Murudeshwar Ceramics – Are the financial numbers telling us something important ?

Murudeshwar Ceramics

Murudeshwar Ceramics Limited a low priced stock showed a smart spike of 18% last Friday closing at Rs 22 with volumes also increased sharply to around 2.37 lacs shares on BSE.

Hence we decided to have a close look at this low priced stock just to get some basic idea of what’s happening here.

First, let’s get a Business Background here

Murudeshwar Ceramics Limited set up in 1987 is the pioneer in manufacturing world-class Vitrified tiles and Ceramic tiles under the brand name “NAVEEN”.

It has been promoted by Dr. Rama Nagappa Shetty wherein the RNS Group has diversified interests in Hotels, Power, Engineering, Auto Dealerships, and Real Estate.

The company has 3 states of the art production units located in Hubli, Tumkur, and Karaikal and manufactures Wall tiles, Floor tiles, Ceramic tiles, and Parking tiles with a total production capacity of 28000 square meters a day and 8.4 Million square meters annually.

However, what do the financial numbers tell us?
From observing the financials of MCL for the last 6 years (Starting from FY2014 onwards) it is clear that the company’s focus on manufacturing has reduced significantly towards & increase seen in trading/services where margins have been very low. This is shown in the table below –

Year Ended  Rs Crs 2014 2015 2016 2017 2018 2019
Products 86.42 88.15 68.89 52.34 61.78 83.09
Services/Trading 58.61 49.89 46.12 52.89 57.59 42.68
Total Sales 145.03 138.04 115.01 105.23 119.37 125.77

Also as mentioned earlier with manufacturing taking a backseat, MCL focus in the last 6 years started increasing on Trading/Services which offered very low margins. This is reflected from the table below –

Year Ended  Rs Crs 2014 2015 2016 2017 2018 2019
Segment Results
Ceramic/Vetrified -1.73 -0.58 -0.39 0.47 0.81 2.11
Trading/Services 2.34 1.67 1.22 2.3 3.51 2.81
Total Profit 0.61 1.09 0.83 2.77 4.32 4.92

With manufacturing taking a backseat, the biggest negative for MCL has been the fact that the ROCE has never exceeded 10% in the last 6 years with the working capital cycle also gradually getting elongated, both negative for the stock. This is shown in the table below –

Year Ended 2014 2015 2016 2017 2018 2019
Roce % 5.1 5.46 5.14 4.59 5.62 5.01
Debtors Days 93 131 106 107 99 134
Year Ended  Rs Crs 2014 2015 2016 2017 2018 2019
Inventory 117.84 102.11 103.29 103.6 111 101.01
Debtors 36.99 49.53 33.43 30.74 32.56 45.97
Total 154.83 151.64 136.72 134.34 143.56 146.98
Net Sales Rs Crs 145.03 138.04 115.01 105.23 119.37 125.77
(Inv+Debtors) as % to Net Sales 107 110 119 128 120 117

But the biggest red flag which appears very uncomfortable, are the rising component of Inventories & Debtors over the last 6 years as a % of revenues.

Such high levels of working capital despite no growth in topline make us feel uncomfortable and there are strong chances of both these components going bad ahead which would mean a significant dent to the profitability ahead.

Finally coming to the H1 FY20 performance, despite a drop in sales to Rs 48.42 crs from Rs 50.71 crs in H1 last year, the PBT is up to Rs 8.82 crs in H1 FY20 from Rs 1.76 crs in H1 last year followed by a PAT of Rs 6.97 crs from Rs 1.40 crs earlier.

However operational numbers continue to be weak and the rise in PBT is largely due to a one-time insurance claim of Rs 7.49 crs which if taken out would have meant an actual PBT of just Rs 1.33 crs down from Rs 1.76 crs earned in H1 last year.

One also cannot take the operating cash flows generated by the company in H1 FY20 seriously as a large part of this is generated from non-core income which is unlikely to be sustained ahead.

Also interestingly MCL has invested cumulatively Rs 67 crs as capex in the last 6 years since 2014 onwards, but all these investments have not made any difference to the topline growth which is another big question mark on the asset utilization factor here?

Net net we believe that with such weak fundamentals, the MCL stock looks to be extremely vulnerable and investors should not fall in any short term trap here as our belief is that financial numbers never lie and give you a proactive view in advance of the danger lurking ahead.

So be careful, invest wisely and safely but more importantly keep away from such weak fundamental stocks.

Disclaimer –
This document is meant for the recipient only for use as intended and not for circulation. This document should not be reproduced or copied or made available to others. The information contained herein is from the public domain or sources believed to be reliable. While reasonable care has been taken to ensure that information given is at the time believed to be fair and correct and opinions based thereupon are reasonable, due to the very nature of research it cannot be warranted or represented that it is accurate or complete and it should not be relied upon as such. Also above note is not a recommendation to Buy or SELL and is only a view based on facts and figures and we will be in no way responsible for any losses incurred by anyone who uses this information to either trade or invests securities mentioned herein.