Looked at from its current status, it appears to be a company which has sung its swan song
A company run on celestial power
It is a razor thin annual report for sure, but entirely in keeping with the present state of affairs at the company. The latest annual report runs into all of 28 pages. There is really not very much to report on the company you see. Polychem is a part of the larger Kilachand group which also includes Synthetics and Chemicals and yet others. But the company's investment portfolio does not show any holding in any larger group agglomeration. It is today managed by the father/son combination of Tanil and P T Kilachand. It has a stake in an immediate group company affiliate going by the name, Gujarat Poly AVX Electronics. The book value of the parent's investment in this company amounts to Rs 42 m, on a total portfolio value of Rs 44 m. (Wonder who holds the balance equity stake in this company?) There is separately an investment of Rs 10 m in liquid debt instruments. It is another matter that there is a provision of Rs 30.4 m towards the book value of its investment of Rs 44 m. This is only a part of the muddle that permeates this company.
Being stripped down to the core
It appears to be an undertaking which has slowly been stripped bare. It is a company of long standing-54 years young to be exact and is a pioneer in the manufacture of thermoplastics. Today it makes and sells cross linked polystyrene, low molecular polystyrene, and styrene butyl acrylate in the main. These terminologies must be sounding like Greek to many readers. The first named is used in the paints and the pharmaceutical industry, the second in printing inks, rubber formulations and plasticisers and the last named in the water proofing and metal coating industries. The basic raw material for its products is styrene monomer, which again is derived from Benzene and which in turn is derived from crude oil.
What it makes and sells
The company has an installed capacity to manufacture five lakh kgs of Speciality Chemicals as per the quantitative details that it has furnished. In 2010-11 it produced 402,000 kgs of this material at a capacity utilisation of 80%. In the preceding year, the production was at 73% of capacity. But this production when broken down into the three basic commodities that it sells, ekes out only very marginal gross revenues (inclusive of excise) of Rs 57.5 m against Rs 44.8 m previously. The largest revenue generator is cross linked polystyrene with sales of Rs 35.5 m, followed by molecular polystyrene with Rs 12 m and styrene acrylate with Rs 4 m. Then there is a poor apology of an item called 'Others' which brings in an inconsequential sum of money. The total sales figure mentioned herein excludes excise levies of Rs 5.2 m. It may be noted that the revenues generated include export sales of Rs 16.8 m. The export sales in turn constitute over 30% of net revenues. Add to this the other income of Rs 7.8 m against Rs 20.9 m that it generated previously. The company possesses this remarkable ability to generate just the right amount of other income to put its house in some sort of working order.
After manufacturing and other expenses, and depreciation provision to boot, the company managed to record a pre-tax loss of Rs 3.9 m against a pre-tax profit of Rs 11.2 m previously. The company has even set aside Rs 0.8 m towards tax provision on this book loss against a NIL provision in the preceding year. This would seem odd at first sight. It has made a tax provision in a year in which it reported a book loss, but not in the year in which it booked a pre-tax profit. But obviously it has very good reasons for doing so. What is more, the company has a net advance tax paid amount of Rs 58 m in its favour. That is a lot of money to lock away in an unproductive manner.
How the pre-tax profits are arrived at
Further, if one looks at the pre-tax profits and compares it to the other income it recorded, it is very clear where the margins are kicking in from. The fact of the matter is that it makes a loss on its normal business operations and has to rustle up income every which way. The constitution of this other income in either year is a token to its dexterity to drum up resources. It includes such exotica as interest received on IT refund, interest on deposits, profit on sale of fixed assets, sale of licenses, profit on redemption of mutual funds etc. There is a small dribbling of write backs too.
Its cash flow management
Needless to add the company reported a negative cash flow from operating activities in both the years , but still managed the feat of juggling its liquid investment portfolio by buying liquid debt instruments for Rs 20 m and then selling half of it, presumably on a no profit no loss basis or some such. The objective of this exercise is a trifle difficult to understand. The more fascinating aspect of its functioning is that the company is also debt free – especially so in the context of mounting accumulated losses. There appears to be no debit entry on revenue account for interest paid on borrowings of any sort either. On the contrary, it is the recipient of interest on deposits and such like! These guys are a bunch of geniuses in the art of managing the environment that is for sure. One reason for its ability to manage its working capital finances is that it is able to generate cash for sales affected at a quicker pace than it has to pay its trade creditors.
The most fascinating aspect of this company's working is that the fixed asset base is being slowly depleted. In this context it is remarkable that it is able to drum up production at near its rated capacity levels. The gross block at year end weighed in at Rs 19.4 m against a gross block of Rs 24.2 m previously. During the year, it got rid of fixed assets with a historical pre-depreciated gross value of Rs 5.9 m against Rs 1.9 m previously. The fixed assets were sold for Rs 13.7 m and Rs 6.5 m respectively and it realised a profit on sale of fixed assets of Rs 4.8 m against a profit on sales of Rs 5.5 m previously. The net fixed assets base post depreciation, believe it or not was valued at Rs 3 m against Rs 5 m previously. More specifically the item classified as plant and machinery has a net asset value (post accumulated depreciation) of Rs 0.3 m! It is simply incredible that it still continues to be in the manufacturing business in the first place and also able to operate at high capacity levels. This is truly a fit case for a study on how to make the most of a poor joke.
Its manufacturing prowess
What is more the management is optimistic about its manufacturing prowess. The directors' report adds that there is a good demand for one of its product lines both in the domestic and export markets once the company develops the knowhow for this product! It goes on to state elsewhere that the company needs to work on yet other products further to improve their performance for various diversified applications for which there is a good market! It is also trying to develop a knowhow for the mass polymerisation of some of its products. This information is grouped under the heading 'Specific area in which R&D work is carried out". This would infer R&D work of sorts, right? But in a column under 'Expenditure on R&D' the company states that no major expenses were incurred on R&D. Presumably no minor expenses have been incurred either. But it is all getting to be really far out stuff! The puzzling point is, if the company does perceive a hot market out there waiting to fall into its lap, why then is the company not adding to its productive capacity, and instead seeking to get rid of its manufacturing asset base please?
The fixed asset schedule is remarkable in yet another aspect. It boasts of no land holding-either of the free hold variety or even of the leasehold concoction too. Where then is the plant and machinery located, and what of its office buildings too? The answer lies partly in a schedule called 'Property under development' with a book value of Rs 14 m. The entire real estate appears to have gone up for development. The extent of the land under development is not stated specifically, but the value pegged to this land appears to be the historical value. The market value of this land must be many times above this book value figure. But it still begs the question on whether the plant and machinery is currently operating out of mid air or some such. The company has yet to make any headway here and book any income from this land development. Unfortunately, the report is rather tight-lipped on the land development for reasons best known to the management.
The future imperfect
The company will have to do something very fast. It has accumulated losses of Rs 215 m that it carries in its books, but this amount is offset by adjusting a like amount from accumulated reserves and surplus. Even after this set off the company still has positive reserves of Rs 151 m - but this amount basically represents share premium reserves- and it is also a reflection of the good times that the company had sailed through eons ago. The paid up equity stands at a ludicrous Rs 4 m. The promoters' control some 42% of this voting stock. But they have really nothing much to worry about as such a holding is more than enough to keep a firm grip on management control. The real estate development on its part is unlikely to add to its brand equity in any which way.
There is a brief mention about its affiliate company Gujarat Poly AVX Electronics in which the bulk of its investments are sunk. The parent says that this affiliate achieved a turnover of Rs 92 m and made a profit of Rs 5.5 m during the year. But it is still on the sick list it appears .The profits have been arrived at after remission of interest on term loans and write back of other exceptional items too. It looks like this investment too is set to go the way of the parent.
In sum total this is a company which can at best reflect on its enviable past and little else.
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.
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