Cerebra Technologies: Can this Waste-to-Precious-Metals Company Work Wonders?

Here are the reasons why Cerebra Integrated Technologies has potential:

1. The company was formed in 1992 and listed in 2000 and at that time it manufactured hardware. It immediately ran into a wall of competition from the unorganized sector and this made it run into losses.
2. Its financial situation was grim (BIFR)  but because the company’s management was clean, it survived and hung on.
3. The turnaround started from 2011-12 after it forayed into e-waste management. This is going to be the mainstay of the company going forward along with its AMC (Annual Maintenance Contracts) and EMS (Electronic Manufacturing Services) which makes motherboards, memory modules, graphic cards and networking products, Repairs and Refurbishment market and High Capacity Hardware manufacture.
4. The company has set up offices in the Middle East (UAE, Saudi, Qatar) where it distributes Canon’s products, along with its hardware business. It has more than 170 resellers in that region.
5. In 2013, it acquired Cimelia Resource Recovery Pte. Ltd., an ewaste processor based in Singapore.
6. In 2015, Cerebra entered into a JV with Echostream to make storage servers. Given the boom in cloud computing, storage servers are hugely in demand.
7. The company also has built an Automated Driving Test System (ADTS) for which it has bagged a large order from Transport Department, Government of Karnataka for testing and issuing driving licenses. The company owns a surveillance software which it uses across different applications, driving tests being one such.
8. The company also have dived deep in the refurbishment market. This business is in a nascent stage in India and has fantastic potential. In developed countries, refurbishers do phenomenally well.
9. It owns a subsidiary, Cerebra LPO, which offers onsite and offsite legal help to law firms in the USA and UK. UPDATE: The company has cut down the Cerebra LPO operations, which now functions as a BPO out of Bangalore.
10. The company also owns a medical transcription facility.
11. It also sets up and maintains hardware in eGovernance centers in Bangalore.
12. Having said all this, the company’s main business going forward will be eWaste recycling and refurbishing, plus all of the above, which will now become secondary.
13. Therefore, you should understand the eWaste business model.

The eWaste Business Model

Precious metals such as gold, palladium, rhodium and silver are used in the manufacture of electronics.

With technological obsolescence fast catching up, and with rising incomes and the desire to own new stuff, old devices are often replaced, and such old devices are sent to ewaste recycling centers.

The recycler then processes the electronic waste and extracts the precious metals, which it sells.

As of date, 100s of Indian entrepreneurs are minting money by setting up recycling facilities.

Cerebra’s and India’s eWaste Business Potential

1. As per reports, India generates 18.5 lakh metric tonnes of eWaste every year. Not just that, the waste keeps growing at a compounded rate of 30% every year.Companies that generate and keep collecting eWaste without getting rid of it effectively will have to pay a stiff penalty as you can read in the article linked first.
2. In 2013, given the commodity prices at that time, it was estimated that processing 1 tonne of eWaste would yield Rs 58,535 worth of revenue of minerals. It will be safe to assume – given the inflation in commodity prices – that the current figure would be in the region of Rs 70,000-75,000 per tonne. Let us assume Rs 70,000/tonne.
   The cost per tonne is about Rs Rs 10,000 to Rs 15,000 and many companies who do not wish to pay a penalty often give away their eScrap for free.
3. Cerebra’s ewaste processing capacity is 36,000 tonnes per annum, with potential for increase to 96,000 tonnes.
4. So, as on today if we take Cerebra’s total capacity of 36,000 tonnes per annum and multiply it by Rs 70,000 per tonne (see 2 above), we get 252 crores. The EBITDA can be assumed at 60% given the fact that raw material is either free or too damn cheap. The current sales of the company are 145 crores on a standalone basis and should witness a substantial jump in the current year 2017-18. UPDATE: The company’s ewaste plant is currently working at 30% capacity (2 days in a  week). This is because the company has to add some machinery. The recent preferential issue to Kuber Fund and the promoters should trigger the process.
5. The company’s capital is 110 crores and if the net profit of the ewaste facility works out to 20%, we are looking at an additional EPS of Rs 5 per annum.
6. UPDATE: The eWaste plant is currently operating at 30% of its capacity and is expected to operate at 100% of its capacity in FY 2018-19. Thereafter, the company will increase capacity in FY 19-20.

The Negatives

1. The book value is a measly 15.60.
2. The 2018 EPS may not exceed 2 bucks.
3. The company has issued FCCBs which will get converted into equity shares at Rs 10.50 before December 2019. This will swell the capital and reduce the earnings.
4. The trade receivables and trade payables are humongous. Standalone Sales are 145 crores and debtors are 173 crores (last year 30 crores, so 143 crores were added this year). Consolidated sales are 250 crores and debtors are 216 crores (last year 60 crores, so 156 crores were added this year). It looks dicey and has to be clarified by the management. The trade payables also have jumped from 2 crores in 2016 to 137 crores in 2017 (standalone), and though it is not clarified in the AR, there seems to be some correlation in the near-identical rise of both receivables and payables. Update: The increase in debtors and creditor were because of government contracts. This is what the company guys told me.
5. The auditors have stated that capital advances amounting to Rs. 37 crores and trade receivables amounting to Rs. 19.5 crores are outstanding for more than 3 years and may not be recoverable. But the management is confident of recovering these.  This raises another question.
6. These questions need to be clarified by the company and will be followed up by me shortly.

Conclusion

Unless the company clarifies on the negatives, it does not become a buy. Update: The company has clarified, as marked above.

If the ewaste business takes off and when the plant runs to full capacity (96000 tonnes), we are looking at an EPS of at least 17, plus its earnings from the other subsidiaries and Indian businesses. Update: IMO, this is a long termer and can work out well if you hold it for at least 2-3 years.

I also have heard from sources that the company is going out all guns blazing on its ewaste and refurbishment business. The refurbishment business also holds phenomenal potential. Update: This is true. the refurbishment business is part of the ewaste division.

Kuber Fund has bought 1.19 crore shares and the promoters have bought 53 lakh shares at 40. The downside is capped and the potential is huge, but it must first satisfy investors about the negatives pointed out upstairs. Till then it is not a buy. Update: It is only a buy if you are prepared to hold it for the long term.