Is Manpasand Beverages’ Balance Sheet Showing Signs Of Stress?

Manpasand Beverages Ltd. has had a turbulent year. In May, Deloitte Haskins & Sells resigned as auditor of the maker of Mango Sip, just days before signing off on annual accounts. The company’s stock has lost nearly 80 percent of its value in the last 10 months.

Now, a BloombergQuint analysis of the Gujarat-based beverage maker’s latest balance sheet reveals signs of stress in its operations. In the first six months of the current financial year, the company has seen its working capital cycle deteriorate with worsening receivables and payable cycles and capex delays.

1. Worsening Trade Receivable Cycle

Trade receivables show what customers owe a company.

The portion of trade receivables against total sales in a quarter provides an estimate of number of days customers take to pay the firm.

BloombergQuint’s analysis of Manpasand’s financials shows that the company had a receivable cycle of 93 days at the end of September quarter. This means its customers are paying after 93 days from the sale of goods as of September. That compares with 33 days as of March 31, and 45 days as of September last year.

In the first half of the financial year 2018-19, the trade receivable cycle rose to 64 days from 27 in the year-ago period.

“It’s a significant jump and really inexplicable why, despite the seasonality of business, receivables have gone up in September against March unlike previous years,” Amit Mantri, co-founder and fund manager at 2point2 Capital, told BloombergQuint over phone.

Manpasand Beverages, in its reply to BloombergQuint’s emailed query, cited two reasons for the rise in receivables.

First, the company extended the credit period to customers to instill confidence after the statutory auditor's resignation. “In Q2FY19, our business was impacted by the resignation of our statutory auditors and it caused some of our customers to worry. To support our marketing team and instill confidence among customers, better credit terms were offered. Credit period was increased by 30 days.”

Second, it tweaked the supply chain and removed distributors for key accounts. “From Q4FY18, we changed the supply chain model and removed distributors. Now we are extending the credit to key accounts that was earlier extended by distributors.”

The company hasn’t publicly disclosed the change in strategy with respect to distributors.

2. Rise in Working Capital Cycle

Trade payable is the amount a company owes its vendors for the goods received.

The portion of trade payables against the total material consumed in a quarter provides an estimate of the number of days a company takes to pay its creditors.

Manpasand had a payable cycle of 46 days in the quarter-ended September, according to BloombergQuint’s calculations. This means that Manpasand was paying its vendors 46 days after purchase as of September. That compares with 35 days in the year-ago period, and 19 days in the March-ended quarter. For the first half of 2018-19, the trade payable cycle rose to 29 days from 21 a year ago.

Manpasand said their credit cycle reduced on a yearly basis. “The creditor days have changed from 36 to 29.”

The company calculated the payable cycle taking material consumed for the trailing twelve month period ending September. BloombergQuint calculated the receivable and payable cycles using quarterly sales and material consumed in the quarter as denominator to give a better reflection of the results during the quarter.

3. A Decline In Depreciation With An Increase In Assets

Despite an increase in assets during the the quarter, the company saw its depreciation decline. Depreciation reflects the reduction in value of an asset with time. It’s based on the book value of assets and hence with its increase, depreciation expense should also ideally rise. But that’s not the case with Manpasand. Although, the company’s asset book value increased by Rs 115 crore from March, it reported a Rs 6.7 crore fall in depreciation expense.

The company attributed the fall in expense to shift-based depreciation. “There were changes in the method of calculation of depreciation in India under the new Companies Act, 2013 compared with Companies Act, 1956,” it said in an emailed statement to BloombergQuint. “In case of property, plant and equipment, shift-based depreciation is calculated. For January-June, double-shift depreciation is charged and for July-December, single-shift depreciation is charged.”

Under shift-based depreciation, plant and equipment used in double shift will have 50 percent higher depreciation than the one used in a single-shift. The quarterly reports of the company over the last two years, however, didn’t mention any shift-based depreciation as per the new Companies Act, 2013.

4. Borrowings Rise

The borrowings of the company rose by Rs 42 crore between April and September, taking its total debt to Rs 137 crore at the end of the September quarter. This was despite Rs 159 crore in cash, bank balance, and other current financial assets.

“These short-term borrowings are an overdraft facility taken against the fixed deposits of the company,” the company said. “This facility was taken to support the short-term working capital requirements. The cost of taking this facility is lower than the penalty paid on prematurely breaking the fixed deposits.”

5. Capex

Manpasand is undertaking capital expansion to the tune of Rs 300 crore. It is setting up a manufacturing plant at Sricity and Khordha. At the end of September, its work in progress declined by Rs 166 crore, indicating completion of capex and transfer of this amount to property, plant and equipment.

Capital work in progress reflects an ongoing construction of a plant or other equipment that will generate revenue for the company. This balance of capital work in progress is eventually transferred to property, plant and equipment or building on completion of construction.

A BloombergQuint analysis indicate that capital expenditure didn't take place during the period if work in progress and depreciation is factored in the assets forming part of the property, plant and equipment.

Manpasand told BloombergQuint that its capex hasn't been completed. “Two new plants—one each at Sricity and Khordha are still under construction. The capital work in progress relates to these under construction plants.”

6. Capital Advances

BloombergQuint’s analysis considering the above calculations shows that the company hasn’t incurred any capex after March. But its non-current assets, primarily comprising advances given for capex, has risen by Rs 128 crore at the end of September.

The company had Rs 149 crore as capital advance as on March 2018. A Rs 300 crore non-current asset balance is quite high, said Mantri. Because a company doesn’t pay upfront. The company had Rs 165 crore of non-current assets at the end of March. That still seems to be outstanding at the end of September. Why are they giving capital advances for such a long duration of 6-9 months, Mantri added.

The capex isn’t complete, Manpasand reiterated in its emailed response to BloombergQuint. “Our Sricity and Khordha plants are still under construction. The increase in non-current assets is on account of these two units.”

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