Nelco Ltd: Both headless and tailless - Outside View by Luke Verghese

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Nelco Ltd: Both headless and tailless
Mar 7, 2012

For some seemingly incomprehensible reason this company can never get its bearings right

An eyesore

Nelco is the not so illustrious company where the soon to retire officiating chairman of the Tata group, Ratan Naval Tata, first cut his teeth (or did he blunt his teeth) following his return to India from Cornell University. His long tenure as the top gun of Nelco is one experience that Ratan will like to forget in a hurry, if that is ever possible. (All successive CEOs of Nelco would also wish for the same). Nelco has changed tracks since the days of Ratan's superintendence of the company. It today advertises itself as being in the business of electronics and telecommunications (ISP) activities. Not that the company has much to show for it - but it is still extant - which in itself is a great achievement. As a way to rise up Phoenix like it has even divested three of its business lines - industrial drives, traction, and SCADA recently to Crompton Greaves Ltd. As a part of the revamp, and with the help of Tata Strategic Management Group, it has created a new organisation structure and also given pink slips to redundant staff. (The company has even booked an advance liability for the voluntary retirement scheme for Rs 30 m under the head of current liabilities). It has during the year also brought in a new CEO to try and set matters right. However, whatever happens, given its connections to the very top of the hierarchy, this is one Tata group company which is unlikely to be allowed to ride out into the sunset any time soon. Consider also the fact that it has been soldiering on for the last 69 years or so. It also gives the appearance of being a totally cross wired operation.

The operating results

As the operating results of the company for the 12 months ended September 2011 show, it continues to be a lilliput of an enterprise. It today makes do with two divisions - the Strategic Electronics division and the Tatanet division. The former provides integrated security and surveillance solutions to the defence sector, the railways, and other governmental bodies like oil and gas, and power plants. The revenues are also generated from the services that come with the product on offer. In the meteorology business it is eyeing opportunities in the airport and meteorology departments. It is also setting up air weather stations and hydrometeorology projects and tsunami warning projects, and is eyeing niche areas in disaster management and water resource management. It

The Tatanet division (which till the other day was a subsidiary) holds the requisite license for providing the shared hub VSAT services. It claims it is a leading VSAT service provider and has a large presence in the BFSI, Education, telecom, and oil and gas sectors. The VSAT services include internet access, broadband, IP multicasting and digital streaming. These high sounding technologies look very impressive on paper for sure.

The efforts are wanting

But the results of these efforts are wanting. The company generates revenues through manufacture, trading and income earned from services rendered. The service rendered, which by itself is an impressive chunk, does not appear to be directly proportional or even inversely proportional to the revenues that it generates from the sale of goods. In 2010-11 it generated income from operations of Rs 1.1 bn and other income of Rs 21.8 m, or a total of Rs 1.1 bn. This includes manufactured sales of Rs 275 m, traded sales of Rs 423 m, and income from services of Rs 437 m. Gross revenues in the latest year incidentally were lower than in the preceding year, but this must be due to the offloading of some of its businesses earlier. In the preceding year it toted up gross revenues of Rs 1.4 bn.

But sad to say the re-organisation has yet to bring any succour, though the losses were marginally depleted. In the latter year it had a pre-tax loss of Rs 203 m against a pre-tax loss of Rs 235 m previously. In the previous year it had the benefit of extraordinary gains of Rs 530 m from the sales of business, which helped it to report a pre-profit of Rs 284 m after this adjustment. And it obviously believes in sharing this good fortune with the tax man too. It made a net tax provision of Rs 66 m on this hard earned profit. On its traded sales it appears to generate margins and this conclusion is based on observing the difference in the unit purchase/sales price. In the preceding year it definitely generated a bomb on some of its traded items. But one cannot take a similar call on its manufactured sales and services income. But quite obviously there is a catch somewhere in its operations.

Unable to control growth of major expenses The company appears unable to put a brake on material input costs and personnel costs which are denting margins. This is one of the two immediate situations which it has to address. The other is the extent of the trade debtor balances. It is forced to give large dollops of credit to fund its revenues. The trade debtor balances at year end accounted for close to 70% of the income from operations for the year against a much larger 80% previously. More than half of these balances are for a period exceeding 6 months. This means adding indelibly to working capital costs. The paradox here is that on the one hand it is operating high funda new business opportunities, and on the other, it is unable to collect its dues on time. Or is it because its clientele basically consists of governmental organisations that are taking their own time to pony up their purchase dues? And in spite of its supposed client base it also drums up substantial provisions under bad and doubtful debts. There is something not quite right here. And guess what, there appears to be no light whatsoever at the end of the tunnel either. For, during the year it credited provisions account with Rs 50.4 m by debiting P&L account, being the provision for foreseeable losses! These provisions are towards contracts being executed where the company is expected to lose money.

Some oddities

There are other oddities too. At year end it boasted a gross block of Rs 691 m. On this it generated a manufactured sales inflow of a mere Rs 275 m. This is hardly what one would refer to as manufacturing efficiency. Not only that, during FY11, the company also spent Rs 100 m on gross block addition. This is a large sum of money given the total value of its gross block. But it does not appear to have led to any increase in the installed capacities of any of the items of manufacture. To be fair however the gross block is also littered with such depreciated intellectual property assets as technical know-how fees and software expenditure which accounted for 20% of the gross block. The gross block in itself is an oddity of sorts. The biggest constituent of the gross block comes under the classification of 'Office equipment and furniture' which accounts for almost 60% of the gross block. The items classified under Plant and machinery accounts for a mere 11%. The other interesting aspect of its manufacturing process is that the production of various items of manufacture was way below the installed capacity for the items concerned. Several of the items such as power converters, control electronics, and supervisory assemblies, are not even manufactured! This is truly bizarre.

Cut to yet another oddity. The opening stock of inventories in 2010-11 includes an item called Car Park valued at Rs 21.7 m. But at year end this valuation has been extinguished. Has the car park been sold or something? In the preceding year the car park had a similar valuation both in the opening stock of inventories and in the closing stock of inventories. The point is how does a car park become a part of inventories - or am I missing out on something here please?

One creditable achievement

In this hullaballoo it had one striking achievement to its credit during the years. It was able to reduce borrowings at year end by Rs 196 m to Rs 532 m. In consonance with this, the interest paid out fell sharply to Rs 65 m from Rs 127 m previously. (Whether any interest paid was debited to capital account is not known). The fall in borrowings was made possible by some fancy footwork on the working capital front. It was able to negotiate an increase in trade payables at year end against a sharp fall in this commodity in the previous year end. The fact that trade receivables also fell in unison also helped set right what may well have turned out to be a nightmare as happened in the preceding year. There was thus enough cash left over to splurge on capital assets. It also makes do with a few piddling associate companies whose purpose of existence is difficult to understand. But this is in keeping with how the company functions. The Tata group in the meantime has also got the holding pattern in this company right. Around 49% of the outstanding equity of Rs 228 m is held by Tata Power and a further 2% is held by Aftaab Investments, a subsidiary of Tata Power. So they have effective power over this company without complicating matters for any particular group company. It will help immensely if they can similarly think out of the box on the revenue front too.

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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