About
Shakti Met Dor is a leading manufacturer of steel doors since 1995. The company was established primarily to manufacture steel doors, windows, and other building material products to cater to the construction industry. Shakti has expanded its facility to 180,000 Sq.ft of manufacturing and warehouse space capable of producing 300,000 doors and frames. Shakti has seven sales and marketing branches across the major metropolitan cities in India.

Financials
The company is in a niche business and has done fairly well in the last 8-10 years. The ROE has been maintained in excess of 20% with the recent drop due to new CAPEX and higher receivables. The Debt levels have gone up due to the new capacity and due to high additions to accounts receivables in the current year.

The inventory turns has remained at around 10 turns per year and the working capital turns in range of 3.5-4 which seems the reasonable. The total asset turns are at 2.3 which is likely to improve to around 3 with the capex being completed in the last one year.

The one key area of concern is the increase in accounts receivables which is now at around 150 days. I think this needs to be watched closely over the next few years.

Positives
The company operates in a profitable niche and has been able to scale up well in the last few years. The company has been able to deliver a topline growth in excess 20% in the last 10 years and bottom line growth (inspite of the recent drop) in roughly the same range.

The company has recently completed its capex cycle and with the growth in the construction, IT and other user industries, should be able to grow well. In addition the profit margins are likely to improve in the next few years, if the company is able to reduce the debt load and control the raw material costs. The improvement is not a given, but based on the past performance likely to happen.

Risks
There are several key risks in the business. The number one risk is the delisting plan of the company (see here). The management plans to delist the company and has offered around 195/ share. The management holds 56% of the company and needs 34% more to delist. Around 100 shareholders (including the promoters) hold around 90% of the company. I do not have details of these shareholders, but if the management has an informal agreement with them, then the delisting may happen at the proposed price. The minority shareholders holding 10% of the stock will not matter much in the reverse book building process.

A consent order was passed by SEBI on non-compliance of the company of the Substantial Acquisition of Shares and Takeovers Regulations in June 2010. It seems the promoters were acquiring the shares from the market since 1998 and have not disclosed it. This information is missing from the annual reports till 2008-2009. I think this does not inspire confidence

The other risk is the increase in the accounts receivables. This may not be as much as risk as the last quarter of 2010 has seen a sudden increase in topline and hence the year end numbers could be inflated due to that. However one has to watch this number closely as the debt more than 6 months doubled in 2009 and the total debt has increased further in 2010. This increases the risk of bad debt write-offs in the future.

Management quality checklist
–        Management compensation: On the higher side. Management compensation is around 12% of net profit
–        Capital allocation record: Has been sensible and good till date.
–        Shareholder communication – Not good. The management has not been transparent in their communication (see the point on risks above)
–        Accounting practice – Seems fine for most part with all the mandatory disclosures in the latest AR.
–        Conflict of interest – None in the notes to account. However see the risks section where there have been such incidents.
–        Performance track record – Good from a business performance perspective. Corporate governance standards have not been satisfactory.

Conclusion
I started this analysis a few days back and was impressed with the fundamentals. On looking through the BSE filing, I noticed the delisting notice from the company and was thinking of this as an arbitrage or long term opportunity. However the nature of the shareholding (thanks to ninad for pointing that out), I have concerns on how the delisting will work out for the minority shareholder. In addition, some of the past actions do not inspire confidence.

As I discussed in the last post, my valuation template has a checklist which I go through before doing a more detailed analysis on the company. On running through the checklist, I have come across the risks mentioned earlier in this post. I am not too comfortable with those risks and hence inspite of good fundamentals have decided to drop this idea.

Note: If you hold the stock and don’t think the above issues are material enough, it may be so. However I am more conservative and don’t want to put my money on the line to test it out.

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