A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have raised for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
The above paragraph is from the “letters to the shareholder” in 2005 by Mr Warren Buffet to the shareholders of his holding company Berkshire Hathway.
As an investor, our sole intention is to find a well-run and sensibly-priced business with fine economics …… and stay invested ignoring the gyrations of the market. But if a stock appreciates rapidly to the point where it no longer represents excellent in absolute terms or reasonable value relative to prospective purchases, or if new information comes to light that causes us to revaluate , it may be sold quite quickly. In this respect, I can’t resist the temptation of quoting Mr. Buffet from his “letter to the shareholders – 2003 ”. “…. We own pieces of excellent businesses – all of which had good gains in intrinsic value last year – but their current price, reflect their excellence. The unpleasant corollary to this conclusion is that I made a big mistake in not selling several of our large holdings during the great babble. If these stocks are fully priced now, you may wonder what I was thinking four years ago when their intrinsic value was lower and their prices far higher. So do I ”
Ricoh India Limited (RIL) is one of India’s leading sellers of office automation equipment like copiers, printers and multifunctional devices. It is the subsidiary of Ricoh, Japan, one of the world’s leading players in the office automation industry. The parent company owns 73.9% of the equity of Rs 39.7 crore.
The Indian office automation market is one of the fastest growing in the world and being driven mostly by BFSI sector (banking/financial service/insurance etc). The Industry in all likelihood will continue to grow in foreseeable future.
Ricoh (Japan) used to operate two units in India , Ricoh India and Gestetner India ( manufacturer of duplicating machines). Few years back, Gestetner India was merged into Ricoh India. The duplicating division was closed and all the employees were given VRS. The cost of closure was charged in the accounts of Ricoh India already. The goodwill arised out of merger was written off in the accounts and as on 31.3.09, entire Goodwill amount was already written off in the accounts.
One interesting aspect of sales mix of Ricoh is that over the years, the share of service revenue as compared to the revenue from products sales are increasing. This is interesting as the service division enjoys higher EBITDA margin as compared to the margin from product sales. Ricoh will benefit from higher sales of consumables like toners, cartridges and also from higher fees from annual maintenance contracts.
It is interesting to note that during 2008-09, revenues from service division has crossed Rs 100 crore for the first time.
Now let’s look at the numbers. P&L numbers first and then we will have a look at its Balance Sheet (BS). As I always believe, investment decision should be taken on the basis of BS.
Revenue at Ricoh has grown steadily from Rs 167 cr in 2005-06 to Rs 242 Cr in 2008-09 – grown by 9.55% CAGR. The profit at the net level remained flat at Rs 10-12 crore. This is not a concern as Ricoh has generated free cash flow each year and in the process has emerged as debt free company as on 31.3.09.Ricoh has also written off all the costs associated with restructuring and merger.
In 2008-09, Ricoh’s profitability has suffered due to the sharp depreciation of Indian Rupee(INR).Ricoh imports most of its products and the sharp depreciation of INR has resulted in a forex loss of Rs 7.60 Crore. Unlike the other Indian companies, it did not take the advantage out of AS-11(revised) and charged off the entire loss in the P&L. Despite this extraordinary item, Ricoh reported a net profit of 12.5 crore after paying full tax.
Ricoh looks more attractive from the balance sheet point of view. It’s debt free , Fixed assets are almost depreciated. As it imports most of its products, its capex requirements are very negligible. Working capital requirements are moderately high due to large Govt sales. As on 31.3.09, it was having Rs 6 per share. The working capital situation deteriorated in 2008-09 as compared to 2007-08 but things are expected to improve in the coming years.
There is one negative in the form of substantial amount of contingent liabilities. As on 31.3.09, it has a sales tax liability (arised from Gestetner merger) of Rs 22.6 crore. Of the total amount of Rs. 2261.20 lacs on account of sales tax cases (previous accounting year - Rs. 2278.20 lacs), Rs. 1160.48 lacs pertains to Delhi Sales Tax. As per the management of the company ….. “It is pertinent to mention here that most of these demands were raised by the Delhi Sales tax department after reopening the assessment years of the period 1989-90 onwards in the year 1999 pursuant to a survey conducted by the department. The Company considered these demands to be arbitrary and devoid of judicial basis and contested the same at various judicial and quasi-judicial levels. The successful contention by the Company before the authorities is likely to result in demand worth Rs. 1160.48 lacs being dropped and all these cases being decided in favour of the Company. The Company has also received a favorable order from the Central Sales Tax Appellate Authority, Noida in June, 2009 for assessment years 1998-99 to 2000-01 amounting to Rs. 328.92 lacs. In respect of other sales tax demands too, the Company is confident that its contentions before the authorities will succeed since the nature of demands raised are similar in most of the cases.” …..
Now going forward, Ricoh is expected to report EBITDA of Rs 25-35 crore/year. With negligible capex and working capital requirement ( in 2008-09, the sharp increase in working capital will take care the next few years need ), there will be free cash flow of 12-18 crore/year (after paying of the corporate tax at full rate).
Ricoh’s current market capitalization is at Rs 100 Crore ( at its current market price of 26 Rs ). Mkt cap to free cash flow is at 5 times, and is quite attractive. Its market cap to sales ratio is also at quite low at 0.6 times. EV/EBITDA at 4 makes it even more attractive.
Ricoh is also a possible delisting candidate primarily because of two reasons :
1) Outside Japan, it is the only other listed entity of Ricoh group
2) Given the current free cash flow generation, Ricoh India will have significant amount of cash in the balance sheet over next 1-2 years and that may prompt the parent company to go for delisting.
Ricoh is a compelling value buy at the current price of Rs 26 and we may expect a 50% return over a period of one year.
Apart from being a tech-savvy company, Ricoh is also trying to be a green company and it has recently introduced to India the world’s first biomass toner. Given the corporate India’s growing “Go Green” initiatives, the biomass based toner should be able to attract more customers.
Happy Investing !!!
(Dipak Sen is the CFO of UshaComm ( www.ushacomm.com ), India. Views expressed herein are entirely his own. He can be contacted at dipak.sen@ushacomm.com / dipaksen@yahoo.com . Any suggestion/views are welcome. )
(Disclosure of Interest Statement: The author owns Ricoh in his personal capacity)
23rd December,2009
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