The current section of the “Analysis” series covers RIR Power Electronics Ltd, formerly known as Ruttonsha International Rectifier Limited, an Indian manufacturer of semiconductor devices like diodes, rectifiers, thyristors etc. and high-power equipment like inverters, UPS systems, battery chargers, stacks, modules and rectifier assemblies. The company is currently setting up a Silicon Carbide (SiC) plant in Odisha.
To benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.
RIR Power Electronics Ltd: Detailed Fundamental Analysis
RIR Power Electronics Ltd has a history of corporate existence of about 55 years. It was established as Ruttonsha International Rectifier Limited by the Ruttonsha family in 1969. The company was taken over by the Mehta family in FY2006. Currently, the Mehta family has been in charge of the company for nearly two decades.
In FY2022, the company acquired a 100% stake in Visicon Power Electronics Pvt. Ltd. and made it a wholly-owned subsidiary. As a result, for the first time, the FY2022 annual report presented consolidated financials from FY2021 onwards.
We believe that while analyzing any company, an investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire company including its subsidiaries, joint ventures etc. Consolidated financials of a company present such a picture. Therefore, if a company reports both standalone as well as consolidated financials, then in such a case, it is advised that the investor should prefer the analysis of the consolidated financials of the company, whenever they are present.
Further advised reading: Standalone vs Consolidated Financials: A Complete Guide
Therefore, in our analysis of RIR Power Electronics Ltd, we have analysed consolidated financials from FY2021 onwards and standalone financials before that.
Financial and Business Analysis of RIR Power Electronics Ltd:
In the last 10 years, RIR Power Electronics Ltd has increased its sales at an annual growth rate of 11% from ₹27 cr in FY2015 to ₹67 cr in FY2024. During the latest twelve months i.e. July 2023-June 2024, the company increased its sales to ₹74 cr.
Over the last 10 years (FY2015-2024), the operating profit margin (OPM) of RIR Power Electronics Ltd has witnessed fluctuations from 8% to 15%. The net profit margin (NPM) of the company has been also volatile and has fluctuated from 1% to 11%.
The financial picture of the company’s historical performance presents more insights if an investor extends her analysis to the earliest available financial information from 1996 onwards present in its historical annual reports available on the website of BSE Ltd.
In the below table, we have presented the data of sales, net profits and net profit margin (NPM) for the last 29 years (1996-2024) for RIR Power Electronics Ltd.
A look at the last 29 years shows that the financial performance of RIR Power Electronics Ltd has been very volatile. The company has frequently had periods of declining sales and profitability. Once, it had a continuous stretch of losses for six years, from FY2000 to FY2005. Even otherwise, the profit margins have been very volatile.
To understand the reasons for such fluctuations in the business performance of RIR Power Electronics Ltd over the years, an investor needs to read the publicly available documents of the company like annual reports from 1997 onwards, credit rating reports, management interactions as well as its corporate announcements.
After going through the above-mentioned documents, an investor notices the following key factors, which influence the business of RIR Power Electronics Ltd. An investor needs to keep these factors in her mind when she makes any predictions about the performance of the company.
1) Rapid change in technology in the semiconductor industry:
Technology in the semiconductor industry is advancing at a very fast pace as it is one of the key areas where large amounts of manpower and investments in advanced research are deployed by multiple nations. As technology improves, semiconductor devices become more efficient and cheaper.
Due to changing technology, companies that are not able to upgrade to the latest technology suffer by losing business and suffer even to the extent of closing down plants based on old technology.
An investor may read an example of how a company had to write off huge sums of money spent on creating manufacturing plants when rapidly changing technology made existing plants even those created only a couple of years back, as economically unviable leading to large losses for lenders as well as shareholders: Analysis: Websol Energy System Ltd
Even RIR Power Electronics Ltd has suffered in the past due to changing technology, which led to its customers demanding products based on newer technology leading to a loss of business for the company. For example, in FY2000, when the company reported losses, then it cited a change in technology requirements from its customers, which it did not have, as one of the key reasons.
FY2000 annual report, page 1:
…decline in sale was due to change in Technology required by Department of Telecommunication. Instead of Silicon controlled Rectifiers and Diodes they now require Mosfets and IGBTs. These items are mainly imported and for which your company does not have the technology.
Similarly, the company suffered in FY2002 due to a technology change.
FY2002 annual report, page 3:
…reason for decline in sale was due to change in Technology
However, despite suffering due to changing technology, the company has rarely invested any money in its own R&D. Ever since its earliest available annual report (FY1997) to the latest one (FY2024), the company has never spent any money on its R&D.
FY2024 annual report, page 19:
Expenditure incurred on Research and Development: Nil
FY1997 annual report, page 2:
At present the Company has no separate department of Research and Development.
The company has relied on other companies to help it with technology; however, an investor would appreciate that when you rely on others to give you technology; first, it becomes very hard and expensive to gain access to the latest technology and at times, what you get is a substandard technology/product.
For example, before FY2000 when RIR Power Electronics Ltd started losing business due to changing technology, it used to have a tie-up with International Rectifier Corporation, California, USA, which had expired in FY1996.
FY1999 annual report, page 2:
Company had over 25 years of association with M/s. International Rectifier Corporation, California, USA, which ended during the year 1995-1996.
Once its technology tie-up ended, then it fell behind on technology. Therefore, when its customers started demanding products based on newer technology, then it lost business and reported net losses. Then, RIR Power Electronics Ltd started looking for new technology partners and made an agreement with Silicon Power Corporation and even purchased plant and machinery from them.
However, the plant sold by Silicon Power Corporation was of poor quality.
FY2001 annual report, page 3
Company was to start commercial production in October 2000. However the whole project was delayed as there were various deficiencies found by our engineers in the Plant and Machinery during installation.
RIR Power Electronics Ltd could never make the plant work and had to get rid of the plant as well as exit the agreement with Silicon Power Corporation. The company had to suffer financial losses on account of this deal gone wrong.
FY2002 annual report, pages 3 & 5:
Your Company had entered into an agreement with M/s Silicon Power Corporation, USA and were in the process of installing the imported machinery supplied by them for setting up an Export Oriented Unit. With great difficulty our engineers succeeded in installing the machinery and had started the trial runs. However the project failed at the trial production stage due to various reasons and your directors decided to hive of the unit to M/s Orient Semiconductors Pvt. Ltd. before it was too late. This decision was taken to save your Company from going into very heavy losses and grave financial problems.
Your Directors considered it prudent to rescind the agreement in view of heavy losses incurred during the trial production.
The company could never recover from the losses that started occurring first due to its lagging in technology and the unfortunate decision to enter into an agreement with Silicon Power Corporation and buy the plant from them. It seems that the company could not get the new technology and kept on reporting losses continuously from FY2000 to FY2005 and finally, the promoters, the Ruttonsha family exited the company in 2005.
Any guesses as to who took over the company from the Ruttonsha family? It was the Mehta family who were the promoters of Silicon Power Corporation.
Credit rating report by ICRA, April 2018, page 3:
In 2005, the company was taken over by Dr. Harshad Mehta and Mrs. Bhavna H. Mehta, the promoters of Silicon Power Corporation, USA.
Also read: How to do Business Analysis of a Company
2) Intense competition in the semiconductor industry leading to very low pricing power in the hands of RIR Power Electronics Ltd:
The company faces a very tough business environment where it faces strong competition from both domestic as well as foreign players.
In the domestic market, the company faces competition from both, the unorganized players, as well as multi-national companies (MNCs), which have their presence in India due to govt.’s liberalized policies. From the overseas players, the company faces intense competition from China, which has a surplus manufacturing capacity and routinely dumps semiconductor products at very low prices.
As a result of such intense competition, the company does not have any negotiating or pricing power over its customers.
Credit rating report by ICRA, April 2018, page 2:
company faces intense competitive pressures from local unorganised players as well as cheap Chinese imports. The prices for basic semi-conductor devices are very competitive and hence command low margins. In the special semi-conductor devices segment, though the profitability margins remain healthy, RIRL has to compete with large multi- national companies like ABB Limited, Westcode Semiconductors (USA), Powerex Corporation, etc.
In FY2014, when the company reported net losses, it mentioned strong competition from both organized as well as unorganized as one of the reasons for its poor financial performance.
FY2014 annual report, page 12:
Company faced a steep fall in demand and competition from organized sector in Equipments and unorganised players in devices, it took a severe hit with turnover during the financial year falling
At times, the company has described the competition as “cut-throat”, highlighting the severe intensity.
FY2011 annual report, page 8:
Company has successfully ventured into Business for supply of Equipments to Indian Railways despite stiff and cut throat competition.
Due to intense competition, it has very low pricing power over its customers as reflected in its long stretch of losses in the past. In addition, due to poor negotiating power, it is not able to collect money from its customers on time and ends up facing a high working capital burden as customers pay it in 150-170 days instead of offered credit terms of 90 days.
Credit rating report by ICRA, February 2017, page 1:
The ratings are, however, constrained by…its high working capital intensity due to high inventory days and low bargaining power with customers
Credit rating report by ICRA, April 2014. page 2:
Additionally, the general credit period offered by the company to its customers is up to 90 days, but the receivables position is stretched to almost 150-170 days on an average because of delays from larger customers.
Also read: Credit Rating Reports: A Complete Guide for Stock Investors
In the past, when the company reported losses, then it highlighted its inability to pass on an increase in input costs to customers as one of the key reasons for losses.
FY2004 annual report, page 1:
The increase in the cost of copper and the increase In the Euro by 35% also contributed to depressed margins. The price of the finished products could not absorb the high cost of raw material due to keen competition
The corporate size of RIR Power Electronics Ltd is very small in front of its customers who are big govt. departments, defence forces or large corporates. As a result, at times, it had to suffer significant losses due to the changed priorities of its customers.
For example, in FY2004, one of its large orders was cancelled by defence forces where it had spent a significant money in making the prototypes etc. It contributed to the net loss reported by the company in the year.
FY2004 annual report, page 1:
the cancellation of the huge order of around Rs.4 crores by the Defence Dept. Govt. of India at the last moment when the Prototype samples were made ready at a cost of substantial expenditure incurred by the Company.
In FY2014, when the company reported losses, the change in the buying strategies of Indian Railways by delaying orders’ finalization and accepting deliveries was one of the causes.
FY2014 annual report, page 8:
The decline in turnover and net profits during the year was mainly attributable to weak macro economic situation in the country, delayed order finalisation by Indian Railways and deferment of deliveries on to next financial year.
Going ahead, the competitive situation in the Indian semiconductor business is going to intensify as many large players are entering the market with very large investments, some of them nearing ₹100,000 cr. (Source)
Also read: How to analyse New Companies in Unknown Industries?
3) Forward integration by RIR Power Electronics Ltd:
To strengthen its business model, the company took steps to forward integrate to move up the value chain.
In FY2010, the company entered into semi-conductor-based equipment, modules and capsules.
FY2010 annual report, page
Company had strategically decided to re-enter semi-conductors based equipments, modules and capsule business as a forward integration in a phased manner to climb up the value chain
After a few more years, in FY2013, the company started the production of inverters.
FY2013 annual report, page 8:
Company has commenced successful commercial production of Inverter segment and has started receiving orders for supply of inverters.
4) Access to current technology by RIR Power Electronics Ltd:
Currently, the company is executing plants to make semiconductor devices using Silicon Carbide (SiC) technology. As it does not have any R&D department nor it does any R&D expenditure; therefore, it needs to access this technology from outside.
While reading its annual reports, an investor notices that the company is buying this technology from Sicamore Semiconductor Inc. USA, which is a company owned by the promoters. RIR Power Electronics Ltd plans to pay ₹42 cr to Sicmore to buy this technology.
FY2024 annual report, page 11:
Purchase of process know how related Intellectual Property pertaining to Silicon Carbide Wafer Technology from Sicamore.
Sicamore is an entity under common control with the Promoters of RIR, who are holding 100 % stake in Sicamore (being 80% held through group entity Silicon Power Corporation (SPCO) and 20% stake directly held by promoters).
Value of the transaction: Not exceeding…Rupees Forty-Two crores only
To support the purchase price, the company has put out a valuation report dated April 18, 2024 (click here). The valuation report has some interesting details.
First, the seller (Sicamore) has not yet developed the intellectual property (IP) that RIR Power Electronics Ltd plans to buy. It will take a further 12-21 months for the development to complete.
Valuation report, page 13:
IP Development Timeframe:
- The SiC Diodes have a development time frame of approximately 12 months to completion.
- The MOSFETs have a longer development time frame with approximately 21 months to completion.
Until now, the seller has only developed a product design of 4-inch diodes and for that also it has taken the support of a third-party Silicon Carbide device design company.
Valuation report, page 13:
The Seller has developed product design for 4-inch Silicon Carbide diodes (“SiC Diode”) and Metal Oxide Silicon Field Effect Transistors (“MOSFET”) with the mask design support of a third party SiC device design company.
In addition, RIR Power Electronics Ltd is going to pay more than ₹90 cr (GBP 8.5 million = ₹93.5 cr @₹110/GBP) and a royalty of 2% of sales to another company, Clas-Sic Wafer Fab Limited, for intellectual property of similar products of what it is buying from Sicamore, but of different size (6-inch from Clas-Sic Wafer Fab Limited vs 4-inch from Sicamore).
Valuation report, page 13:
Agreement with Clas-Sic Wafer Fab Limited:
- RIR had entered into a 20-year license agreement in December 2023 for the know-how to manufacture of the 6-inch 1200V SiC MOSFETs and Diodes with Clas-Sic Wafer Fab Limited…This agreement with Clas-Sic Wafer is for a similar IP as that of the subject IP, but for a different size (6-inch Vs 4-inch).
- RIR has agreed an upfront fee of GBP 8.5 Mn and a royalty on sales of 2.0 per cent from Year 1 to Year 11 and reducing linearly to 0.2 per cent by Year 20.
While arriving at the valuation of ₹42 cr (about $5 million) recommended by the company to shareholders for the IP to be purchased from Sicamore, it has used different approaches. While reading about one of the approaches, the Replacement Cost Method, an investor notices the following points.
First, the direct development cost is only $1.47 million. The company has added 110% of the direct development cost i.e. $1.62 million as an overhead burden (i.e. general and administration expenses). On top of both of these items, the company has added 20% profit for the seller (i.e. promoters).
Moreover, in addition to the assumed profit of 20% for the promoters, the company has also provided an additional opportunity cost of about $1.1 million to cover the scenario if the promoters had invested the direct development cost + overheads + their profit of 20% into some other work/activity, then they would have earned a return of 19.5% per year on it.
Valuation report, page 24:
Opportunity costs represent foregone returns during the period…The premise behind the concept is that the costs incurred to re-create the asset would have otherwise been invested.
Thus, it arrived at a valuation of about $4.8 million by replacement cost method.
Valuation report, page 25:
In light of the above, an investor may do proper due diligence in her assessment of payment of about ₹42 cr to the promoters for buying an intellectual property, which is still incomplete, is being developed in collaboration with a third-party SiC design company and where the company is anyway going to pay more than ₹90 cr + annual royalty on sales to another company (Clas-Sic Wafer Fab Limited) for a similar product of different size.
She may also keep in her mind that the direct development cost is a small part (about 30%) of the payment and the major part (about 70%) is overheads, assumed profits and opportunity cost if the promoters would have invested this money anywhere else.
Also read: How Promoters benefit from Related Party Transactions
5) Current under-construction plants of RIR Power Electronics Ltd:
At on date, the company is executing two plants, both based on Silicon Carbide (SiC) technology.
The first plant is in its wholly-owned subsidiary, Visicon Power Electronics Pvt. Ltd. (VPEPL). RIR Power Electronics Ltd had purchased VPEPL from Silicon Power Corporation, a company owned by the Mehta family (its own promoters).
Investor presentation, June 2024, page 20:
Visicon Power Electronics Pvt Ltd was a fully owned subsidiary of Silicon Power Corporation (SPCO), U.S.A, which was acquired in 2021 by RIR Power Electronics Ltd. for INR 21 Mn
In FY2022, when the company acquired VPEPL for ₹2.1 cr, then it had net assets of only ₹1.36 cr as almost the entire investment in its plant & machinery and working capital was made by debt.
FY2022 annual report, page 86:
VPEPL was making losses in its business at that time.
FY2022 annual report, page 10:
The total revenue of Visicon Power Electronics Private Limited for 3 months period was ₹ 27.21 Lacs and the Company incurred Net Loss of ₹ 5.48 Lacs during the reporting period
VPEPL’s under-construction plant was at Baska, Halol, Gujarat i.e. in the same locality where RIR Power Electronics Ltd had its manufacturing plant.
FY2022 annual report, page 10:
Visicon Power Electronics Private Limited is into the business of manufacturing Silicon Carbide (SiC) wafers and power electronic devices through Epitaxial process. It is in the process of setting up its plant near Baska, Halol, Gujarat. It expects to start the commercial production from F.Y. 2022-23 onwards.
So, it might be a case where the promoters purchased/got an allocation of a land parcel near the existing plant of RIR Power Electronics Ltd and then sold this land to it by selling VPEPL as a company.
Nevertheless, promoters expected that this plant will be completed by March 2023. In March 2023, the company had a capital work-in-progress (CWIP) of about ₹24 cr (FY2023 annual report, page 83), which might be close to the overall project cost. This cost was almost entirely debt-funded because the total debt of the company increased from ₹3 cr in FY2021 (before the acquisition of VPEPL) to ₹32 cr in FY2023 (after the acquisition of VPEPL and near its proposed commissioning date).
However, this project has faced a dramatic change of fate. Now, this plant is being shifted from Halol, Gujarat to Odisha and as a result, it has witnessed significant delays in completion of about two years. The updated cost of the project was mentioned as ₹54.3 cr, which might be a significant cost overrun due to the shifting of its location across India.
Investor presentation, June 2024, page 19:
Phase 1a: Halol Plant being shifted to Odisha and a total capex of INR 543 Mn… Operational in 3-4 months with revenue inflow from FY25.
In Q1-FY2025, the company merged the plant, which was until now in the wholly-owned subsidiary company, VPEPL into itself. The transaction is structured by buying out all its fixed assets.
Going ahead, the company plans to execute phase 1b (about ₹170 cr) and phase 2 (about ₹395 cr) in Odisha for a combined investment of about ₹565 cr.
Investor presentation, June 2024, page 19:
Phase 1b: Capex of INR 1,691 Mn…Operations to begin from 2024, subject to requisite government approval.
Phase 2: Overall capex expected to be INR 3,952 Mn
While assessing these proposals, an investor may note that these projects are very large for the company when seen from the perspective of its overall business size as well as from the perspective of its project execution history.
There have been only a few attempts to execute expansion projects by the company in the past. As discussed earlier, the project in FY2000-FY2002 based on imported machinery from Silicon Power Corporation had failed. Recently, the project in the wholly-owned subsidiary, VPEPL, has also witnessed significant delays and cost overruns.
Until now, the company has timely completed only one small project of ₹1.8 cr in 2021 for the manufacture of module devices by st wire bonding.
FY2021 annual report, page 23:
During the year under review, the Company has commenced project for manufacture of module devices by st wire bonding the same…The total outlay is estimated at about ₹180 lacs and the said project has since being commissioned in August, 2021.
In light of its project execution history, an investor should closely monitor the developments related to the future phases of its project in Odisha.
Going ahead, an investor should monitor the profit margins of the company to understand if it is able to handle competitive pressures well. She should also assess the money to be paid by the company to its promoters for technology and other services and also monitor whether the company does more related party transactions with its promoters.
In the last 10 years (FY2015-2024), the tax payout ratio of RIR Power Electronics Ltd has been nearly in line with the standard corporate tax rate in India. In FY2015, the tax payout ratio for the company was negative due to a large deferred tax asset creation.
FY2015 annual report, page 35:
Similarly, in FY2020 as well, the tax payout ratio was lower at 15% due to deferred tax assets.
Recommended reading: How to do Financial Analysis of a Company
Operating Efficiency Analysis of RIR Power Electronics Ltd:
a) Net fixed asset turnover (NFAT) of RIR Power Electronics Ltd:
Over the years, the net fixed asset turnover (NFAT) of RIR Power Electronics Ltd has improved from 2.9 in FY2016 to 8.9 in FY2024. An improvement in the NFAT indicates that the company has been using its assets more effectively to generate sales.
However, with large upcoming capex plans, it remains to be seen whether the company is able to beat the competition to gain orders for generating higher revenue and use the new plants efficiently.
Nevertheless, whenever any company undertakes a capacity expansion program, then for some time, its NFAT declines until the company ramps up its production and reaches optimal utilization of the new manufacturing capacity.
Going ahead, an investor should keep a close watch on the fixed asset turnover levels of the company to assess whether it is able to optimally utilize its production capacity.
Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors
b) Inventory turnover ratio of RIR Power Electronics Ltd:
Over the years (FY2015-2024), the inventory turnover ratio (ITR) of the company has increased from 2.4 in FY2016 to 3.5 in FY2024. An increase in ITR indicates an improvement in the inventory utilization by the company.
Nevertheless, the company’s business and its competitive position force it to have a high inventory as it uses a lot of imported raw material, for which it needs to order a long time in advance and its products have a long manufacturing period.
Credit rating report by ICRA, April 2018, page 2:
High reliance on import, a lengthy manufacturing cycle and diversified product range lead to high inventory holding.
Going ahead, an investor should keep a close watch on the inventory position of the company to understand whether it is able to maintain the efficiency of its inventory utilization.
Further advised reading: Inventory Turnover Ratio: A Complete Guide
c) Analysis of receivables days of RIR Power Electronics Ltd:
Over the years, the receivables days of RIR Power Electronics Ltd have improved from 132 days in FY2016 to 98 days in FY2024. An improvement in receivables days over the years indicates that RIR Power Electronics Ltd has collected its money from its customers on time.
However, as highlighted earlier, due to its weak competitive position, it is not able to collect money on time from its large customers. As the company is undertaking large capital expansion plans, which coincide with many much larger plans of multiple very large Indian and MNC companies, it remains to be seen whether the company is able to build a competitive position by gaining profitable orders and collecting the money on time.
Further advised reading: Receivable Days: A Complete Guide
When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of RIR Power Electronics Ltd for FY2015-2024, then she notices that over the last 10 years (FY2015-FY2024), the company could not convert its profit into cash flow from operations.
Over FY2015-2024, RIR Power Electronics Ltd reported a total net profit after tax (cPAT) of ₹24 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹19 cr.
It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT.
Further advised reading: Understanding Cash Flow from Operations (CFO)
The major reason for cCFO being lower than cPAT is its working capital-intensive business where it needs to keep a large inventory position of imported raw material and delays in payments by its large customers.
Going ahead, an investor should keep a close watch on the cash flow performance of the company to monitor if it is able to convert its profits into cash flows.
The Margin of Safety in the Business of RIR Power Electronics Ltd:
a) Self-Sustainable Growth Rate (SSGR):
Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company
Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.
Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.
An investor may calculate the SSGR using the following formula:
SSGR = NFAT * NPM * (1-DPR) – Dep
Where,
- SSGR = Self Sustainable Growth Rate in %
- Dep = Depreciation rate as a % of net fixed assets
- NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
- NPM = Net profit margin as % of sales
- DPR = Dividend paid as % of net profit after tax
(For systematic algebraic calculation of SSGR formula: Click Here)
From FY2018-FY2024, RIR Power Electronics Ltd had a very fluctuating SSGR ranging from -4% to 43%. In recent years, its SSGR has been very high primarily due to recent improvements in its sales and profit margins due to ongoing geopolitical issues and the demand in the country for self-dependence in semiconductors. Otherwise, until FY2022, its SSGR was about 8% and below whereas over the last 10 years, it has grown its sales by 11%.
As a result, the company has to rely on outside funding to meet its capex plans and its debt has increased from ₹13 cr in FY2015 to ₹34 cr in FY2024.
An investor arrives at the same conclusion when she analyses the free cash flow position of the company.
b) Free Cash Flow (FCF) Analysis of RIR Power Electronics Ltd:
While looking at the cash flow performance of RIR Power Electronics Ltd for the last 10 years (FY2015-FY2024), an investor notices that it generated cash flow from operations of ₹19 cr. During the same period, it made a capital expenditure of about ₹34 cr.
Therefore, during this period (FY2015-FY2024), RIR Power Electronics Ltd had a negative free cash flow (FCF) of (₹15) cr (=19 – 34).
In addition, during this period, the company had a non-operating income of ₹8 cr and an interest expense of ₹11 cr. As a result, the company had a total negative free cash flow of (₹18) cr (= -15 + 8 – 11) Please note that the capitalized interest is already factored in as a part of the capex deducted earlier. In addition, RIR Power Electronics Ltd also gave dividends of about ₹2 cr over these years.
The company funded this gap in its cash flow by raising debt as its debt increased by ₹21 cr in the last 10 years from ₹13 cr in FY2015 to ₹34 cr in FY2024.
Moreover, to meet requirements for its large capital expenditure plans in Odisha, the company has diluted equity by issuing 1,000,000 warrants to two investors at ₹855/- per warrant. The total transaction is valued at ₹85.5 cr out of which it received 25% i.e. ₹21.37 cr in FY2024. Thereafter, on Sept 5, 2024, it received an additional ₹34.2 cr on the conversion of 400,000 warrants. As of date, 600,000 warrants remain outstanding/pending conversion.
Going ahead, an investor should keep a close watch on the free cash flow generation by RIR Power Electronics Ltd to understand whether the company can generate surplus cash from its business.
Further recommended reading: Free Cash Flow: A Complete Guide to Understanding FCF
Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin of safety in the business model of any company.
Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing
Additional aspects of RIR Power Electronics Ltd:
On analysing RIR Power Electronics Ltd and after reading annual reports, its credit rating reports and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.
1) Sale of shares by promoters since receipt of approval for the Odisha project from the state govt.:
On Nov. 2, 2023, RIR Power Electronics Ltd intimated to BSE Ltd that it has received approval from the Odisha Govt. for its plant in the state (click here).
Corporate announcement to BSE Ltd, Nov. 2, 2023, page 1:
This is to inform you that our Company – RIR Power Electronics Ltd. has received approval from Govt. of Odisha for investing Rs.510.80 Crores for establishment of manufacturing, fabrication & packaging facility for SiC devices at Info Valley, Khordha, Odisha.
The moment this news came out, the share price jumped and since then, it has increased from ₹726 on Nov. 3, 2023, to ₹2,853 on Sept 11, 2024, i.e. it has become almost 4 times.
However, during this period, promoters have continuously sold their shares in the market at a fast pace.
From Nov. 2023 until Sept 9, 2024, promoters have sold shares worth ₹29 cr. Names of promoters who sold shares include the main promoter, Mrs. Bhavna H. Mehta who has sold shares for almost ₹22 cr during this period.
The below table contains the list of all transactions with the date of sale and amounts.
Additionally, an investor may also note that during this period, the CEO of the company, Mr R. G. Trasi has sold his entire holding of 7,000 shares in the company for about ₹89.5 lac.
From the above transactions, it seems that promoters and CEO are doing exactly the opposite of what minority investors are doing at the moment. When enthused by the receipt of the Odisha project, public shareholders are continuously putting in more money in the shares of the company, the promoters are continuously selling their stake in the company and taking money out of the company.
Add to this the plan of taking a further ₹42 cr from the company by way of the sale of Silicon Carbide technology, which the promoter company Sicamore is developing by taking help from a third-party design firm.
Also read: Why We cannot always Trust What Management Claims
2) Related party transactions of RIR Power Electronics Ltd with its promoters:
Over the years, the company has done multiple transactions with its promoters and their companies. For example, in FY2009, it merged a promoter group entity, Orient Semi conductors Private Ltd with itself.
FY2009 annual report, page 28:
Related Party Disclosures: During the financial year under review erstwhile Orient Semiconductors Private Limited (OSPL) was amalgamated with the Company
Until FY2020, RIR Power Electronics Ltd had availed a loan from its promoter, Ms Bhavna Mehta, on which it was paying an interest rate of 12.5%. In addition, it paid a rent of ₹7.20 lac to Ms Bhavna Mehta.
FY2018 annual report, page 47:
In addition, the company had sales/purchase transactions with promoter-owned entities Sicamore Semiconducter INC and Silicon Power Corporation USA. On March 31, 2024, the company had receivables of ₹2.63 cr from Sicamore and payables of ₹3.16 cr to Silicon Power Corp.
FY2024 annual report, page 99:
An investor would appreciate that each of the transactions that any company does with its promoters has the potential to shift economic benefits from minority shareholders to promoters. For example, if any company buys things from promoter-owned entities at a price higher than the market price or sell things to them at a price lower than the market price, then promoters benefit at the cost of minority shareholders.
Therefore, investors should be cautious and do deeper due diligence on every transaction that a company takes with its promoters.
As discussed above, currently, RIR Power Electronics Ltd plans to buy technology from promoters at ₹42 cr, which should be analysed properly by minority shareholders.
Also read: How Promoters benefit from Related Party Transactions
3) Management succession planning of RIR Power Electronics Ltd:
The company was promoted by the Ruttonsha family in 1969. However, after a long streak of losses from FY2000 to FY2005, they sold their ownership to the Mehta family.
Currently, three members from the promoter family are present on the board of directors: Mrs Bhavna Harshad Mehta (age 69 years), chairperson & managing director; Ms Sonali Harshad Mehta (age 31 years), daughter of Ms Bhavna Mehta as a non-executive director and Mr Piyush K. Shah (age 72 years), brother-in-law of Ms Bhavna Mehta as a non-executive director.
Dr Harshad Mehta, promoter, is working as a technical associate with the company.
Even though the daughter of promoters, Ms Sonali Mehta, is present on the board of directors; however, by profession and qualifications, she is a writer who currently writes for Netflix and Amazon-MGM etc. It remains to be seen whether she will take an active role in the leadership of the company.
FY2024 annual report, page 14:
Ms. Sonali Mehta is a senior writer in the startup/tech industry, currently working at Netflix. She also serves as a writer for companies such as Amazon-MGM and Invention Studios
An investor may contact the company directly to understand more about its succession planning.
Further advised reading: How to do Management Analysis of Companies?
4) Weakness in internal controls and processes at RIR Power Electronics Ltd:
An investor comes across a few instances indicating scope for improvement in the internal controls and processes at the company.
In FY2023, the company delayed filing of its related party transaction details and as a result, BSE Ltd imposed a fine on the company, which it paid. This information was revealed in the Annual Secretarial Compliance Report for the financial year ended 31st March 2024 filed by the company on May 4, 2024; however, the same is not included in the annual report of the company.
In FY2024 annual report, the company made errors in its cash flow statement in the section cash flow from investing activities. For FY2024, it had a cash outflow on property and plant of ₹397.58 lac and had an inflow from interest income of ₹21.22 lac indicating a net outflow of ₹376.36 lac. However, the annual report shows an outflow of ₹480.72 lac from investing activities, which is an error.
FY2024 annual report, page 82:
The company had shown weaknesses in controls and processes in the past as well. For example, it did not deposit undisputed statutory dues on time to govt. authorities e.g. PF and ESI dues (FY2004) and sales tax dues (FY2005).
In FY2003, it did not appoint a full-time company secretary, which was a legal requirement, stating that it could not afford it.
FY2003 annual report, page 2:
Company has tried its best to find a suitable Company Secretary within its affordable limits, but has failed so far. The Company has not been doing well for the last 8 years and therefore is not able to afford a full time Company Secretary.
The Margin of Safety in the market price of RIR Power Electronics Ltd:
Currently (Sept 12, 2024), RIR Power Electronics Ltd is available at a price-to-earnings (PE) ratio of about 228 based on consolidated earnings of the last 12 months (July 2023-June 2024). An investor would appreciate that a PE ratio of 228 does not offer any margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.
Moreover, we recommend that an investor read the following articles to assess the PE ratio to be paid for any stock, which takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, even a low PE ratio of the company’s stock may be a sign of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
Analysis Summary
Overall, RIR Power Electronics Ltd has grown its sales at a rate of about 11% over the last 10 years. The company operates in a highly competitive semiconductor devices and equipment industry which has intense competition from both domestic and overseas players. Local unorganized players as well as MNCs present in India along with cheaper imports from countries like China that have surplus capacity put a lot of pricing pressure on the company.
The company, which is very small when compared to its customers as well as competitors, has very low negotiating power over its customers.
Rapid changes in technology impact all players in the semiconductor industry. RIR Power Electronics Ltd faced such a situation in the early 2000s when its attempts to access the latest technology failed as the plant sold to it by its technology associate failed in FY2002.
As a result, the company has reported a long streak of losses from FY2000 to FY2005 due to which the original promoters, the Ruttonsha family sold their ownership to the Mehta family. However, even the Mehta family has had a tough time running the business until the last 3 years and the performance of the company was average. The net profit of the company in FY2009 was ₹1.2 cr and after 12 years, in FY2021, the net profit was ₹1.3 cr.
In the last 3 years, since FY2022, when all of a sudden due to global geopolitical issues, demand for domestic production of semiconductors gained momentum, the performance of RIR Power Electronics Ltd has improved.
Due to India’s aim of becoming self-sufficient in semiconductor production, many companies including very large global players as well as the biggest of Indian corporates have announced humungous investments in semiconductor projects with a few proposals of ₹80,000-90,000 cr as well.
At the same time, RIR Power Electronics Ltd has also announced a project of about ₹600 cr, which is a very large investment compared to its business size. Moreover, the company does not possess the technology to make the in-demand semiconductor devices. It plans to buy technology to make Silicon Carbide semiconductor devices, from its promoter group company, Sicamore, for ₹42 cr. Sicamore is currently developing that technology and may develop it in the next 12-21 months.
RIR Power Electronics Ltd also plans to buy similar technology but for slightly different-sized devices from another company by paying ₹90 cr upfront and a royalty of up to 2% of sales.
The company’s current business position does not have enough financial resources to make these investments. However, it has resorted to diluting its equity by issuing warrants (at ₹855/- per warrant) to meet these expenditures. It may get ₹85.5 cr if all the warrant holders convert them into shares.
After the announcement of the grant of the state govt. approval for its Odisha project, minority shareholders are buying its shares in huge quantities and its share price has become almost 4 times since the announcement. However, during this period, the promoters of the company including its CEO are continuously selling their stake in the company. In fact, the CEO of the company has sold his entire holding during the recent phase of increase of share price.
This is even before the work on the actual Odisha plant is yet to commence. Until now, in Odisha, the company has completed only phase 1a, which is the plant that it has shifted from Gujarat.
The company enters into related party transactions with promoter group companies, which need greater assessment by investors. The company’s promoters are about 70 years old whereas their daughter, even though, present on the board of directors, is in a non-executive position. She is a writer and works actively for Netflix, Amazon-MGM etc. It remains to be seen whether the promoters come up with a succession plan.
Going ahead, an investor should keep track of developments related to the Odisha project, the purchase of technology by the company from its promoters and the price paid for it, and the sale of shares of the company by promoters. She should also monitor its profit margins to understand whether it is able to maintain its business position in light of large upcoming semiconductor projects in India as well as after any easing of the geopolitical situation.
Further advised reading: How to Monitor Stocks in your Portfolio
These are our views on RIR Power Electronics Ltd. However, investors should do their own analysis before making any investment-related decisions about the company.
You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”
I hope it helps!
Regards,
Dr Vijay Malik
P.S.
Disclaimer
Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.
