cost of Material Consumed: 2069.10Cr
Purchase of Stock in Trade: 411.34Cr
Stock in Trade as % of Cost of Material Consumed: 411.34/2069.10 = 19.88%

GAEL is carrying as "Stock in Trade" inventory equal to 19.88% of its full year's  cost of material consumed. 
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Lets get this clear.. 
Jayant has sales of 1228.21Cr and the cost of material for this sale of 1228.21Cr is 504.03Cr .. and in the expense section is purchase of stock in Trade worth 502.43Cr which is very very close to the cost of material consumed for the whole year..

surely this is a lot of inventory.. that is being carried forward.. infact in the year ending March 2012
Jayant "Cost of Goods Sold" was 678.71Cr while inventory was 775.19Cr .. 114.21% of last year's full year's "Cost of Goods Sold"..
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Assuming "Inventory at a level of 20% (similar to GAEL) 
Cost of Material Consumed: 504.03Cr
Suggested Purchase of Stock in Trade: 20% of 504.03 = 100.80Cr

Difference in "Purchase of Stock in Trade" = 502.43-100.80 = 401.63Cr

Assuming everything else is the same in the income statement of Jayant Agro.. 
Net Profit should have been: 401.63+ 27.73 = 429.36Cr

Surely a net profit of 429.36Cr is way way out compared to reported profit of 27.73Cr

Lets take GAEL again into the picture: 
GAEL had Value Add Margin as percentage of sales at 31.35% and Net Profit as a percentage of sales at 3.76% (11.99%)

we know that Jayant has a Value Add Margin as percentage of sales at 58.96% let us assume that Jayant will have a Net Profit as a percentage of sales at 7.01% (11.99% of Value Add margin)

Ideal Net Profit for Jayant Agro Organics (standalone): 86.17Cr which translates to EPS of 57.44 per share


Conclusion: Jayant is under reporting profits by a huge number by increasing costs.. Though a company is allowed this level of flexibility .. we as investors can see the under reporting done and get a stock at an unbelievable discount to its real value..

Jayant has a Market Cap of just: 108.53Cr and only 5235 shareholders.. Right now looking at the level of under reporting I can say Jayant is an easy 10 bagger!!
 
We as investors can also approach the management to report real numbers and help in value unlocking .. hence benefitting all investors..

PN: These are my personal views about publicly available information.. Please do your own deep dive before investing!!



11 comments:

Chetan Bansal said...

This post shows lack of basic knowledge about accounting!

ttthakur said...

Sir,
Thanks for posting the latest analysis of Jayant Agro and GAEL.
However, on going thru Annual Report of Jayant Agro, i find the co. is not showing carryover of inventory of Rs. 775.19 crs.as on 310312, as stated by you. In fact, co. is showing only inventory of 83.16crs as on 310312. As regards, the fy 13, as per Annual Report, inventory is only 74.51 crs.
Sir, Kindly go through the annual report once more, and , correct me if i am wrong.
I have not gone through GAEL reports so far, which, I shall do soon.
Awaiting your quick response,as per your nature!
Thanks and Regards,
ttthakur

km said...

Dear Prahalad,
If Jayant had included the entire cost of material for this year in the last year's AR itself, then they should be used this year without purchasing additional material. Somewhere there is lack of clarity. If what you say is true , can't this be proved openly by true accounting people ( say the chartered accountants). I think Market is not ready to accept this mirage. Please correct me if I'm wrong.

What'sUp Prahalad said...

Chetan Bansal ji:

I think you are saying that there is a misunderstanding on my part in reading the data..

I would appreciate if you can provide some insight..

True I donot have an accounting background.. So would appreciate if someone could explain the high level of "Stock in Trade" in layman terms..

To me it looks like a ploy to under report earnings by inflating expenses.. by increasing inventory levels..
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If "Purchase of Stock in Trade" is an input cost for "Total Sales" then it should be included in "Cost of Goods Sold"

"Purchase of Stock in Trade" looks like "inventory" (buffer stock) but buffer stock which equals Full year's "Cost of Goods sold" is too high a level of buffer stock... which leads to the conclusion that its part of effort to under report profits..

"Any help in understanding this would be appreciated.."


=happy investing
whatsup-indianstockideas.blogspot.com

What'sUp Prahalad said...

KM ji:

Feel you are being "diplomatic" but it looks like you also mean that my understanding is not correct..

Kindly elaborate..
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"Purchase of Stock in Trade" to me is the buffer stock of raw material that keeps your production plant working till the next batch of raw material is available...

Certainly its not part of "input material cost" already used in "Sales" ..if it was.. it should be in "Cost of Goods Sold"
==============
Look at GAEL income statement.

It mentions Total Sales.

It deducts "Cost of Goods"
It deducts "Traded Goods"
It deducts increase/decrease in Inventory.
It deducts Employee Expense, other expense, depreciation, taxes.. Bla.. bla.
=======================
Jayant has Increase/decrease in inventory of 12.8Cr
Jayant has Employee Expense, finance and Depreciation, taxes ..bla bla..
=======================
Only thing which makes no sense is "Purchases of Stock in Trade"
=======================

I know explaining something to somebody else is a time consuming activity.. and not beneficial to you as such as you already have the understanding..

but appreciate if you or "Chetan Bansal ji" could spend their valuable time writing down an explanation of your understanding..

It would help me and other readers of the blog..

=happy investing
whatsup-indianstockideas.blogspot.com

What'sUp Prahalad said...

TTThakur ji:

as you can see.. from my reply to KM and "Chetan Bansal" they both seem to think my understanding that
"Purchase of Stock in Trade" Equal's "Inventory" is wrong.

===================
I think what they are trying to point is:
"Purchase of Stock in Trade" is actually "Cost of Trading Goods Sold"
===================
Sales = Manufactured goods Sale + Trading Goods Sale.
"Cost of Goods Sold" + "Purchase of Stock in Trade" should be "Total Cost of Manufactured and Traded Goods"

==========
Which effectively means that "purchase of Stock in Trade" is not "inventory" but a type of "Cost of Goods sold"
==========

Must confess that I am not an accountant by profession.. and for a layman like me "Purchase of Stock in Trade" looks like Inventory... correct title should have been "Cost of Traded Goods"

So that will make the inventory discussion meaningless.. for now..

Still I feel the profit numbers reported are way way below realistic levels.. and realistic net profit levels could be close to 7% (my calculated value)

=happy investing
whatsup-indianstockideas.blogspot.com

km said...

Dear Prahalad,

I will try to ask my company Chartered accountant about this item " purchase of stock in trade". Will be meeting him early next week.

Without the accounting background , the amount of information you are digging out and bringing to surface and public knowledge is phenomenal. We have to learn from your hard work and contribute our 2 cents.

ttthakur said...

Sir,
There is no under-reporting of earnings by Jayant Agro, by inflating expenses, after analysing P&L Acctt.
Refer Note 20 of Annual Report:
Sale of Products after deducting Excise Duty is: 1225,97,13,309 , which is total of cost of Traded Goods =504,50,91,194 and cost of manufactured goods = 721,46,22,115.
In other words, sales include cost of traded goods, thus debit of Purchase of stock-in-trade(viz.traded goods)502,43,17,384 is correctly done, and not to suppress earnings.
Hope this is clear.
Pl. verify and comment agreement.
Thanks
ttthakur

What'sUp Prahalad said...

TTThakur ji:

First of all "Big Thank You" for digging in and taking time to clarify.

Today .. I did send an email to the company Secretary asking for his help in clarifying this line item in "Expense" section.

I also requested them to start a "conference call" for AGM and analyst meeting so that shareholders and "analyst" can attend the meeting virtually.

Lets see what the management has to say.. Thank you once again.. your explanation .. it makes perfect sense..

Kudos for all the hard work!!

=happy investing
whatsup-indianstockideas.blogspot.com

km said...

Dear Prahalad,

Now that TTThakurji has clarified us that JAOL numbers are close to real performance, can we now assume its a 3 bagger from this price point instead of a 10 bagger.

Need your re-look on its potential with fresh eyes.
Regards

What'sUp Prahalad said...

km ji:

yes 3 bagger is the first pitstop.. I think we should evaluate the situation once the stock reaches 300 levels..

In venkys I was invested @100 and then the stock raced to 300-350 levels obviously I sold most of my stock..

then came the SAST announcement of promoters still buying at 350..

The stock finally peaked at 4 figures..

========
Venky's did correct .. but never below 350 (I think)

Right now Jayant is highly undervalued..its like no price appreciation since 2005 ..

once the sentiment changes it generally swings to the other side.. so can it be a 10 bagger..

I would say "Never say Never" I have seen it with my eyes..
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having said that @ 300 levels I would definitely lighten my load significantly.. (PN: my avg is around 100 so actually its 3 bagger for me)

=happy investing