Thursday, December 3, 2009

The Headline Misses The Point

Last week, Orsus Xelent (ORS) reported its third quarter results. The headline referred to an 8% year-to-date drop in annual revenues. But this is an exceedingly useless headline, for several reasons.

First of all, the first two quarters of the year have already been reported. As such, it would make more sense to headline third quarter data. But third quarter revenue was down 34%. The headline suggests a lack of candor from management and a will to sweep the latest numbers under the rug.

Still, for most value investors, I suspect the third quarter income data changes little in their valuations of the company. The mobile market in China was down some 30% this quarter, so the company's numbers are fairly consistent with an industry suffering from a cyclical issue. While infrastructure spending in China has kept GDP numbers high, consumer spending has left retailers dry, slowing down distributor orders.

Those who have read our previous discussions of Orsus Xelent will know what we are looking for: the management of its receivables balance. The company trades for just $20 million, but it carries receivables of $93 million contributing to shareholder equity of $55 million. The company has earned 20 cents per share in the first nine months of this year, but the stock trades for just 70 cents!

However, the profit numbers are rather deceiving: while the company continues to churn a "profit", it is not seeing the fruits of that profit in the form of cash from its main customer, which is a concern. And as a result of the slowdown in the mobile market, the receivables balance is going in the wrong direction. While the company sold $16 million worth of phones to its largest customer, the receivables balance to this same customer increased by $9 million! Not a great sign.

Of course, management assures shareholders that it believes it will collect on the full balance. If this is true, the company is deeply undervalued. The problem is, that's a big "if". The uncertainty of the situation going forward is a major reason why investors should be diversified; not every scenario with high upside potential will pan out.

Do these results lead me to give up on the company? Not quite. The company trades very cheaply compared to its assets and earnings (assuming, of course, you believe management is genuine), and the insurance the company took on the receivables does help mitigate some of the risk. Having said that, the risks to this company have increased with the increase in receivables, as the company's cash flow situation has become rather serious.

Disclosure: Author has a long position in shares of ORS


rayhaan said...

yo saj ,
dont u think chinese companies are quite suspicious especially after the asia aluminium bond default incident?the way they treat foreign shareholders and creditors is quite akin to dirt!!
heres a link file://localhost/ezxlocal/download/mystuff/y chinese r suspicious.htm

Rayhaan said...

hey everyone ,
if u have access to the indian market , this is one opportunity u should really check out.
note: $1=rs50 approx and 1 crore=10 million .
Temptation foods is a frozen food processing and exports firm. It is listed on bombay stock exchange . it trades at less than rs120crore or a p/e of 1.7!!! here are the facts according to the last annual report
inventory-rs30 per share
debt/equity ratio-.45
sales-rs870 crore
net profit-rs52.7crore
reported book value -rs80,the roe is also quite impressive
Significant disclosures
a)The stock has gotten into a downward spiral from rs206 to a low of rs 18 ,primarily due to 2 reasons-
1)earlier this year it tried to buy another company(kohinoor foods
)which it was unable to do so because it was unable to accumulate funding and its lenders sold the shares it had accumulated leading to a loss (the regulators too scolded it)
2)it was one of the stocks that got really hammered when scamster and inside trader ketan parekh was found 'playing ' with it
b) it is registered in british virgin islands
3)it has proposed a dividend of 6% on face value(rs.6o) despite almost 100% profits which they havent paid till now(since august )
4) the promoters have pledged 84% of their shares
5) they have vested employees with options of upto 10%shares outstanding
6) i own 1000 shares
7) it has a significant mutual fund portfolio (189 crores at cost) which although not well disclosed has been liquidated to fund 2 acquisitions made by the company in 2008(couldnt find it in the annual report ,found about it when i talked to the company secretary , who also told me that the co.has registered sales of rs600 crores in the last 6 month but the thing is the jerk couldnt even remember the date of the last agm!!)
8)The income tax department held a raid on the company alleging a swindling of rs50 crores ,which was denied by the company in september

this about wraps it up, !,despite everything i think this stock holds gr8 upside potential at its current price , pls check it out if u get the time saj


Rayhaan said...

p.s promoters stake-19%,
just as if to illustrate y value investing asks for lots of patience this stock has been at this stagnant level since 6 months ive held it
impatiently awaiting ur analysis ,

Saj Karsan said...

Hi Rayhaan,

I think the link you posted regarding the bond default was on your computer, not the internet, so it's not readable. In any case, there will always be fraudulent companies, but I'd be wary of painting every company in a certain geography with the same brush.

Rayhaan said...

Yo saaj, maybe u r right.But its in our genes to b suspicious of the chinese ever since 1960's (hope im not gettin 2 political here) . Sorry 4 posting d wrong link, cant figure out a way to get it out of dis stupid mobile! Found it on Anyway the basic story is this- Asia alumina issues bonds in 2004. Later issues PIK s.Buys out another factory half owned by the chairmans son in 2008!.Sends notice in 2009 without bothering bout a little thing known as financial transparency ,offering 29cents on d dollar. Offer is rejected . Creditors get Norsk(another aluminium co.) to white knight.B4 even making a firm offer Norsk is told to buzz off by city officials! 2nd offer comes =20cents on d dollar 4 d senior notes ,1cent 4 d pik s. Guess who makes the offer?Golden concord a company owned by d employees of the supposedly 'bankrupt' asia alumina!creditors give up n accept, otherwise they suspect it ll b even cheaper if d bankruptcy proceedings move to mainland china(the company even though loc8ed in hongkong has most of its assets in mainland china) .MORAL OF THE STORY- Investors in China need a BIG margin of safety. By the way would it help ur analysis if i converted the above mentioned stock s figures in dollar amounts n made it more understandable?(being irritatingly persistent thats one of my genetic traits too!) , hoping u dont mind, Rayhaan

Saj Karsan said...

Hi Rayhaan,

The stock you posted looks interesting, but I don't really have access to the BSE, so I won't be very helpful. Hopefully somebody else will be able to help you out.

Anonymous said...

Does anyone know what happened to the ORS website? It used to be at

editor said...

Any update on Orsus? Stock is getting cheaper everyday but sales and cash flow are still weak. The company claims its AR are insured which is a big plus but it changed auditors recently.

Saj Karsan said...

Hi tscott,

No idea what to make of it at this point!