Yokogawa: Benefiting from the booming market - Outside View by Luke Verghese

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Yokogawa: Benefiting from the booming market
Feb 6, 2012

Operating on the dictates of the parent also has its dual benefits

Top-line growing in strength

As the name plate suggests it is of Japanese origin, and the holding company, Yokogawa Electric Corporation, Japan, holds 97% of the paid up equity. It was not always like this. It was listed for trading having first set foot in India in 1987 for the manufacture of electrical Process control Instrumentation systems, (switches/sockets/relays/computer networking products) with a plant in the Electronics City complex near Bangalore. It still boasts of a piddling number of Indian minority shareholders, even if it is delisted for trading in the Indian bourses.

It has grown in metier over the years and ratcheted up a gross turnover of Rs 6 bn in 2010-11, as against a turnover of Rs 5 bn in the preceding year. The revenues include sales and services income. (The profitability aspect is not really relevant here given the holding pattern of the permanent capital, and the global operations of the parent). As we will see later on, the profitability aspect is also dependent on other extraneous factors too. The company appears to be basically in turnkey contracts, judging from the schedules to the accounts, and it is heavily dependent on its parent for its succour. This bit is very obvious from the inter-se deals that the company has with the parent and its fellow subsidiaries. For the matter of record there are some 28 fellow subsidiary companies which fits the definition of parties under common control of the parent. This list includes another India based sibling sporting the name Yokogawa IA Tech India Pvt. Ltd. The name plate gives nary an indication of how it may be earning its living. It is not known either whether this is a standalone operation or not.

A rambling concoction

The company is some sort of a rambling concoction. It manufactures, trades, sources raw materials and components in abundance from abroad, sources foreign finished goods, and sells in markets abroad - all on the dictates of the parent, no doubt. And in a year in which it suffered a dip in margins it hiked dividend payout. But more on this aspect later on in this show folks. It is so much under the yoke of the parent that it even incurs an expenditure item nomenclature as Global Sales and Marketing Activity Fees amounting to Rs 59 m (net of taxes that is) against Rs 52 m previously. By allocating expenses in this manner among its many foundlings, it helps to keep a proper tab on the operations of the group across the globe.

The way it pans out, the company classifies its manufactured sales under the head of Process Control Instrumentation Systems. This accounted for 50.3% of all sales for the year. Included in this subsection is an item called ‘Others'-which apparently belongs to the traded category or some such-- accounting for another Rs 509 m in sales, accounting for another 8.4%. The second category is called Traded Goods and in this grouping is an item called Recorders and Accessories. This item roped in 28.5 % of all sales. The rear end is brought up by Services accounting for 12.7% of all revenues. Imported raw materials and components amounting to Rs 1.2 bn accounted for 45% of all materials consumed. The total value of all imports including traded goods amounted to Rs 2.4 bn. Also, the entire quantum of imports was made thru the parent, or as in the case of some instances it was affected through parties under common control. Exports of finished products at Rs 507 m accounted for close to 9% of all sales and services. The vast bulk of the exports have been affected to the parent, or, affiliates companies. That's not all. One third of the other income, which in itself is a substantial constituent of the pre-tax profit, emanates care of the group companies! The foreign other income refers to commission income. It is all in the family you see. In this manner the parent company gets to have a firm hold of every aspect of the functioning of the group, and even decide on its profitability aspect of each company in the group.

The many inter-se deals

The other very revealing aspect of the inter-se revenue deals is that Yokogawa India's group company transactions appear to be settled with minimum fuss, compared to the squaring up of deals with third parties. For example the outstanding receivables from group companies at year end accounts for only 20% of all sales affected during the year. (The receivables include dues from Yokogawa, Korea, to whom no sales have been made during the year!) This is magic mantra. Compare this with the overall position at year end. The total value of trade debtors at year end amounted to 31% of all sales made during the year. The same conditions must be subsisting for payables between group companies also, though it is not possible to make a similar calculation due to several technicalities. But what is clear is that outstanding payables at year end to group companies for revenue transactions made was a mere 16% of all transactions. This is a fine way to run a company no doubt.

The sales generation in itself is a tale worth telling. It sold 119 items of process controlled instrumentation systems during the year. That is to say the average price that it obtained on each item sold was Rs 25.5 m. In the preceding year the average price realised was Rs 21 m. The company states that it cannot give installed capacities, as the size and mix of the system varies according to the customer's requirements. So it is not possible to have a take on the capacity utilisation. It also sells ‘other items' valued at Rs 509 m, but no further details are available on the sourcing pattern of these items. The real clincher is in the traded goods which are categorised as Recorders and Accessories.

How it ponies up its bottom-line

The opening stock is valued at Rs 9,071 per item. It purchased 37,117 nos of these items during the year. The purchase price of these items is not available. It would definitely have been helpful if the details had been furnished. But what is interesting is that it obtained an average sale value of Rs 44,873 per item that it sold. As compared to the average value of opening stock per item, this is a phenomenal average mark-up to obtain per item on sale. There is reason to believe that the average cost per item that it purchased during the year was not substantially different from the value of the opening stock per item. This is because the closing stock is valued at Rs 16,946 per item. Even assuming an average sale price of Rs 15,000 per unit, the company would have worked up a gross margin of Rs 1.1 bn on this exercise alone. This is simply a fantabulous gross margin to work on, and if one may hazard a guess the company may even have made a loss on its main manufacturing line! One wonders from which fairy tale land the company sources its Recorders and Accessories. Then there are the services rendered of Rs 764 m, on which the profit margin calculation is not possible, as it is a part of a composite whole. Talk about manufacturing efficiency, folks! The point is that if this is the manner in which companies turn a profit, or a loss for that matter, then all that the parent has to do to recreate either situation, is to open or close the spigot, depending on the exigencies of the situation.

No particular dividend policy

And as stated earlier it suffered a dip in margins during the year. The post tax profit dropped to Rs 258 m from Rs 324 m previously. But the dividend was hiked for no particular reason to Rs 88 m from Rs 66 m previously. This excludes the dividend tax payout of Rs 14 m (Rs 11 m) which added to its cash flow worries. Was the hike in dividend resorted to, to compensate for the fall in the value of the rupee parity or something? This hike in dividend payout has to be seen from another viewpoint too. The company had to negotiate a funding anomaly during the year. It registered a negative cash flow from operations of Rs 30 m against a positive cash flow of Rs 200 m previously. The problem was that it suffered a sharp increase in the value of its receivables and inventories during the year, while the increase in payables did not bring about the needed succour, resulting in the anomaly.

It tried to garner some extra cash through the purchase/sale of debt instruments during the year. But would you like to believe it that the company was actually out of pocket from this exercise at the end of the year? The other income was also buttressed through some very fortuitous entries. There are the customary write-backs of liabilities and provisions, as also the exchange gain .The latter can go either way, though the former can be stage managed.

From the looks of it, the investing fraternity should be more than happy that the company is not listed for trading any longer. Companies such as this seem to operate more on the dictates of the parent, than on its ability to operate on its own terms in a competitive and vibrant market.

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 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.


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