The reason for analysing the stock chart pattern of Bartronics India back in June 2009 was not because this small investors' and brokers' favourite was looking like a 'good buy'. It was to suggest to existing holders that it was time to say 'good bye' to the stock.
Why? The company is in a supposedly high-tech field with great growth opportunities. Technically also, the chart was looking impressive. But one look at the fundamentals painted a completely different picture. It supports my oft-repeated refrain that a stock should be bought only when the technicals and fundamentals are indicating a 'buy'.
The cash flow from operations for year ended Mar '09 improved considerably over the previous year, but still remained negative. Which means, the 10% dividend and the tax on 'profits' were paid out of borrowed money. No wonder the debt to equity ratio increased from 1.3 to 1.8 and financial expenses zoomed more than 5 fold from Rs 4 Crores to Rs 22 Crores.
That dented the NPM from 17.8% to 12.8%. Prudent management would not have declared a dividend on such worsening financials. May be it was an effort to improve sentiment and keep the stock price high. Guess what? It didn't work.
The 2 years bar chart pattern of Bartronics India shows that the stock has gone nowhere:-
Nine months back, the stock had closed at 165. Today it closed at 150. In between, it peaked at 194 in July 2009, made a trough at 130 in Nov 2009 and fluctuated within the 130-194 band.
The stock has sought support from the 200 day EMA several times and both the MACD (which is in the negative zone) and the RSI (which is below the 50% level) are showing weakness.
Only the OBV is showing positive divergence - moving up while the stock moved sideways. But looks can deceive. What looks like 'accumulation' is actually 'distribution'. Why? A look at the shareholding pattern will reveal all.
The Indian promoters (27% holding) and the FIIs (6% holding) have been reducing their holdings while the general public, which now holds a whopping 45% of the steadily rising equity capital, have increased their share over the previous two quarters. No better example of stocks moving from strong hands to weaker ones.
Bottomline? The stock chart pattern of Bartronics India and the fundamentals are looking quite weak. Get out before it is too late. Die-hard hopefuls should note the strong resistance zone between 180 and 195. Only a cross above the zone can take the stock to a new high.
10 comments:
Hey, Thanks for nice and detailed analysis. Something sure look fishy here... Just unable to understand the recent proposed allottment of warrants convertible @ 232 Rs/Share to promoters. My take, a good business which is financially not managed so well... Would like to here more from you on this one...
Appreciate your comments, Prasad.
Not sure if the business is all that great. They started off importing and selling bar code readers. Others are doing the same. Don't know if volumes justify manufacturing. Where is the 'moat'?
Apparently they have a manufacturing set up for smart cards, which is a high-volume low-margin business. Main client is the Government, which is a poor paymaster. That could explain the negative operating cash flows.
A Very detailed explanation of fundamental & clear advice.
Much appreciated
Thanks a lot
Thanks Subhankar babu! I got into Bartronics in the midst of the hype and got rid of it when I made a 50% profit on it. Then I read your blog on this. Thank God, I could get off!
I'm not so lucky with Punj Llyod though...at current price, it doesn't matter whether I sell it or hold it!
Regards
Ruy Guy
Hi, A few points about the financials of the company - (1) The negative cash operating flow accrues not because of the company has a flawed business practice, rather the reason is that it has committed a lot of money to its foreign subsidiaries (total 7 in number). A closer dig in the annual report reveals that the american sub. alone has been loaned $48mn (>INR 200 cr.)The result...its profit has grown 3 times due to application of those funds & this sub. accounted for $2.2mn net profit in FY09!! (2) Another point, the debt levels, although high, aren't too worrisome because most of it is in form of unsecured loans (mainly zero coupon FCCBs, the point I want to bring abt is that the conversion price of INR 130 shall act as a support for share price of the company and diluted EPS, which accounts for dilution due to conversion of debt to equity, was pretty tempting at INR15 for FY08 (FY09 was much lower at abt INR7, can be treated as an outlier given the global turmoil, However, the last 3 quarters have shown great resilience with total EPS already past INR18!!!).
Not sure if I have the liberty of playing the Devil's advocate here, I believe the company has very sound fundamentals....it is in a fast growing business & the growth is visible in past 5 yrs' statements. Not just numbers, the company has expanded both organically & inorganically while maintaining profitability ratios...has presence in Telecom, Retail sectors and the Govt. UID program will only enhance its already healthy order book of >INR700 cr.
@Alkesh: Thanks for the feedback and kind words.
@Ruy Guy: Appreciate your comments. Learning from one's mistakes and not repeating them are part of the evolution to becoming a successful investor.
Holding on to a losing hand is not a good idea. If Punj Lloyd gets decimated, you will lose what little you can save by selling now.
@Tanuj Goyal: Welcome to the blog! All readers have the liberty to present their point of view - and yours is particularly important because it reveals interesting details.
However, I do not quite agree with your conclusions. The cash flow statement has 3 parts. Investing in a subsidiary falls under the second part: 'cash flows from investing activities'. It does not fall under the first part: 'cash flows from operations'. Negative cash flows from core operations usually indicate a poor business model.
Any idea what the American subsidiary's business is? If it is bar code readers or smart cards then I will be very surprised!
FCCB conversion at Rs 130 may not be a support if the stock price dips any further.
i was just checking this stock on your blog , yes your analysis of the stock is supported with the fall in price . At present its trading at 133.40. Those who moved out were lucky others better late than never.
Thanks for your comments, D'SOUZA.
The stock price didn't fall because of my analysis, but because of the worsening fundamentals and poor Q1 results.
In the short-term, any stock can move up on a wave of sentiment and liquidity. But longer-term, the fundamentally strong get separated from the fundamentally weak.
this stock has faced a 50% loss in q2 profit on YoY basis. 16.5cr this year q2 from 35.2 cr last year q2.
as expected its value has almost hit its 52 week low.
are its business fundamentals good enough for a buy reco ?
Negative cash flows from operations combined with huge debt is a giveaway that the business model is not good (or, some hanky-panky is going on).
Technically, the stock is at a long-term support at 100. If it breaks down, it can fall to 60.
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