Vikas Ecotech – How promoters and auditors can keep fooling investors!
We had recommended Vikas Ecotech way back during August 2016 around Rs.14 and booked profit at Rs.30 during November 2017. Our members earned 100%+ tax-free return within 16 months and delighted. As on June 2018, after the Q4FY18 result from Vikas Ecotech, we can realize that a mistake actually earned 100%+ profit and how promoters and auditors are fooling investors for the last few years and still many investors not even realizing it!
The story that can attract anyone –
Since 2016 Vikas Ecotech was marketing themselves as an R&D driven eco-friendly lead free PVC stabilizer manufacturer having very high growth potential. There was news that the government might phase out lead-based stabilizer used in PVC pipes industry that causes pollution. Considering the environmental factors, this was indeed a great high growth opportunity. After every quarterly result, their press release comes out with many optimistic comments including some patent talks in the US, initial orders from MNCs across the world, encouraging customer’s feedback, capacity expansion, new plant in Dahej, new product innovation and many more with the promise of continuing high growth business in a responsible and eco-friendly way! Then comes the surprise in FY18 balance sheet!
Click here to read one of our old coverage. (Paid Members can log-in to check the entire investment rationale, details of sell call, quarterly result update and chronology of events)
Q4FY18 Balance sheet that can reveal the surprise!
Vikas Ecotech reported Q4FY18 (January -March 2018) result on 31st May. Click here to check the same. I am not going in too many technical terms rather trying to portray in simple language –
- They were reporting around 100-110 crores revenue in the last few quarters but in Q4FY18 they reported around 34 crores revenue with negative PAT along with excuse of some business disruption for “international trade surveys”. A dip in revenue or profit is nothing wrong in the business. Every business must face ups and down. Interesting point is that there is “Trade Receivables” of 208 crores against the 9MFY18 revenue of around 250 crores. In simple language, it means from July 2017 to March 2018 for 9 months although they are showing sales of 250 crores but out of this 250 crores, 208 crores is not entered in their bank account. Thus there are invoices for 250 crores but they received only 42 crores “real money”. It essentially means either their customers are not paying them or they are reporting fake numbers for all the past few years.
- Even more, interestingly, they know that such drop in sales and profit will cause stock price correction so just after the result, there is a “Press Release” saying that after the disruption in Q4FY18 now everything is normalised and they will again report around 100 crores sales in the next July-September 2018 quarter! How can any business know how much they will earn in the next quarter? It is like saying by hook or by crooks we will again manipulate the P&L account in the next quarter to report 100 crores of sales!
- We can remember during the last year January – March 2017 quarter also they reported loss and mentioned that the loss is due to the unfortunate fire accident. Now, anyone will doubt, whether that was even real fire or not! No retail investors or equity analyst can verify exactly how much damage the fire caused. Is it even accidental fire or incidental fire just to keep cooking the books!
We invested in Vikas Ecotech during August 2016 around Rs.14. It was on “Hold” for the next 16 months until November 2017 and then we booked profit at Rs.30. After our profit booking, the stock price even touched Rs.48 in January 2018 and many members raised the question “Why you booked profit at 30 while the price peaked at 48 within 2 months!” (that’s a different issue and we understand many amatuer investors will keep questioning like this).
The primary point is from August 2016 to January 2018 the stock price keep on raising by 300% (approx 12 to 48) inspite of the “window dressing”. It reveals no equity analyst or investor can ever read the mind of the promoters. The receivables were high during FY16 and FY17 too but that is possible if you develop a new eco-friendly product that can take time for customer acceptance. Otherwise, they were paying around 33% tax on reported profit whereas the profit numbers itself can be fake! They had reasonable debt level with decreasing debt to equity ratio, fair ROE and ROCE and interest coverage ratio and above all an attractive growth with bright prospects of eco-friendly lead-free PVC stabilizer!
Probable Plan of Vikas Ecotech (I might be wrong) –
The company announced demerger in the last year and regulatory permissions with formalities might be completed within the next few months. Post-demerger they might transfer all the manipulated books in one entity and then report a big loss. The same tricks were played during Omkar – Lasa demerger, Mandhana Industries demerger (Even Rakesh Jhunjhunwala purchased 28Lacs shares or MRVL for approx 40+ crores in 2017 which is now worth less than 20 crores). I even wonder, how can so many regulatory bodies like SEBI, NCLAT, stock exchanges give permission for such demerger! Indirectly even those regulatory bodies are also allowing all those malpractices keeping the sufferer as only “retail investors”.
P.S. – Demergers, if comes with the good intention of promoters, can actually create massive wealth for shareholders – like Future Enterprise demerger, TCI- TCI Express, Crompton Greaves and many more.
Main Culprit – Promoter or someone else?
The main culprit is not the promoters rather the auditors and Chartered accountant. Promoters might have bad intention but they don’t know how to manipulate accounts. It is the auditors those help promoters for all kind of frauds just for some extra ill-gotten money. If the government can become very strict on auditors then 90% of the black money, frauds etc would be resolved. There are two possible ways –
- After the outbreak of any fraud, simply cancel the auditor’s license and put him in jail for the lifetime. Dozens of such punishment will create the example and no auditors would dare for any kind of wrongdoing. But wait, it is India. Punishment to the dozens of such auditors will make 1000s of other corrupt persons to protest on the street, some corrupt political party will ignite the protest for vote bank politics and ruling party might get collapsed! This is why no ruling party can take such extreme steps that can eradicate corruption.
- A long-term solution is teaching “Ethics and Morals” as a compulsory subject in every school and colleges. But again the problem is who will teach “Ethics and Morals” considering the fact that few months ago it came in public that few teachers leaked CBSE question paper to some students just for the money that caused re-examination and extreme harassment for millions of students!
What do investors need to do?
There are two things you need to remember while investing in the stock market –
- Investors can stay with well-known reputed names like ITC, HDFC Banks etc that can earn an average return. However, in India not even all well-known reputed names are safe. Some biggest brands like ICICI Bank, Axis Bank, SBI, PNB etc are also caught in fraud and wrongdoing. The biggest disappointment is that the CEO (serving around 10 years) of the largest private sector bank ICICI, Chanda Kochhar is also named in fraud. Not only ICICI Bank’s CEO, lots of senior post holders across many banks are in the same place. I really wonder what makes these veterans involved in wrongdoing while they earn the salary in crores!
- Investors those invest in midcaps and smallcaps for extra return must have to accept the risk. No equity analyst can know what is going on inside a promoter’s mind. If you invest in midcap and smallcap stocks then along with many good returns you must have to face many negative surprises. Apart from the recent cases of PC Jewellers, Vakrangee, Gitanjali, Atlanta, the story of Manpasand Beverages surprised me a lot. Motilal Oswal had in-depth coverage on Manpasand and they are also one of the largest public shareholders through various funds. Many other reputed funds (SBI, ICICI Pru, Nomura, SAIF partners) had investment. All on a certain their auditor Deloitte resigned by saying the company is not disclosing all information. It means that for all the last few years, Deloitte helped them for manipulating books now they are saying we can no more remain “partner in crime”. The result – the stock price crashed by 50%+ in 4-5 days with continuous lower circuit! Many stocks in which famous investor Porinju had sizeable stake experience the similar big downfall just because of the similar reason.
There are many more frauds are going on in the stock market. We can’t write/expose everything in details because by doing so we can become the target of any powerful nexus of promoters-auditors. Our task as an equity analyst becomes more and more difficult while researching any midcap/smallcap stocks due to many such factors. Remember, one can even earn good money from a potential fraud if the fraud is not revealed during the holding period. Similarly one can also lose money from a clean company if they went wrong on valuation (entry-exit timing) or if there is some genuine business setback. Moreover, figuring out whether a company is “fully clean” or “partially clean” itself is difficult because you can never read the mind of promoters (or any other person). Remember, while doing business in India majority of the companies must have some issues in some form or other. If you are developing residential/commercial housing project or if you are a road/bridge contractor or if you own any factory that requires license/clearance etc then you must have to pay the bribe at some point of time. Now you can’t report the “bribe money” in your balance sheet, so some alteration is required. The mystery that we as an equity analyst try to solve is whether a company is “small chor” or a “big chor” or a “maha big chor” and probably when such “chori” (fraud) can be out in public or can cause damage in stock price or whether it is already factored in the stock price. Many stock price also declines just from some rumours and how much truth is there in those rumours is something that is almost impossible to find.
Thus, every equity investor should factor all the risks in the equity market before investing and be prepared for positive/negative surprise. Abusing any equity analyst after any negative surprise in the stock price won’t help anyone.