It is important for enlightened companies to come clean on their year- end financial statements
Company needs to be more focussed
Reconstructing ingenious quotes and anointing boardrooms with vision and mission statements is the flavour of the season for India Inc these days. Rolta has posted a delectable observation of Charles Darwin, besides giving a low-down of its many laudable objectives. It would appear to be a tough act to follow for mere mortals - but no harm in making a go of it I guess. The great helmsman of the Rolta group is the long serving Mr Kamal K. Singh, who is also the promoter, Chairman and Managing Director.
In a nutshell, the company appears to operate in the high end IT space
. Its revenues are derived under three heads of income both for the standalone company and for the consolidated entity: Enterprise Geospatial and Defence Solutions, Enterprise Design and Operation Solutions, and Enterprise IT Solutions. (The first named brought in 62% of the IT revenues, the second 26%, with Enterprise IT Solutions bringing in the balance with 12%). To many readers these high funda sounding terms must read more like Greek and Latin than plain English. According to the dictionary 'Geospatial Information' means data concerning a place collected in real time. Using geographical information systems, geospatial information can now be layered and analysed to understand complex situations like economic trends, natural disasters , ocean levels, military action, population shifts etc. Enterprise design means web site design and development. Enterprise IT Software means software used by organisations for specific purposes. The company registered a gross revenue of Rs 16 bn and posted a pretax profit of Rs 5.57 bn, while the consolidated group consisting of the parent plus its nine subsidiaries rang up gross revenues of Rs 19.4 bn and squeezed out a pre-tax profit of Rs 4.6 bn. As one can see the consolidated results does not add much value and is also a drain of sorts on the company's resources. But more on this point later.
High quality staff and IPs
The company says that more than 75% of the 3,500 plus professionals in the company are armed with relevant engineering, postgraduate or PhD degrees. As a way up the value chain Rolta has acquired many companies having best of breed technologies in the US and Canada. The company has also acquired key technologies and assets of reputed companies in the US and Canada. It is also in partnership with big ticket IT brands across the North American and the European hemisphere. In an effort to get the message across to its shareholders, the company claims that its enterprise geospatial and defence solutions business group is spread over 20 countries worldwide. The company has also spent precious sums of money on glossy four colour two page spreads explaining what its business is all about.
There are three specific anomalies that come across very clearly in a manner of speaking. One is why a company which is on cloud nine and tom toms about it too in large detail has chosen to provide only the abridged statement of accounts. No explanation appears to be forthcoming in the annual report on why it resorted to this short cut. The second is the enormous difference in the remuneration earned by the chairman and managing director and the principal promoter on the one hand, and the two other joint managing directors on the other. According to the annual report, the head honcho earned a total remuneration, being a slice over Rs 100 m, almost all of it in the form of Commission. One joint managing director was entitled to a pagaar of only Rs 34.5 m, while another joint managing director had to make do with even less - a gross salary of Rs 20 m. Even the President, International Operations had to make do with a package of Rs 32 m. The inter-se remuneration structure of the directors appears to be highly skewed. The five whole time directors collectively received a gross remuneration of Rs 203 m, and this payout appears to account for over 10% of all remuneration during the year. The third is that it is one of the very few information technology companies monitored by Capital Market magazine which has chosen an accounting year end other than March. Its nine subsidiaries on the other hand have chosen accounting year endings in June, Dec and March. Whether by design or by accident it is all panning out beautifully for the parent. Besides, such tricks only add to the collective confusion. But let that be.
Bare bone financials
There is really very little to go by, given the bare bone details which have been furnished in the standalone statement of accounts. Still there are bits and ends to go by. Suffice to state here that the company got by with borrowings of Rs 13.8 bn at year end. The net cash outflow resulting from the investments etc that it made during the year had to be partly funded by additional borrowings. It appears not to be generating sufficient cash from its operations to fund its capital expansion schemes. The other interesting point is that the company boasted a gross block of Rs 20 bn at year end, but it could rustle up sales income from operations of only Rs 14.5 bn. This is a truly a remarkable state of affairs for an IT solutions company. Unfortunately there is no breakdown of what these fixed assets constitute - save an inkling of what it may contain. The cash flow statement for the year declares that the company purchased intangible IPs worth Rs 4.7 bn during the year. That is a lot of intellectual property to buy, and presumably this expenditure has been capitalised. It would have helped if the company gave some details of how this purchase will translate into revenues in the future.
Notes to the accountsv
The company also has a high level of debtors' out-standings at year end. In percentage terms and on a rough basis, the outstanding accounted for 47% of all billings during the year. Not only that, it is experiencing difficulty in generating margins. The other income of Rs 1.5 bn that it received during the year accounted for 27% of pre-tax profits. (The company sold its stake in its joint venture resulting in the manna from heaven and helping to boost the bottom-line). The notes to the accounts also states that the outstanding balances at year end in respect of some of the sundry debtors, creditors and deposits are subject to confirmation from the respective parties. This is also another first for a large IT company. Significantly the company has not quantified the balances involved in the reconciliation effort.
Significantly, the parent's capital investments in its subsidiaries also do not bring in a farthing as direct tithes. The total book value of its investments in its unquoted siblings and two JVs amounts to Rs 6.2 bn. (It has also advanced loans to them to the tune of Rs 1.1 bn. Whether these loans are interest bearing or not is not readily known). It has 10 subsidiaries - of which nine are based in the USA, Europe, Australia and the Gulf. It has one 51% subsidiary based in India sporting the name Rolta Thales. Its total dividend receipts in 2010-11 were Rs 32 m. None of the nine siblings whose brief financials have been incorporated separately with the consolidated accounts have declared any dividend during the year. Apparently the dividend receipts must have been realised courtesy the JV which was sold to the joint venture partner. It also has one step down subsidiary in the US called Rolta TUSC Incorporated which is a subsidiary of Rolta International US. Its brief year end financials, which have not been shown, was for the six months ended December 2010. What exactly does this company do for a living, now that it has been incorporated?
It is not difficult to see why none of the siblings have been able to declare any dividend. None of them have turned in a pre-tax profit during the year. Rolta International the holding company of the US based siblings is the largest by far both in terms of assets and sales. At year end it boasted assets of Rs 4.7 bn and a turnover of around Rs 3 bn. But it could only manage a pre-tax loss of Rs 264 m. All of them without exception have accumulated losses too. The parent has not painted any picture of the operating performance of its siblings, so there is really very little to go by. Presumably the parent has some game plan for these lilliputs or some such.
All in all this is not a company which exudes much confidence in a prospective 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.