The company appears to be a totally unfocussed entity - the treatise of the chairman not withstanding
A multihued past
Incorporated as Revathi Equipment as far back as 1977 to make drilling equipment, this Coimbatore based company has negotiated many bends in its lifecycle, and for several years was also known as Revathi CP Equipment. The CP in the name stood for the American drilling equipment and compressor manufacturer Consolidated Pneumatic Tools (this company separately also boasted a subsidiary in India of its own going by the same name). The American parent in turn was ultimately swallowed up by the Swedish giant Atlas Copco. Revathi entered into a technical and financial tie-up with Consolidated Pneumatic which resulted in a 40% minority equity stake for CP in Revathi. The objective was to make better water well rigs, blast hole rigs, drilling accessories and allied products. The foreign collaborators subsequently sold their 40% stake in the company at the turn of the century and this shareholding devolved into Indian hands. At some point in time the company also came into the orbit of Saroj Poddar, the son in law of the late KK Birla - and who is the Indian promoter of Gillette India. The present proprietors came into the picture thereafter. Today the company operates in two revenue streams-the drilling solutions business, and the concreting solutions business.
The chairman's bizarre address
The address of the chairman of the board, Mr Abhishek Dalmia, to the shareholders through the latest annual report is a scream to say the least. It beats me totally what exactly he is trying to communicate to his fellow shareholders in particular - and the investing public in general. There are not that many shareholders for sure - weighing in at 5,115 members as on March 31, 2012 - but still. Consider the second para of his worldview -'Many years ago when I was in college, I was having a chat with one of my uncles about business prospects in a tough economy. He, quite matter of factly said a difficult environment hurts almost all businesses. Some more. Some less. The experience of the past few years has been a grim reminder of the truth of these words'. He goes on to add that the old management was pensioned off in the financial year 2010 due to complacency and a new one brought in, in its wake. He also cautions that the road to a recovery is gradual. He even adds that 'if any one of you face tenuous issues in your own organisations I would recommend you talk to Ganga at Levers for Change. They are one of the nicest people that I have interacted with, not to mention highly competent at what they do...' What is the real message in all this please?
However difficult the environment may be, the chairman's message to the shareholders which is about the only written communication to a company's minority shareholders in a year should be exuding positive vibes and dwelving on its aspirations, and not a compendium of old wives' tales.
Some help from the tooth fairy
The company could sure do with a load of help from the tooth fairy. The picture is a more than a little bleak at this point in time. It is simply making no money at the end of the day and it is loaded with debt so to speak. The company realised revenues from operations of Rs 1.3 bn during the year against Rs 1.1 bn previously. Other income did poorly at Rs 20 m against Rs 150 m previously. (In the preceding year the other income got a right royal push through a onetime receipt from the sale of investments).In the latter year the lease rental income rocketed to Rs 9 m as compared to Rs 0.8 m that it recorded previously. With the income side of the equation remaining static and the revenue expenses on the rebound, the bottom line took a neat hit - and it registered a pre-tax loss of Rs 2.5 m against pre-tax profit of Rs 124 m previously. The interesting factor here is that the pre-tax profit in the preceding year was lower than the other income of Rs 149 m for that period. Ditto was the situation in the current year - except that it was inked in red. In other words but for the saving grace of fortuitous receipts from extraneous sources, the company would have registered a loss in the preceding year too. The sale of investments was also well timed.
Collectively, the amount of long term and short term debt amounted to Rs 921 m at year end against Rs 637 m previously. The interest burden at Rs 96 m was sharply higher than the payout of Rs 69 m previously. The interest payout would infer a percentage amount of 10.5% against 10.9% previously - on a rough basis. And what were the possible reasons that led to the spurt in borrowings? It registered a negative cash flow from operations due in part to a spike in the year-end inventories by Rs 32 m, and also a spurt in trade receivables by very uncomfortable Rs 290 m. The increase in trade receivables could infer it is having a tough going hawking the very equipment that brings it its bread and butter. I will delve on this aspect of its functioning later on in the copy. The increase in current liabilities by Rs 92 m was not enough to bail the company out. Add to this some minor spending on capital assets and also in its investment portfolio and the company had to dig deep into its pockets to finance the hole in its cash flow.
The revenues and profits
So what's up on the revenue front? Value wise, the company sold marginally more at Rs 1.14 bn against Rs 1.02 bn previously (revenues include sales of Rs 60 m made outside India). That included waterhole rigs, blast hole rigs, and construction equipment worth Rs 803 m against Rs 643 m previously and merchanting goods worth Rs 341 m against Rs 375 m previously. The closing stock of merchanting goods is almost double that of the preceding year - implying that it is not making much headway on this front. That is to say value wise revenues grew 12.2%. Volume wise details have been made redundant from this accounting year and hence not known. But the problem was that material input costs-the largest item of revenue expenditure - at Rs 636 m, rocketed by over 21%. Add to this the inability to flog its merchanting goods and you have a double whammy. Given the higher dependence on borrowed funds, the interest costs debited to the P&L account also risen majestically - by 39%. Only employee benefits were kept under wraps of sorts. Given this dichotomy between the growth in revenues and the growth in expenses, it was only natural that the company ended up scraping the bottom of the barrel. The situation would have been further exacerbated but for its fortuitous deft handling of the working capital portfolio, with the company recording a negative capital flow at year end on this count. But it also has two very perplexing entries under both 'Long term and under Short term loans and advances' -called 'Loans given' cumulatively amounting to Rs 67 m. What does this pertain to?
The cash outlay in non core investments
The other very niggling aspect of the company's functioning is the plonking down of hard to get resources into its non current investments. Such investments at year end amounted to an untidy Rs 920 m - up from Rs 906 m previously. The parent has not received a dime worth of dividend inflows from this investment in both years - but there are reasons for it too. Revathi has two subsidiaries and one associate company. Just one subsidiary and also a curiously named outfit at that, sporting the name Potential Semac Consultants Pvt. Ltd accounted for 94% of all such investments at Rs 861 m. The shares of this company possess a face value of Rs 10 each, and they were apparently acquired for a per share price of Rs 667. This company must be a goldmine or something. Revathi holds a 70.9% capital stake in the latter. Who perchance holds the balance stake please? The other sibling is the wholly owned subsidiary, Renaissance Construction Technologies India Ltd. This is a pidgin operation by comparison, and the investment outlay by Revathi is only Rs 10 m - made at face value. It has an associate company going by the name Satellier Holdings Inc USA, in which it has invested a sum of Rs 49 m in the form of preferred stock at Rs 5.5 per share. What in heaven's name is this investment all about? It also possesses an interest in two other companies - Semac Qatar and Semac Muscat - the former is a joint venture, while the latter is a subsidiary. These two companies are apparently offshoots of Revathi's sibling Potential Semac Consultants. Separately, under the heading of 'Long term loans and advances' it has for a start made a capital advance of Rs 0.2 m, in a joint venture incorporated for the joint development of property. One can probably expect large sums of Revathi's funds to flow into the coffers of this venture too as the days go by. Not to mention a corporate guarantee of Rs 45 m made on behalf of a subsidiary.
The two siblings whose brief financial details are available are at two ends of the spectrum. Potential Semac is much much bigger beta in both asset and revenue terms, but the unique feature of both companies is that they toted up a loss before tax for the year. Renaissance is into construction and mining like the parent, while the latter is into engineering design services. Whether there are any inter-se dealings between the parent and the siblings is not immediately known except for an entry in the loans and advances schedule of the parent detailing a marginal receivable from a subsidiary.
Potential Semac on revenues of Rs 555 m and assets of Rs 548 m generated a loss before tax of Rs 17 m. The company incidentally has reserves of Rs 316 m on a puny paid up capital of Rs 18 m. This is an incongruous situation. I am not clear on the elements that make up the reserves and surplus figure of the company - some of the reserves is obviously of the share premium variety, given the exorbitant premium that Revathi paid on the face value - but it appears ironical that a company with such ample reserves relative to its paid up capital cannot even make ends meet at the end of the day, and that too in the services business that it operates in. Renaissance Construction is definitely on the sickbed - going by the brief financials on display. On revenues of Rs 57 m it racked up a pre-tax loss of Rs 7 m. It also boasts negative reserves of Rs 8 m on a paid up capital of Rs 10 m. This is definitely a bad scene. The management has no encouragements to offer.
This is not a company which exudes any confidence whatsoever in a discerning investor.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.