MIDCAP &
SMALL CAP CORRECTION
VAKRANGEE
From January, 3rd week or so, of this year, market has been
in a correction mode. Mid caps and small caps especially have undergone severe
correction during this period.
This period, unfortunately coincided with some adverse
occurrences in respect of companies like Vakrangee.
A news paper at Mumbai carried some adverse comments on
Vakrangee. This was followed by severe reaction in the market on Vakrangee's
share price.
There were some other rumours of Vakrangee purchasing some
huge shares in PC Jeweller. This drew adverse reaction from Investors and
others in the press etc.
All this was clarified by the Management of Vakrangee
through Media reasonably logically. Vakrangee sought to sell off the shares of
PC Jeweller early and never to do such purchases in future.
This was somewhat convincing and the share price recovered
partially but not fully. The company also announced a capital allocation Policy
for Buy Back of shares and paying dividend to investors. This boosted Investor
confidence to some extent.
Then came the Bomb shell - in the shape of the Auditor's
resignation. The Auditor stated that the company is not furnishing some
information in the absence of which it cannot complete the audit. So, the Audit
is resigning.
Nothing could be done by Vakrangee Management to persuade
the Auditor to resume Auditing. So, it appointed another Auditor who completed
the Audit eventually.
The audit certificate was unconditional. But the accounts
themselves consisted of 2 items which reduced the net profits severely as below
:
"Other expenses includes Rs.220 Crores towards amounts
written off as bad debts pertaining to the legacy business of e-governance,
during the quarter ended March 31 , 2018."
The cumulative loss recognised on disposal of equity
instruments for the year ended March 31 , 2018 is Rs.3,086.34 lakhs. Dividend
recognised during the year for the investment disposed off is Rs. 46.96
lakhs.
These two items reduced the Net profits severely in Q4. On
the face of it, these will not probably have any effect on the results of Q1 to
be declared shortly. One good thing is, it seems to be giving up its legacy
business of e-governance where it is unprofitable.
The company postponed its capital allocation policy -
including dividend indefinitely. This drew criticism from all.
But, it announced some restructuring Plan for its Business
involving huge Capex on the part of the company and on the part of the
Franchisees of Vakrangee kendras.
This also involves re-working the ratio of sharing between
the Franchisees and the company which will alter the existing revenue
sharing. Its effect on the revenues of Vakrangee is not known. We are unable to
form any estimate or opinion on this restructuring and its effect on the
company's revenues right now.
Therefore, I am unable to form an opinion on how the
company's profits will look like in Q1 and Q2 of this year.
In the mean time, the company's share price is relentlessly
beaten down in the market to a low of 31.
At this stage, can we form an opinion on the company's
future?
The basic business model is of course intact and sound. The
restructuring may possibly reduce the company's revenues to some extent.
We don’t really know this and have to wait to see this. But, the brand image of
Vakrangee at ground level may improve a lot, which was also one aspect of
criticism on whether so many kendras really exist. That criticism will go.
If so much capex is expected of the Franchisee,
Proliferation of Kendras may not happen at the speed Vakrangee wants. Some slow
down may happen.
But, India is very Big. 72,000 Kendras is a small number. It
might well happen.
Vakragee seems to have taken RBI's approval for some 10,000 White ATMs or something but
condition is, some of them must be in rural areas. Whether it will be
profitable in rural areas remains to be seen.
All in all, Vakrangee is improving its Business image and
brand image on one side, but is moving into a slightly uncharted territory. If
this Business plan succeeds as good as the earlier business plan, Vakrangee can
build far larger number of kendras all over India.
Even with a slightly reduced revenue share, Vakrangee can
still succeed well.
Current price of Vakrangee is at around Rs.60, which is
ridiculously LOW. So, what is its correct level? In my view, it can't be
less than Rs.150. But, it is the Q1 results that can firmly tell us what level
it deserves. It also needs clear Management commentary through Media and along
with results on what it expects about the future.
Will it declare results quickly? Will it declare reasonably
good results, even if slightly less than earlier due to restructuring and due
to the fixing of new revenue sharing formulas. Vakrangee should build up its
investor confidence levels now through all these and by clearly telling us what
it expects from future through its current initiatives.
All market uncertainties will be laid to rest when results
get announced. Rs.60 levels are too low for a company which had reached over
Rs.500 too. Everybody expects quick results and clear Management commentary
about the future.
All said, I firmly believe that the company still has a
bright future. India is too big and the company’s business model cannot fail in
India. The scope for expansion of Vakrangee is almost infinite.
