I am sure most of you must have heard about Alphageo India Limited (AIL), about it having thousands of crores of orders in hand, about it being so small as on date relative to the orders in hand, about Alchemy India Long Term Fund (Read Rakesh Jhunjhunwala among others) owning substantial number of shares, about Mudar Pathreya recommending the stock, about it being the multibagger you can bet your salary on.. and what not!
Well, enough of the rant. There are several issues one needs to consider before investing in AIL. For starters, the orders in hand need to be looked at in the overall scheme of things. AIL is so small in relation to its orders in hand that it will need to hire like crazy in the coming years if it were to service these orders. Access to quality personnel can be an issue here.
Further, they will need to make huge capital expenditure for the same. Working capital requirements are also very high in this business as the company grows in size. My hypothesis here is that the customers in this case are mostly public companies wherein the recovery of receivables in the desired timeframe can become an issue as the orders under execution increase in size. If the receivables will be relatively high, the company will need to finance its capital requirements either by equity dilution or by debt or both; none of which sound the best of options.
To confirm my hypothesis, I did some research on similar companies across the globe and found out that the numbers in terms of bottom line, receivables, working capital requirements, capital expenditure requirements etc. can be bothersome. Cash flows, bottom line, receivables etc. can fluctuate wildly from quarter to quarter. To quote from one of the SEC filings of a US company:
“Seismic data acquisition technologies historically have steadily improved and progressed, and, over the long-term, we expect this trend to continue. Manufacturers of seismic equipment may develop new systems that have competitive advantages relative to systems now in use that either render the equipment we currently use obsolete or require us to make substantial capital expenditures to maintain our competitive position. In order to remain competitive, we may need to continue to invest additional capital to maintain, upgrade and expand our seismic data acquisition capabilities.”
“Due to the unpredictability of weather conditions, there may be times when adverse conditions may cause our operations to be delayed and result in additional costs and may negatively affect our results of operations.”
“The significant fixed costs of our operations could result in operating losses.”
This is not to say that AIL cannot be a good investment. The competitive environments are different, company sizes are different, they are not perfect comparables etc. However, in my view, one has to keep a close watch if one were to invest in AIL. The management has stated that it has the intent and capability to do what it takes. If only we could predict the future 🙂
The stock has fluctuated a lot in last 9 months or so in the range of Rs. 850 to Rs. 1,050 and had last closing price of Rs. 916.