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Mafatlal Ind.: Needs more than just a cash infusion - Outside View by Luke Verghese
 
 
Mafatlal Ind.: Needs more than just a cash infusion

Suffering from bouts of asphyxiation

Well for starters any direct comparison between the working results of the company for FY10 as opposed to the preceding year FY09 is not possible, as the results for the latest year are for 14 months as compared to the 12 months of the preceding year. Not that the year-end financials gets altered for the better in any way. Like all composite cotton textile mills of vintage, Mafatlal Industries will be completing its centenary of working results 4 years hence, it is alternating between bouts of asphyxiation and resuscitation. The company is now down to two small manufacturing units in tandem with a compliment of fully depreciated manufacturing assets - but more on this later.

The snapshot of the 10 year financial performance that it has appended along with the annual report is pathetic in its revelation. There was for example, not a chance in hell that the company could pay a dividend in any one of the ten years. And, the company's accountants for some reason reckoned that by lengthening its accounting year once very few years would help to ease the pain in the public eye. So the company extended its year end in 4 years out of the last 10 years. Hence the financial results of what should have been of 120 months working got extended to 140 months. But the net result at the end of it all is that as in end May 2010, the net liabilities exceeded the net assets by a cool margin of Rs 2.6 bn. And this figure is going by what the company reckons it should be.

An unbridled India Inc.

The working results of the company over the last decade are a classic example of the rot that has encompassed the functioning of an unbridled India Inc. It is also a fit case study of the changes that are urgently needed to make management's of enterprises completely accountable for the poor performance of their wards, by giving other stakeholders, especially the lenders of moneys the right to effect regime changes, if necessary, if the company is found to be in irresponsible and incompetent hands. That is precisely what should have happened in this specific instance.

On the contrary, after running the company to the ground, the incumbent management has now been ensconced even more firmly in the saddle by the very organization tasked with saving a terminally ill patient. As mandated by BIFR (Board for Industrial & Financial Reconstruction), of all things, 'the promoters of the company have, in order to strengthen the equity base of the company, converted Rs 300 m of convertible preference shares into 4.8 m equity shares of Rs 10 each at conversion price of Rs 62.3 per share, or a premium of Rs 52.3 per share as per formula provided in the modified rehabilitation scheme'. That is to say a total conversion price of Rs 300 m. It is not immediately clear if the promoters had to pump in any extra money into the company's coffers over what they would have put in at the time of the issue of the preference shares, or whether this is a mere book entry. But the net effect of this exercise is that, the holding of the promoters in the voting capital of the company is now at an unassailable 65.7%. The promoters have got the company back lock, stock, and barrel, without even performing a song and a dance.

BIFR not up to the task

This is simply incredulous poppycock. To think that the BIFR which is tasked with finding a revival scheme for Mafatlal industries considers that the first step in the exercise is to place the founder promoters back in the corner office is insane to say the least. In the process, the doctor has committed the act of shooting itself in the head. (Besides, the BIFR is a 'hippo footed' organization which takes years to come up with a solution of sorts, and thereby exacerbating the problem in the interim, as in this specific instance.) The giveaway to the promoters of Mafatlal Industries is in tandem with creditors, including lenders of moneys, having to take a rap on the knuckles by forgoing large outstandings due to them. Consider the following - by the 'restructuring' of loans and liabilities, the company saved Rs 3.8 bn. (In an effort to rub the point in the directors' proudly add that it has become a 'debt free' company in so far as the banks and financial institutions are concerned. If nothing else this is supreme irony).

And by forcing the hand of its other creditors, the company was richer by another Rs 267 m. By marking down the book value of its investments in numerous 'dodgy' group companies it was poorer by Rs 400m, but then, the group companies were the beneficiaries by a like amount. (It boasts of 5 subsidiaries, 9 associates, and another 14 enterprises, over which it exercises significant control - and the parent is apparently spreading its largesse all around.) It has also written off bad debts and advances to the tune of over Rs 400 m. Does this down and almost out company exercise any due diligence at all in its daily transactions? If the BIFR continues to approve revival plans in this manner, then sooner than later it will become a BIFR case itself.

Positive net-worth?

Perhaps the only silver lining at the end of it all is that the labor force has been reduced by a considerable 5,265 nos over the decade. The management has also 'suo moto' (on its own motion) come to the conclusion that the company is likely to be deregistered from BIFR due to the net worth turning positive - which will open up several opportunities for the company. It is not known on what basis the company has come to this learned conclusion. The auditors have the following to say about the company's financials. The arrears of statutory dues outstanding for a period of more than 6 months on account of PF dues, ESIS dues, Sales Tax dues, Gratuity, Excise, Property Tax, Municipal Water charges and Electricity amount to a total of Rs 570 m. It appears that all statutory dues are included in this list. How could such a company be characterized as net worth positive, or was the management merely shooting in the dark?

Pulling rabbits out of the hat

It is not just all about what the auditor's have to say. In FY10 it earned a profit before tax of Rs 627 m, against a profit before tax of Rs 3.4 bn in the preceding year. What made this book entry possible was the liberal help that it received from 'Other Income.' The other income for the year amounted to Rs 1.8 bn against Rs 4.2 bn previously. Juxtapose this figure with the pre-tax profit. More importantly the other income figure in either year includes a chaotic and judicious mix of reliefs and concessions, write backs, excess provisions, profit from sale of fixed assets and investments, and also rent from property, with the latter alone contributing Rs 131 m (Rs 129 m). Significantly, its balance investment holdings with a book value of Rs 1.2 bn earned the company a piddling Rs 2.2 m (Rs 1.8 m). Most of these Other Income receipts represent non recurring cash flows in the future, assuming that its accountants are not able to keep pulling rabbits out of the hat each year.

Group Investments

Its investments in its group companies are another notable feature. As stated earlier it had during FY10 provided depreciation in the value of its long term investments to the tune of Rs 400 m. Otherwise the auditors would have had to make a note of this in their report to the shareholders. Take a peek at the investment mix at year end. The aggregate book value of its quoted investments was Rs 5 m and the market value was Rs 14 m. The aggregate book value of its unquoted investments was Rs 1.2 bn. The latter basically consists of three major investments. An investment of Rs 1.1 bn in Mishapar Investments, Rs 163 m in Anil Products, and Rs 90 m in Sushmita Investments. They obviously are a gateway to family group company investments and are non performers to boot. The company has provided Rs 150 m as depreciation during the year on its holding in Mishapar, which is also the only subsidiary among the three. Its investment in its other four subsidiaries is almost fully provided for.

The company has provided the working results of four of the five subsidiaries as on March 31, 2010. The kingpin here is Mishapar with a capital base of Rs 780 m. (In the parent's books the investment value is shown as Rs 1.1 bn. The parent had acquired these shares at a premium to the face value).The book value of the subsidiary's investments is Rs 311 m. It is deep in the red with liabilities exceeding assets to the tune of Rs 235 m, which implies that the parent has not fully provided for probable loss of value. Two of the other three subsidiaries like the parent are also total gone cases. In effect the entire investment portfolio of the parent is in all probability a dead loss proposition. But that is another matter.

Vintage gross block

Its fixed assets are about as old as the hills and it is showing. Its total gross block at year end was Rs 2.2 bn. Its accumulated depreciation at year end was Rs 2 bn. That leaves it with a net block of Rs 198 m, which in all probability is also fully written off, except for the land and the buildings, that is. What exactly can the company produce with an asset base of such vintage? What is more, it even has uninstalled machinery which is almost completely depreciated. But the directors' make light of all this and harp on improving production of cloth and spending tiny bits on capex, especially in the processing plant, and in installing a captive power plant.

Future Imperfect

If the company really wants to make a go of it, then it hinges entirely on its ability to sell its surplus lands double quick and deploy these funds in a manner which will actually see a revival in its fortunes. It needs funds not only for capital equipment but equally for working capital. Now that the institutional lenders are clearly out of the picture, there is really no outside influence to monitor any proposed fund use. It is however never too late for the management to put behind the past, but that involves a change in mindset too, and bringing in professional management. But it is difficult to see what exactly they can make of this company any which way.

Disclosure: I do not hold any shares in this company, either directly, or under non discretionary portfolio

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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