AK Capital Services

25Apr10

AK Capital services is a very interesting company. It is a merchant banker and predominantly active in the Private placement of Debt issues.

For the 8th Consecutive Financial year, AK Capital has emerged as largest mobiliser of debt through private placement of bonds and non convertible debentures during FY 2008-09 (non bank category). Market share of AK Capital in private placement of debt in FY 2008-09 was up by 15.40% to 32.60% as against 17.20% in the FY 2007-08. Source: Annual Report
This is a very interesting market and they are very active and a market leader when it comes to private placement of debt for government institutions. They have also grown very fast in last few years.

The figures are very impressive. This company is quoting at a market cap at 220 crores which seems to be a steal and I hence dug deeper into it. The numbers are also definitely very attractive. It seems to be available at a valuation of 5-6 times earnings.

The company is operating in a wonderful industry which can generate high ROEs for the investor. The average ROE/ROA for the last 10 years has been 20-25%. Their PAT Margin has averaged 30% in last 10 years. The business is easy to understand. The industry is growing at a rate of 10-12% and will keep growing. Placing Government debt is an evergreen function and is not likely to die out as long as the economy has to function, which means forever. The business is also not capital intensive since its a service business. The company will also benefit from two significant trends of this business:

Increasing amount of debt placed and this is expected to continue in the future with corporate bond markets expected to open up. Indian debt markets are extremely undeveloped compared to the developed countries and this situation will change in the future. Link here on a news story.

Increasing amount of Debt placed per issue: This benefits the company because the fixed cost in terms of time spent on a deal is almost same across deals whereas the money generated per deal will be higher with greater deal size i.e. Employee costs for AK Capital will not proportionately increase with the deal size and hence they will benefit significantly from this trend.

These trends are evident from this graph:

However there were multiple issues for me in the annual report and I did not have the competence to evaluate. I hence finally gave it a pass though the company is still in my watch list.

Some issues which cropped up:

– Statutory auditors resigned in 2005-06 and no clear reason was given

– The MD&A revolves a lot around topline growth and how growth in itself is good and does not reflect on usage of capital etc

-The revenues generated from investments are 40% of the total revenues and it is extremely unclear how this business works.

-Significant related subsidiary transactions which I don’t understand once again

-Their cash flow statements are very difficult to comprehend. They have generated only 40 crores in CFO in last 5 years against 95 crores of PAT. They have CFI of -77 crores in 5 years and CFF of +45 crores in 5 years. It is unclear why they are borrowing money and where it is going.

-Their CFO before working capital adjustments in last 4 years is 67 crores whereas post working capital adjustment the CFO is 26 crores. I could not tally the investments in working capital with increases in balance sheet current assets and liabilities. I spent considerable time trying to do the same. Also, I could not figure out why the company needs such huge working capital investments.

-Most importantly, I found certain discrepancies in the cash flow statement and could not account for a reduction in 2 crores in their cash account 2-3 years back. In the 2007-08 Annual Report, the cash and cash equivalents at the end of year is Rs 8,27,70,690 (for the year 2006-07 which has been provided for comparison) whereas if one looks at the Annual Report for the year 2006-07 the cash balance is given as Rs 1,02,770,690. There is a mismatch of Rs 2 crores which can be accounted for by the reduction in CFO of Rs 13,10,000 and reduction in CFI of Rs 1,86,90,000 between the two Annual reports. I.e. For the same year, the figures are different across 2 annual reports and it is extremely unclear why this reduction in cash has taken place. I could not understand this at all. I felt my accounting knowledge was not sufficient enough to figure out these discrepancies. But since I could not call this company to be within my circle of competence when it comes to understanding their AR I felt a wait and watch approach is better. I mailed the company regarding tis 2 crores discrepancy but the reply did not clarify my doubt.

I could not confidently answer how this business is generating money and how it is spending it. Hence, AK Capital Services is a pass as of now. However I will keep this under check since I am extremely attracted towards their core business of debt placements.

Disclaimer: None


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6 Responses to “AK Capital Services”

  1. Hi Pradeep,
    Wonderful Blog and a great start,good to see more indian value investing blogs & particularly focused on small/mid cap space 🙂 . I generally stay away from companies in the Financial Sector as they fall well outside my Circle of Competence. However this stock came up in a private investing group i am a part of. Everyone reached a consensus to take a pass as :

    1. Severe equity dilution impact on QIP
    2. With over 50% in treasury ops, they don’t need more funds from QIP to again park there; the business doesn’t need additional funding

    Please do blogging & continue with your effort.

    PS: I Have started a new blog too : http://thriftyinvestor.blogspot.com ..would appreciate your feedback

    Cheers,
    Siddharth

    • Hi Siddharth,

      Thanks for the encouragement. I saw your blog today before you posted your link. 🙂 I read your comment at dalaal-street.com and checked it. Its nice. The first stock pick was good. Keep going!

      This was not exactly financial sector in the sense, I do not understand companies with operations similar to banks but this is a straightforward service they are offering but they have made it murky with some investment operations.

      I had not considered the QIP equity dilution!! Big mistake. But would not the promoters holding come down tremendously too? At a market cap of 212 crores, how can they raise 200 crores? Doesn’t it mean an almost 50% dilution in equity? I do not understand this area. Will read-up further on equity dilution.

      I agree to the second point fully.

      Rgds,
      Pradeep

  2. 3 Jazz

    Hi I would like to know ur views abt this co. now. do u see a value trap ?? it looks like a cash bargain

  3. 4 Sachin Purohit

    Just reached your blog searching for this company. I must compliment you for some very good content from value investing perspective. About this company, I just started analyzing it and found something not good. Just wanted to check if someone else in cyberspace shares my apprehension about this company. The company is apparently in a business that does not require too much of capex. However, it has a miserable dividend payout track-record. Wonder why it is hoarding on all the earnings. But I have seen numerous good businesses that do that and I am OK to some extent on that front. But a lot of this money is going towards related party transactions. One such transaction that caught my eye was some time in 2006-07, it bought stakes of a company named A.K. Capital Corporation Pvt. Ltd. for Rs. 2.1 Crore. This company had got incorporated just a couple of months before it was bought by AK Capital Services. The earnings of this business (about Rs.25000!) does not seem to justify the price paid. Seems like it is the promoter’s way of siphoning some amount of money from this venture.

    • Agree. Their operations are shady. And as Buffet says, There is never just one cockroach. I avoid companies with corporate governance issues rather than trying to use a bigger discount to their intrinsic value because the intrinsic value itself is suspect!

  4. 6 Sam

    Hi,

    Just subscribed to your blog and got a link to this article from your first email. The scrip has corrected significantly. Would you rate it a buy at these levels?

    Best,
    Sam


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