It is nice to know that there are also companies operating within the Harsh Goenka stable who appear to have a relatively free run in managing their affairs of state. But at the same time there is a need for a higher level of disclosures to shareholders given the many wheels with-in the wheels operating in the company.A whiff of fresh air?
This company is a very contrarian entity in a manner of speaking as compared to other companies in the RPG Harsh Goenka group. So what is it about this undertaking that makes it a whiff of fresh air? From the looks of it, it is a company that appears to be run in a professional manner. And what do I mean by that? Namely that it is not being run as one of the holding companies of the group that comprises the Harsh Goenka stable. A staple feature of the group companies is a relatively small capital base relative to the size of the operations of the entity, mega and multiple investments in group companies which do not yield even a dime as dividend since that was never the intention in the first place, large advances to group companies which may or may not be interest bearing, a plethora of fuddy duddy siblings whose purpose of existence is difficult to comprehend, and the revaluation of the gross block purely to facilitate additional borrowings. The portfolio holdings in group companies will include a fair sampling of investment companies and such like, and other investments where the stake held by the company in them will be well below any corporate disclosure limits.
So what is it about Zensar Technologies which is so different from the group scenario? Well it has a small capital base relative to the size of the company - gross assets of Rs 7.9 bn-but it is almost debt free barring some very thoughtfully planned out leasing finance. The interest paid out on this lease finance is almost negligible. There is no revaluation of its gross block-not that the gross block amounts to much, but still. It has investments too - Rs 109 m in group companies under the category of non-current investments, and Rs 417 m in debt instruments under the category of current investments. But the company is at least earning some returns on them both on revenue and on capital account. For the matter of record the list of subsidiaries -all of them are foreign-- considered in the consolidated financial statements number nine. The list includes step down siblings. The consolidated entity is 2.5 times the size of the standalone company in revenue terms. And, finally, yes it has advanced loans of Rs 123 m at year end to group companies (presumably its siblings), but the loans are interest bearing-the company earned Rs5.5 m as interest during the year. The interest that it received appears to be a lot lower than what it should be earning. So what was the magic mantra that the CEO Dr Ganesh Natarajan was able to spin here to keep the big bad wolf largely at bay? Full marks to him in any case.
Unfortunately the market does not appear to have fully discounted this factor in the company share price. The Rs 10 paid up per share yo-yoed between a high of Rs 303 and a low of Rs 179 during the last financial year. The company is also ranked among the top 15 companies in the NASSCOM listing in April 2012.
How the revenues add up
The standalone company’s revenues are divided under two heads of account- software development and allied services and, sale of licenses for software applications. (These are terminologies which are difficult enough to comprehend for the uninitiated. The consolidated entity on the other hand earns its revenues under two different heads of account-application management services and, infrastructure management services. Now, this is getting to be very complicated and totally undecipherable. But let that be). Then there is other operating revenue and rounding up the picture is other income. In the grouping of revenue from operations, the bulk of the inflow amounting to Rs 7.9 bn is derived from software development and allied services. The balance revenues of Rs 333 m is derived from the ‘sale of licenses for software applications’. The latter item appears to be first purchased and then sold, and adds little value to boot. How this purchase/sale operation adds to the company’s brand equity is not readily known but this is the reality of the matter. Also, some 60% of the revenues or Rs 5 bn accrue from sales affected to its siblings -Zensar Tech Inc USA, to Zensar Tech UK Ltd and a small slice to ‘Others’. (Could not the revenues have directly accrued to Zensar with the company selling directly to offshore clients rather than by routing it through its siblings-who then go on to resell it with or without creating value at their end?) What exactly is the deal here? The vast bulk of such revenues were unloaded to the US sibling. The ratio was roughly the same in the preceding year. The mark-up that the parent realised on its sales to its siblings is however not known.
The ‘other operating revenues’ of Rs 126 m is a peculiar concoction. It consists of Finders fees of Rs 50 m, provisions no longer required of Rs 33 m, and miscellaneous income of Rs 43 m. How the latter two receipts fit into the description of other operating revenues is beyond me. Besides, what in heaven’s name are Finders fees please? However, the total revenues from operations were higher by 18% over that of the preceding year.
Fuddy duddy add ons
The ‘other income’ of Rs 346 m is another peculiar make up. It records dividend income from siblings of Rs 160 m - the largest individual receipt under this head. But the financial information on the siblings reveals that only one sibling has paid a dividend -a sum of Rs 41m. One is not able to reconcile the two bits of data. Then there is exchange gain of Rs 144 m and, interest on deposits with banks and siblings. The ‘other income’ accounts for 20% of the pre-tax profit for the year. This in sum total makes up the top line of the company for the year.
On the revenue expenditure side, the increase in employee benefits was kept well under check. What aided to the costs was the over 30% increase in ‘other expenses’. The two major heads of expenses under this head which rose disproportionately were legal expenses, purchase of licenses and software applications and travelling and conveyance. Legal costs rose 197% to Rs 238 m, while purchase of licenses was up by 33% to Rs 312 m. The licenses in turn were sold for Rs 333 m -netting the company a small margin in the bargain. The prior year figures on this count were Rs 234m and Rs 255 m respectively. This appears to be a run of the mill activity or some such. Travelling and conveyance rose 40% to Rs 420 m. With the overall expenses under control--relative to the rise in revenues, the pre-tax profit rose 24.6% to Rs 1.7 bn.
Zensar is in good health from the looks of it. Besides having almost negligible borrowings it has also locked up excess cash in current investments amounting to Rs 417 m. Like all software units it has to offer large dollops of trade credit to realise sales dues-credit on an average in excess of 100 days. But then, software units have no inventories to worry about. The company also loses out on generating more cash given the moneys that it has to lock up in current assets relative to the amounts that it can rustle up in current liabilities-a problem that all It units face. The current assets -excluding cash and current investments -at Rs 3.9 bn is still far in excess of the current liabilities at Rs 912 m. What helps out here is that the company has large dollops of reserves to back up such exigencies. At year end the reserves and surplus amounted to Rs 4.6 bn -all of it created out of post tax profits.
The siblings and their offspring are all into the same biz as the parent - barring one ‘holding’ company that is. This holding company actually generates revenues. But, some of the step down siblings has some weird notings. However, the largest company in terms of paid up capital is Zensar Technologies (Shanghai) Ltd. With a capital base of Rs 50 m, and negative reserves of Rs 30 m, the company has still to get off the starting blocks. On revenues of Rs 62 m the company incurred a pre-tax loss of Rs 3 m. But the clear standout here is Zensar Technologies Inc USA. On a meagre capital base of Rs 29 m it has humungous accumulated reserves of Rs 1.33 bn and total assets of Rs 6.38 bn. (It may be noted here that the total assets of the parent is only Rs 6.11 bn). It does appear a bit odd that this sibling could achieve so much on such a meagre paid up capital base.
This company generated revenues of Rs 9.2 bn-again, more than that of the parent. Whether Zensar US generated any software of its own is not known, but the purchase cost of software from its parent accounted for almost 45% of the revenues that the sibling in turn realised on sale. It also generated a pre-tax of Rs 556 m which unfortunately is much lower than that of the parent. The post tax profit in turn amounted to Rs 365 m. For whatever reason no dividend was declared.
Zensar UK in turn on a piddling paid up capital base of Rs 3.9 m was able to generate revenues of Rs 1.86 bn and realised a pre-tax profit of Rs 142 m. This is the only company n the group to have declared a dividend. One is not clear what the policy is if any for siblings to get to pay a dividend. There appears to be none.
There are four siblings which do not possess a paid up capital. The largest of them is Zensar Technologies IM Inc which appears to be based out of Massachusetts USA. On a NIL capital base it has humungous reserves of Rs 1.16 bn and total assets of Rs 2.6 bn. The company generated revenues of Rs 5.4 bn, and realised a pre-tax profit of Rs 256 m. This company too wisely decided not to part with any dividend. This sibling in turn has a sibling of its own based out of the Netherlands called Akibia B.V. which on revenues of Rs 732 m could only manage a pre-tax loss of Rs 1.7 m. Yet another step down sibling Aquila Technology on revenues of Rs161 m ponied up a most creditable pre-tax profit of Rs 42 m.
Looking at the performance statsistics of the siblings, and the manner in which the parent unloads almost half of its revenues onto the siblings, and from the manner in which the siblings themselves are going about their affairs of state with scant recourse to the parent, the company provides the appearance of a muddled entity.
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.