This branded 67 year old company is definitely back-pedalling-that is for sure. So much so that the chairman and managing director, Mr Nirmal Bhogilal, and a scion of the group that controls the majority voting stock, gets by on a minimal remuneration of Rs 0.6 m per mensem for his troubles. This amounts to scraping the bottom of the barrel. This pip squeak pay packet is being increased to Rs 0.8 m per mensem in 2011-12. At least one understands from the notice given by the company for consideration at the annual general meeting of the company. His son, Kabir, the general manager, makes do with a more piffling amount, for his contribution to creating wealth for the company. Not that the father/son duo are trying to be parsimonious or something. It is just that there does not appear to be enough dough sloshing around. A foot note in the notice states that the reason for the loss or inadequate profits is the constraints for machine tools, and inconsistent demand from the textile industry being some of the reasons for the company incurring losses during the financial years 2008-09 and 2009-10.
Its product portfolio
The company makes industrial capital goods and consumer durables (white goods). The product line includes machine tools, textile air engineering, textile machinery and air conditioning equipment. The textile air engineering items that it makes are humidification systems, fibre condensers and axial flow fans. The air conditioning systems on offer are open type compressors and ductable split air conditioners.
The manner in which the company has sewed up the top-line from the manufactured items is a bit eerie. The sales value generated by the individual items has apparently not been furnished. So there is no knowing which items are the big ticket contributors to the top-line. However, the company has provided the division wise sales in the segment reporting schedule. Indirectly therefore, it affords a peek at the big individual performers. The machine tools division brought in Rs 735 m or 57% of all sales as per this calculation. Next in line was the textile engineering division with Rs 444 m or 35% of sales. Bringing up the rear are the air-conditioning and refrigeration group with 80 m or 6% and the unallocated segment with the balance 25 m or 2%. That makes for a total of Rs 1.28 bn. And, including other unallocated revenue of Rs 68 m it works out to gross revenues of Rs 1.4 bn.
How the P&L accounts antes up
These figures are not in sync with the T form report of the revenues and expenses. In this calculation the gross turnover works out to Rs 1.3 bn, and including other income of Rs 41 m it totes up to Rs 1.4 bn. The P&L account is in reality a lot more colourful than that. It also included extraordinary items of income and expenses. In 2009-10 it had the effect of reducing profits by 14 m, but in 2010-11 it increased profits by 34 m. The make-up of these extraordinary incomes in 2010-11 is quite bizarre. It includes on the plus side, capital items such as the sale of fixed asset for Rs 16 m, and amounts received from welfare trusts (another capital item) of Rs 43 m. But legal claims of Rs 35 m have been deducted. What's with taking money from welfare trusts please? Does this dosh have to be returned please?
The company has revealed an initial pre-tax profit of Rs 21 m before netting off extraordinary items of income/expenses of Rs 34 m to arrive at a second pre-tax profit of Rs 54 m. Besides, but for the other income quotient of Rs 41 m, the initial pre-tax profit of Rs 21 m would have been reduced to a pre-tax loss of Rs 20 m. This other income of Rs 41 m itself also consists of such tricks as write-backs of unclaimed credit balances, and of diminution in the value of investments, and gains on account of exchange rate differences. (But to be fair, the company has made a tax provision of Rs 12 m on the pre-tax book profits. So in a sense there is a profit of sorts). It may be added here that in the preceding year the company had reported an initial pre-tax loss of Rs 27 m and after setting off of extraordinary loss of Rs 14 m, the loss rose to Rs 41 m. The balance sheet figures at year end have also to be seen in the light of the foot note that the balances of debtors and creditors are as per the books of account. The note adds that letters have been sent to selected debtors and creditors seeking confirmation of balances and replies are awaited. How sweet! We are also further assured that current assets, and loans and advances, have a realisable value at-least equal to the amounts at which they are stated in the balance sheet. Note the immaculate wording please!
Turning a new leaf?
The company made a determined effort during the year to push up sales. The rupee sales rose 34%, but this was also marked by a 34% increase in the cost of sales. What appears to be restricting the company's ability to anoint itself an honourable place under the sun is the minuscule size of its operations on the one hand, and the lacking in spunk to handle the competition on the other. (Creditably enough, the value of trade debtors at year end amounted to less than 30% of gross sales for the year, while inventories averaged 22% of sales). As a way out of the muddle, the company made some marginal headway during the year to try and get the better of the situation, as we will see as we go along. One may add here that it is a trifle difficult to get round the lack of adequate capital backing, as the management has a stranglehold on the voting stock and does not appear to be keen to reduce their holding for whatever reason. The 'Promoters and the promoter group' as the shareholding pattern statement puts it hold close to 82% of the outstanding piddling equity of Rs 191 m. Any large issue of capital may lead to a dilution in their holding.
During the year the company issued 5% five year redeemable non cumulative preference shares to the tune of Rs 48 m at par. (This infers that the dividend on preference shares does not get accumulated if the company forgoes dividend payment in any year, and that is a smart move). Additionally there is also preference share capital application money of Rs 11.4 m. That is to say the capital base got a boost of Rs 59 m during the year. It is not known whether the promoters themselves hold these preference shares or not. Given the coupon rate it is unlikely that anyone else would want to subscribe to it. But this capital infusion is small beer. But still it is better than nothing. Add to this the surplus funds of Rs 43 m that it collared from Welfare Trusts. Thus the total cash capital on hand amounted to Rs 102 m against a NIL inflow previously. This issue of capital was also met with some fancy footwork on the fixed assets front. It sold assets with a purchase price book value of Rs 33 m for Rs 17 m, bringing in some additional moolah.
So what did it do with this inflow? The company is trying to add some masala to its fixed assets. It added Rs 6 m to its gross block against Rs 5 m previously. It also spent Rs 33 m (is it an expense) on capital work in progress. In the preceding year the spending on capital work in progress was to the tune of Rs 27 m. If this spending has led to any capacity increase in any of its product lines, it is not showing up. It could also be spending on sprucing up its ageing gross block. The accumulated depreciation of the plant and machinery is as high as 75%. Since the company generates adequate cash from its operations, no long term funds were needed to douse any flames here. The primary purpose of the exercise of taking on long term capital and that too for a limited period, appears to be to reduce its working capital loans. Remember that the preference shares are repayable after a 5 year lock in period. Long term debt at year end fell to Rs 384 m from Rs 508 m previously. Presumably this will have a positive effect on its interest out flow in the current year. The interest outflow in 2010-11 was Rs 54 m. But in any event, given the depleted state of its manufacturing gross block, this exercise at re-juggling is a bit difficult to comprehend.
A fall guy to its siblings
Not only is the standalone company straitjacketed, it even has to act as the fall guy on behalf of its siblings. There is no shortage of them. It has 11 subsidiaries, only one of which is located in India. The rest are a motley mix based out of China, Hongkong, Italy , France, Cyprus, Switzerland, Canada, and of course Mauritius. The Mauritian outfit is curiously named as Queen Project Mauritius. Barring that the siblings add colour to the balance sheet they do not appear to add up to much. The total direct investment portfolio in its subsidiaries is limited to the Mauritian offspring with a book value of Rs 278 m. This consists of both equity and preference shares. The rest are step down subsidiaries quite obviously. It also has direct investments in one affiliate company, Batliboi Environmental Engineering which is unlisted, and with a book value of Rs 19 m, and one listed affiliate sporting the name Aturia Continental, with a book value of Rs 4 m. These siblings do not pay any dividend, which should not come as any surprise to anyone. Separately there are another six companies over which key management personnel are able to exercise significant influence.
Having germinated them for whatever reason, the parent which is itself gasping for breath, has now willy-nilly got to stand guarantee to banks and institutions for credit facilities extended to them. But it does not seem to mind. The guarantees are not small sums by any yardstick, but let it pass. The amount of guarantee fees that it pays out is not separately known. In any event how are the little ones' faring? The Mauritian holding company is a class act in its own right. On a capital base of Rs 248 m (the parent's investment in it is valued at Rs 278 m), it boasts negative reserves of Rs 4 m. It has no revenues, but rang up a pre-tax loss of Rs 0.9 m. This situation is unlikely to witness any shift unless the siblings decide to pay their tithes to the holding company-but that factor is entirely dependent on mind games that the parent decides to play. Five of the siblings are 100% owned by the parent, but the six siblings who are anointed with the name Aesa Air Engineering are 70% owned. Who owns the balance 30% please?
Only three of the siblings boast of any significant turnover. Quickmill based out of Canada recorded a turnover of Rs 439 m, but could only manage a pre-tax loss of Rs 39 m. Aesa based out of France rang up the highest turnover at Rs 501 m, and managed a pre-tax profit of Rs 8.6 m. Another Aesa based out of India ponied up sales of Rs 176 m and recorded a pre-tax profit of Rs 3.8 m. The rest are a bunch of non-performers. How the performance results of these companies dovetail into that of the parent is not immediately evident either. The siblings by and large appear to be standalone companies barring some sales deals on revenue account with the parent. The parent as a matter of fact appears to have larger dealings with companies labelled as entities. It must be referring to the entities over which key management personnel are able to exercise significant influence. There are some curious asides to its revenue transactions with 'entities'. It sold goods worth Rs 66 m to them during the year. But the trade debtor dues at year end amounted to Rs 52 m. What are the payment terms for such sales please?
It appears that one has to put up with several inevitables when monitoring this company. In a sense it is good that the promoters have such a stranglehold on the voting capital of the company, as they appear to be the primary beneficiary of the spoils. This is not an investment option even for the foolhardy.
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.