CREDIT SERIES- MARKET INTELLIGENCE

Case –II – Stock Market Data

Market movement of share prices and market cap is one of the most intelligent indexes especially if it’s a homogenous business and there is adequate free float.

So there was this company which was into lending for a certain asset class. Key performance indicators of the lending business – NPA levels, capital adequacy ratio, liquidity coverage ratio and provision coverage; all were good.

But somehow the market didn’t seem to appreciate that fact. It was evident from just broad indicative numbers as below without going into any fundamental or technical analysis.

Entity Total Assets Market cap/ Total Assets Market Cap/Sales Market cap/Net profit
A 1,00,000 0.30 2.5 9
B 1,30,000 0.21 1.8 13
D 88,000 0.05 0.4 4

 

We can see a clear outlier there in these numbers.  These numbers looked like something below 3 years back-

NAME Market cap/ Total Assets Market Cap/Sales
A 0.45 4.0
B 0.27 2.2
D 0.10 0.9

 

The investor community sensed that there was more to these numbers. And then if you look at the below lagged indicator, events started happening and reflecting the true position-

NAME YEAR 1 YEAR 2 YEAR 3 Outlook
A AAA AAA AAA Stable
B AAA AAA AAA Stable
C AAA AAA AAA Stable
D AAA AA+ AA- Negative

 

So especially in businesses which share common characteristics, try understand if any areas beyond the numbers only needs to be looked into.

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CREDIT SERIES- MARKET INTELLIGENCE

If market intelligence points to something, explore that further

  • We have all been caught with surprise on a number of occasions when an account always repaying on time suddenly starts delaying.
  • So my experience is that it is something which starts showing signs in other areas as well before it starts in the delay mode.

Case-I – Auto dealer with reducing sales volume and increasing inventory

There was this car dealer which was one of the prominent dealers in a certain geography. The repayments were all on time. But below was noted when it came for review-

  • Change in lenders and reduction in exposure by other lenders. It was cited that those lending institutions have reduced their exposure as industry stance.
  • Sales had substantially come down but inventory figures reported didn’t match with sales level.
  • Inventory amount reported and inventory ageing were not in sync.
  • All key outlets were rented.

On market check it came out that it is looking for selling its dealership.

On checking the inventory position of two periods it came out that two different invoice dates for same vehicle was given, leading to wrong ageing of inventory and that inventory as old as two years was being carried.

Now that dealer is looking at monetizing its other assets and reducing the debt. The dealership business may or may not continue in future.

CREDIT SERIES- Numbers are numbers

Case II – Related party numbers and merger/de merger stories

This company is into supplying capital goods to various industries. Their factory,  biggest in Asia on some parameters and being covered by a prominent international news channel on their documentary.

This business had two parts – one pure material supply and another material supply+installation+other services. They decided to separate these businesses and have each company focus on one part. So the more profitable and less working capital intensive one starts supporting the other.

How does this support system work?

  • Loans and investments
  • Sales
  • Receivables on sales with relaxed credit period.

And

Converting those receivables into loans and investments as receivables don’t get realized only.

  • Then post three years of separation they decide that being together was worth more.
  • So finally those receivables which has been stuck for ages gets place in the combined balance sheet.
  • And right timing. Come INDas implementation and fair valuation. They take credit loss and revalue the assets, net effect on overall balance sheet negligible.

TABLE 2

  • At the same time to keep this business of ever increasing receivables to keep going advantage of stock market is taken. With a minimal free float the prices keep moving in either direction now or then.
  • No major casualties so far other than the employees who faced two major layoffs in last one decade.