From the looks of it, ECE Industries appears to be the orphaned offshoot of the B K Birla group, lacking in any sense of purpose or direction. (The B K Birla group per se, if it tried, can easily make it to the ossified grouping classification.) Germinated in Calcutta in 1945, as a small electrical unit, and sporting the name of Electrical Construction and Equipment, it metamorphosed into its present avatar in 1987. Over the years it branched out into elevators and transformers, which it continues to manufacture to this day. It was also privy to the technical knowhow of Schindler and Toshiba for elevator manufacture. It however sold its elevator division to a new company styled ThyssenKrupp ECE in FY03, which has a factory in Maharashtra.
It presently indulges itself in manufacturing equipment for power transmission, and elevators, and in contract work. (For some reason it appears to have a fetish for elevators.) It also faces severe competition in its two major product lines. It also has the capacity to manufacture single phase static motors, three phase static motors, and switchgear & control panels, but these product lines appear to be largely nonoperational for whatever reason. (How much of fixed assets is locked into these manufacturing capacities is not known.) Of the items of business that it indulges in, power transmission equipment is the 'big dadha' hogging probably 90% of all sales, while elevators and contract work bring in the balance top line. Not that the top line adds up to much however. In FY10, it recorded a turnover of Rs 1.6 bn against a much larger Rs 2.4 bn in the preceding year. And but for the grace of god, and other income included, the company would have been totally out of pocket at the bottom-line level in the latter year.
The segment information
The segment information disclosure gives a more accurate picture of matters as they stand. The overall reduction in turnover was due to the fall in sales of the transformer division. Transformer sales fell sharply to Rs 1.3 bn from Rs 2.2 bn, but the division still turned a profit of Rs 42 m (Rs 196 m previously).The elevator division compensated partly by registering a higher turnover of Rs 235 m (Rs 145 m previously) and more importantly recording a profit of Rs 6 m against a loss of Rs 12 m in the preceding year. The company sees a silver lining here, and intends to step up its activities in this line of business in the future. The contracts division, whatever it may be doing, appears to be a total washout. The sharp fall in the sales income from the transformer division created a severe dent in the cash flow generation of the company. It was out of pocket to the tune of Rs 121 m in this respect. So it had to requisition plenty of help to restore this vital statistic into positive territory, and it more than faced up to the task.
The how of the bottom-line
The company recorded a profit before tax of Rs 95 m (Rs 83 m previously). But the point to note here is that this profit includes 'other income' of Rs 153 m (Rs 81 m previously). Thus in both the years, such income is a major player in the bottom-line sweepstakes. The point is also that the other income in either year was basically made up of onetime non-recurring receipts. Such receipts (including profit on sale of long term investments and fixed assets, forex gains, and write back of excess liabilities) chipped in with Rs 130 m (Rs 59 m previously). It is simply amazing how companies pull rabbits out of the hat when in dire straits, especially through a book entry called write back of provisions/ excess liabilities no longer required. In the case of ECE, it is also the repository of shares in companies of the B K Birla group, and needing lots of dosh in a hurry, it extinguished its holding in Mangalam Cement during the year (apparently not being of strategic value to the group ), netting it a profit of Rs 89 m on this score. The company still holds group company shares having a book value of Rs 30 m, and boasting a market value of Rs 277 m. So there will always be quite some moneys to fall back on.
That is not all, as there were other income boosters to chip in. It may have got plenty of massaging from the inventory side of the balance sheet too. In a year in which it was able to foresee a drop in the sales of transformers, the total value of raw material stocks and work in progress, and the finished goods inventory at year end are higher than that of the preceding year. This definitely does not make for sound planning for sure. A higher value of inventory at year end than in the preceding year end has the effect of adding to the bottom-line.
Wising up to the task?
The company has now wised up to the conclusion that its bread and butter business has to be spruced up to take on the competition. The management intends to spend on capital asset infusion to make this division more competitive, and start executing orders of higher capacity transformers. It is of course good to know that they have finally realized the gravity of the situation. So towards this end it issued additional capital for Rs 439 m on a rights basis to help fund the fixed asset infusion. The company has not stated how much fixed asset infusion it requires to take on the competition. It is in any way difficult to see how such piddling sums of additional capital is going to give the company a competitive manufacturing edge. It also has to provide for additional working capital requirements, as its main customers are the electricity boards who take time to pay their dues.
The many pitfalls
The bigger problem with moribund family run companies lorded over by a vegetating plutocracy is that the promoters often lack the wherewithal to bring in their share of the additional capital infusion, in the event of a further issue of capital, or do not wish to, and hence delay taking decisions. At the same time they do not wish to dilute their voting strength in the companies in their orbit. In this instance the BK Birla group holds close to 43% of the voting stock, and besides, this company may not even feature on the Group's radar screens. Resorting purely to additional debt capital only creates an additional wormhole. This anomaly in turn puts decision making on the backburner.
But what the company is definitely doing is in shedding fat. Between FY09 and FY10 the company has disposed of fixed assets to the tune of Rs 130 m, on a gross block base of Rs 389 m. Except that this sale generated cash flow, what else it was intended to achieve is not known. The scheduled fixed asset addition on the other hand does not appear to have picked up stream. When this modernized capacity will come on stream is not known either. And, what additional income streams the new infusions in fixed assets will deliver, is at present very inestimable. And, besides, the bland directors' report has nothing to add in terms of a comfort zone for investors.
Disclosure: Please note that i am not a shareholder of this company
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.