Kiri Industries- The Hot Stock to Avoid

There is a lot of buzz about Kiri industries being a three bagger already and people are saying it is just the start. Initially, I was also a bit enamoured with the idea of investing in it but then I decided to pull out early after further investigation. People including experts such as Mr. SP Tulsian, though were clamouring to invest in it for the following reasons:

  • The total borrowings decreased from Rs 853.13 crore in FY15 to Rs 410.6 crore in FY16, which is a reduction of about 51.87%.
  • There had been a sudden dramatic change in the market situation of dyesIntermediate especially h-acid and vinyl sulphone due to closure of a leading manufacturing plant in China (which contributed a major chunk of the world h-acid market). The average price of h-acid during the previous financial year which had been ranging from Rs 300 to Rs 360 per kg had now shot up to about Rs 900 to Rs 1,000 per kg and average price of vinyl sulphone during the previous financial year which stood at Rs 160 to Rs 180 per kg had now shot up to about of Rs 240 to Rs 275 per kg globally. The company has installed capacity to manufacture 7200 MTPA of H-acid and 18000 MTPA of vinyl sulphone.
  • Kiri Industries also hold 37 percent stake in Dystar Germany and their 37 percent share of profit will give them estimated profit of about Rs 250 crore this year. And in March, 2016 market cap of Kiri Industries was around Rs 210 Cr!!! It is still around Rs 725 Cr.

So did I miss this seemingly great opportunity around March, 2016? Well maybe because it is a three bagger already and maybe not because it can still go back to where it was! I want to lay out some factors as to why I stayed away from this stock:

  • The promoters have given revenue guidance time and again in the past and missed it by huge margins.
  • H-acid prices fluctuate wildly year on year and so does this stock. The Chinese factory will soon start production and the temporary benefit to Kiri Industries will vanish.
  • Also, the way management handled the debt crisis has been poor. Their stake fell from over 70% to 35% odd within a year in the past. This was due to failure to give additional margins as they had pledged their shares and thus their shares were sold in the open market for recovery of dues.
  • The margins (EBITDA) have been poor at 10%. Manish Kiri, the MD, expects to do 20% for 1 or 2 quarters and then it will be back at 10% which is too low for my comfort.

I believe it is better to miss such shady investment opportunities than invest in them and repent later. As they say, better be safe than sorry! India is a land of opportunities. You do not need to take such a “risk” to make money here.

23 Replies to “Kiri Industries- The Hot Stock to Avoid”

  1. Hi Paras, I’m an investor and am extremely bullish on the stock primarily because of the presence of a very valuable asset on the Balance Sheet of Kiri in the form of Dystar which is reporting a profit of 100 million USD and has nearly 20% global mkt share. All the events that are happening in the industry which are of a short term nature, along with catalyst of debt reduction playing out should help realize the hidden value of Dystar. I had covered the story on my blog: I think the investment thesis is to be built around Dystar and not Kiri becoming hugely profitable.
    I understand that you are extremely skeptical about the company’s prospects. See, clearly, if the company takes on too much debt, then things like promoter shareholding dropping are bound to happen. Now I had checked all videos of Kiri on the web, but I could not find very many videos where the company was giving a guidance for the future. I just found one video of 2010. Can you substantiate your claim of promoters missing their guidance every time?

    Now as far as the company being shady goes, if you look at the Balance Sheet posted in Q4 results it is possible to a certain extent to map out the sources of funds needed to repay the debt of around 500 crores. The receivables had dropped by a whopping 200 – 240 crores. The creditors seem to have agreed to delay receiving payments for a while, hence they have increased year on year. Besides Company seems to have disposed CWIP or other FA as they are purely focused on debt reduction and not on growing the business. So those sources put together roughly bring in 500 crores needed for debt reduction. Besides it is extremely hard to fake transactions like debt reductions given the increasingly stringent penalties on auditors that are in place. Tell me if you persist with your negativity.

    • Hi Pranjal, Thanks for your feedback on the post. I understand that you are very bullish on Kiri because of Dystar and the ongoing debt reduction. Regarding missing revenue guidelines, I had done extensive research on Kiri but did not save the articles/ videos relating to the same, so sharing them seems to be a bit difficult but you can take my word on the missing guidelines 🙂

      Next, I am not saying that the company is fudging accounts, they may just have been overly optimistic in the past and proven wrong later. If you look at the recent developments on debt reduction, they are very good. In fact looking just at the numbers you can conclude that the current price of Kiri is just reflecting the earnings potential of Kiri and you are getting dystar for ‘free’. This essentially means that it will be a multibagger if and when Kiri is able to unlock value of shares in dystar and that is a big ‘IF’ for me. Just think about one thing- Why did Kiri not unlock value in Dystar earlier to come out of their debt problem in the last 3 to 5 years? That is my concern here. I may very well be wrong. Maybe tomorrow they are able to unlock this value. But as I said I would rather be safe than sorry.

  2. Hi, I had a talk with Suresh Gondalia, the company secretary of Kiri who told me that Kiri’s majority partner in Dystar never wanted the listing of Dystar to happen. Now Manish Kiri had made a claim in 2010 (which you can see in a video posted on moneycontrol) that he expects the listing of Dystar to happen in first quarter of 2013. Now you know why it couldn’t happen and it would be wrong to hold Manish Kiri and other promoters responsible for making wrong claims as it wasn’t really their fault. Since Longsheng refused, Kiri has filed a case against Longsheng in the Singapore court in which they have suggested that Longsheng group to buy out Kiri’s stake in Dystar. I’m sure when you did your research you would have come across a BSE announcement regarding this and the management is trying to unlock value of Kiri. That is Kiri’s plan to directly unlock the value in Dystar. All this I gathered from Suresh Gondalia.

    Now, you being a value investor would definitely appreciate the concept of margin of safety. I’m sure there is consensus between us that the company is trading at a huge discount to its underlying assets value (which according to me is the intrinsic value). At current prices, there is a huge margin of safety. What’s more is that company is riding on a huge tailwind. So you could safely wait till Q1 results are out and are digested by investor community. Now as far as unlocking the value of dystar in cash terms goes, I think it is not as imperative to unlock the value locked in an associate company as compared to a huge parcel of real estate because the earnings made by the associate get reflected in the P&L and Balance Sheet as per AS 23. However, this is not the case with real estate assets that are highly valuable for which it is absolutely essential that they get sold to realize their value. Hence indirect catalysts like Debt reduction and short term events like Chinese plant closures can help discover value of Dystar.

    Another thing is that even if you can’t find the articles/videos about Kiri, can you help me search them on Google. Because I couldn’t find such evidence which could incriminate the promoters. Would be grateful to you if you can help me with that.

    PS: You have a great website. Would love to get in touch with you. You can write to me on my email as well.

    • I am also putting my email here for the benefit of other users:

      Dear Pranjal

      At the outset I would like to thank you for appreciating my website. I would also like to mention that your research on Kiri is quite comprehensive.

      See I am no expert at legal cases but as a layman one can understand easily that court can not direct anyone to buy a stake in any company. As long as Longsheng is not wanting to buy the balance stake, there is not much Kiri can do regarding the sale of their stake in Dystar.

      Secondly, you mention that regarding the dystar earnings adding value to Kiri. I agree to that but saying that it it also provides margin of safety, that I do not agree. What if they are not able to sell the stake for the next ten years? You are stuck with a company which is dependant too much on the price of the raw material which fluctuates drastically. On the other hand, if they are able to sell the stake next year it will be big gain for the shareholder and Kiri will be a multibagger. But I can simply not take a position in a stock where the future events can not be predicted with reasonable certainty, especially so when there have been so many other opportunities in the market in the last few months.

      Kiri seems to me more like a speculative position than a value investment. Hence, I believe it is better to stay away.

      Kind Regards

      Paras Trehan

      • Well, I have studied these kind of cases in company law. I would like to draw your attention to a famous case law regarding a company by the name Indo French limited where there was management deadlock between the majority shareholder and minority shareholder. The resolution as directed by the company law board was that the majority partner may buy out the stake in co if it does not want to wind up the company. Hence a resolution will be reached.

        Next thing is that even if dystar’s shares are not sold, dystar’s earnings, as I had mentioned before get reflected in the balance sheet and p&l statement of kiri as per AS 23. This is not some hugely valuable parcel of real estate that needs to be sold by company to realise its value for the shareholders. The value of dystar is there for everyone to see as the accounting standards require that the earnings of the associate company get reflected in the income statement and balance sheet to give true and fair view of picture of business. If value of dystar was to get realised by selling the shares in dystar the value that would be realised will be extremely high, but even if it does not the shares of the company still carry a value and that value is very much a part of the intrinsic value of the business. What I mean is that there are several businesses which have investments in associates, but that does not mean that they will have to sell the shares in the associate company to realise its value. It does not make business sense. If the associate is making profits and it will continue to do so in the future, the holding companies may well choose to stay put. Had kiri had a stake of less than 20 percent in dystar, I would have worried about there being a sale of dystar’s shares for cash to realise the value of dystar. But that as is very clear from facts is not the case. This is a very key argument in my reasoning which I had not mentioned this clearly.

        Next thing is that for the business of kiri, there are zero barriers to entry. So price competition is rampant. But that does not mean that it does not carry value. I believe there is consensus between us that that kiri’s business is viable in the future. And if a business is viable in the future, then it must generate sufficient earnings to replace its depreciating assets. And therefore every such business does carry an ‘Assets Value’ which is worth paying for. According to me, conservatively the assets of kiri should be worth at least 1500 crores which translates to around 600 bucks per share. I’m not even suggesting that this stock should be a huge multibagger and should be worth 1500 or 2000 rupees, which it could be if an event like a share sale happens. So my point is that a share sale may just be an icing on the cake and it is not necessary for that to happen to realise the conservative assets value.
        In fact my main point in telling you about kiri’s plan to ‘unlock value in dystar’ was to prove that promoters are being held guilty for no fault of theirs.

        Having said all this, I respect your view and request you to reconsider my point about how you should value an associate. That is key. You don’t need to sell shares of an ‘associate company’ to realise their value, but you do need to sell shares of a company in which you hold less than 20 percent shares to realise their value as their results do not reflect in the financials. The reason why kiri wanted to unlock the value of dystar and get out of it in 2013 was that they wanted to clean up their balance sheet and repay the huge debt they had taken to fund dystar.
        All this is the reason why I feel there is enough margin of safety.


  3. Well Pranjal I get the accounting standard part of it but please understand that Kiri is not getting any benefit out of Dystar, be it in terms of intellectual property rights, access to their clients, share of the profit, temporary cash flow support etc. So they have to sell their stake in Dystar to unlock its value. If the value was already there the stock would not be sitting at Rs. 400 or even 600, it would have already been more than Rs. 2,000. Market is waiting for the stake sale or any other news regarding sharing of profits etc. Till that happens the stock will be volatile and within a range. But given that this can take a lot many years, I do not want to lock my capital in this.

    So let us agree to disagree on this. I wish that you are right here. All the best! Cheers!

    • Kiri holds significant investment in its associate which is a business investment right. I do not think that Kiri needs to sell off its stake in Dystar to unlock value. What if the same investment was in its own plant and machinery. what is important is the value of the business. If the outlook of the business is negative due to highly volatile commodity prices then definitely it is a potential risk. Even more risk if chinese manufacturers restart production.
      Do investors like us need to sell stocks to unlock value in stocks? Value is unlocked when underlying business performs well. So as long as dystar continues to do well value will automatically be added to the business and will be reflected in the share price as well.

  4. Haha! Well, we’ll have to eventually agree to disagree!
    There were several reasons that can be attributed to why kiri was not trading at a value of 2000. One of the main reasons was the absolutely miserable balance sheet state. I’m sure you’ll understand how harmful the effects of leveraging one’s balance sheet can be. In one of the companies in which you say that you had made a mistake, the company was leveraged. There was a lot of uncertainty and doubt about the company being able to deliver earnings and repay its debt, especially when you consider the backdrop of promoter shareholder dropping, company reporting huge losses, working capital position deteriorating, et al.
    Moreover, the full effects of dystar being turned around were visible after 3 years after the company had been acquired. All these factors together have enough force to depress the shareholders of a company and therefore the market. So I think it would be inappropriate to conclude that the reason for the stock not trading at higher levels is because company did not sell shares of Dystar. There is ample evidence to suggest why stock was not trading at 2000 or more.

    Another thing is that I could find nothing in the public domain to suggest that kiri hasn’t benefitted from dystar in terms of greater business. Even if we were to assume that they didn’t benefit, we surely know that the company has made a bargain purchase of a valuable company which is in the related business at a throwaway price which has now turned around spectacularly and is generating profits more than its acquisition price! That is enough indication that the acquisition was a good one and if you are saying that you are getting the accounting standard part, realise that the value had been unlocked from the moment Dystar was turned around. It was just a matter of company emerging out of its debt troubles and reviving its standalone business.

    Having said all this I completely respect your decision to not invest in the company. Cheers to the discussion we have had!

    • Yes it was a great discussion. I appreciate the level and depth of your analysis and the resulting conviction. Views can vary but that is what makes a market. I would want to continue our discussion on other ideas I share on my website if you follow any of those companies. Let’s keep each other on our toes 😉

  5. Since I have invested in Kiri with great hope, read keenly both authors comment for and against investment in Kiri. I have gone through various information submitted by Kiri to BSE stock exchange out of which two information would like to put below for information of both Authors: 1) Information dated 29/03/2016 to BSE- Maturity of outstanding 150 FCCB(Convertible Bonds) has been extended from 2018 to 2022. Out of 150 bonds has been reduced to 82 bonds on restructuring and resulting in reduction of borrowing to the extent of the no of bonds reduced( i.e from 150 to 82) . Net effect of this restructuring is that now about 2.23 cr equity will go up where as earlier arrangement at the origin equity would have gone to 6.83 cr. (2) Information dated 4/4/2016 to Bse exchange: Kiri has executed agreement for settlement of all debts by the end of 31/03/2016. This has resulted in reduction of debt from 853.13 cr to 410.62 cr. Further as per settlement and repay majority of balance debt during current financial year 2016-17.
    High debt and recession industry from last two years must have put lot of hardship to promoters and promoter equity 58.19 % in 2011 came down to 25.7% in Mar-2014 but now gone up to 29.66% in Mar-2015 and further to 37.68 in June-16
    Reduction of debt from 853.13 cr to 410.62 cr during 2015-16 surely will benefit in current financial year 2016-17. Almost 45 cr interest will be saved. I presume,in order to repay balance debt and for working capital, Promoters are issuing equity shares/warrants to themselves which is being discussed during board meeting on 12/08/2016 along with declaring June-16 quarter.
    I request both authors to take the above information and re-assess their opinion on Kiri. Thank you

    • Hi Pandurang

      I understand that you are invested in Kiri with high hopes but as Warren Buffett often says, “The stock does not know you own it”.

      I see that you follow the developments very closely and I appreciate you for that. But personally I am not too comfortable owning a company which has been a disaster earlier (in terms of capital budgeting) and now is diluting itself out of its problems. The equity dilution may not add value to Kiri just because they are saving on interest cost. If that was the case, everyone would dilute their equity and pay off all their debt at the first sight of any problem.

      The only light at the end of tunnel may be the increasing shareholding of promoters and if they can get value out of Dystar by selling their stake. Till that happens, I personally would stay away.

      • Thanks Paras Trehan for your views. I think you are right. One should invest in any Company share or based industry only on fully convinced and if any doubt persist, it is better to get out. I have already decided to quit existing position even with slight loss also. Pandurang Kamath

    • Thanks Pankaj. Problem with Bodal, it has equity of face value of Rs 2 where as kiri has equity face value of Rs 10. Bodal also faced problem with debt like Kiri and now its debt has come down drastically. Bodal equity has come down from 78% once earlier has now around 67% if I am right. I am surprised their 61% of their holding is still pledged as on 30/06/2016 where as Kiri is about 17% as on 30/06/16. With excellent result in June16 quarter by Bodal, EPS works out to 2.98 due to face value. Kiri has paid interest 22.2 cr in June-15 which has come down to 13.5 cr in March-16 quarter. Bodal and Kiri both had good quarter in March-16 and Both will have further better result in June-16(Bodal already proved). Good thing about Kiri is- 1.Debt has already reduced by 52% at March-16 ending and commited to repay major portion of balance debt in 2017 financial year which augers well in reducing interest burden and increase profit even price of specialty chemical remains stable. Another point is to notice about Kiri, equity holding held by FII,FI/Banks,other foreign investors,body corp is about 41% and Individual share hold less than 2 lakh is only 6% where as Bodal has negligible holding of institutions. Further some shady investors now and than buy and sell quantity in lakhs with small difference of paisa in seconds create volume and to keep momentum in price which gives me impression shady operators play in Bodal with shady intention. I think one should come out of both script at right time as advised by Pranjal. If one has slightest doubt in his investment,one should quit and invest in other industry where one is fully convinced.There is no hurry to quit both Kiri and Bodal but at right time in my view.

  6. Paras Trehan, now Kiri has declared its June-16 end quarterly result.
    June16 June15
    Sales 292 cr 197 cr
    Fin cost 2.79 cr 22.24 cr
    NP 31.98 cr (loss 29 lakh)

    Diluted EPS 9.8 -.11
    Dystar shared Profit 49 cr 70 cr.

    I would be happy,if you analysis the above and inform whether there is any change in earlier stand on Kiri.

    • Hi Pandurang

      Firstly, the results are very good. Sales have gone up, margins have improved, finance cost has gone down significantly.. But I still don’t like the stock. Why? I am not comfortable with drastic fluctuations in their raw material prices. I am not comfortable with reputation/ capability (in my view) of the management- In a recent interview (Mid June, 2016) to Moneycontrol, Manish Kiri had said that Kiri had no capex plans currently and that they plan to use the current capacity more efficiently, but now along with the results (I do not understand what has changed in 2 months), he has given a statement that the money raised via warrants may be used for capex apart from reducing debt. Lastly, if you see their Quarterly results for the last few years their sales have gone up and down drastically. So, you can see that as per my understanding the stock has many concerns attached to it. It may still go up temporarily but I am happy staying away.

      • You are right Paras Trehan. fluctuation not only in raw materials,even selling price also fluctuate. I feel China has large capacity who can dump in international market and due to which Indians are not able to get lucrative price. Price rise was occurred in last quarter as one of large producer in China was asked to shift from existing highly populated area as products are pollutive and environmental hazards. Prices have already stabilized compared to last 5-6 months. All his interest burden was eating his profits hitherto and with new equity placement,he may be able wipe out debt shortly. Kiri,Bodal,Shree Pushkar etc have benefited due to spurt in price in lat two quarters and one has to watch what will be their profits in next two quarters in a stabilized market price conditions. As rightly said, why one should invest in any where one is not sure of market conditions and professional ability of Management.

  7. Hey guys, nice blog. I happened to call the company secretary (I got their number through Google!!) and talked to him at length about their plans/debt reduction / chinese plants starting / dystar case. Although he was a little secretive, he made sure to instill as much confidence in me as possible by telling me that the company is priced at the lowest levels right now. He said it can only go up from here. And that over long term, this is neither an operator stock nor speculative in its core fundamentals. Honestly, i think this is not a bad company to enter into. Especially after all the latest developments…

    • Hi Rutvij. Happy you liked my blog. I have just one thing to say here. If the company secretary talks about price levels, one should understand that one is in a dangerous territory.

  8. Now kiri’s debt is almost reduced.If it won the dystar case its market capital increased to three fold.if it lose nothing will happen.So try to accumulate kiri.Good results from last 4 quarters and an annual eps of crossed 600.but in my view its actual value is 850 with out dystar and 1800 if it won dystar.

    Note :
    Analyse youself before investing.I am not a sebi registered consultant.

  9. if atul value 2700 with profit 70cr and kiri s 95 cr and dystarvalue with 38%and asahi 6month 12eps and363 price kiri 60eps 360×5=1800

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