This company represents a classic case study of how an organisation should NOT be run, and on when to administer the right justice
An eyebrow raiser
It makes for a very sorry sight to say the least--the financials of HMT Ltd. That a shining and uplifting example of the Indian government's efforts to promote the core manufacturing industry in India should end up in such an ignominious state some 60 years after the company was incorporated is truly perplexing. But, this is the reality of the matter. In the last ten accounting years the company has reported a pre-tax loss in seven of them, and it is getting maha serious of late. For the financial year ended March 2013 the company reported a pre-tax loss of Rs1.45 bn on total revenues of Rs 1.46 bn. Note the similarity between the top-line and the negative bottom-line figures. On a paid up equity capital of Rs 7.6 bn -- of which 98.88% is held by the President of India-- it boasts of negative reserves of Rs 8.12bn.
It however says something of the resilience of the HMT brand equity that the share price (Rs 10 paid up) oscillated from a high of Rs 50 in October 2013 to a low of Rs 25 in March 2014 at the BSE. The big wonder then is that the share is quoting above par. Not that there is much free float capital to trade in, in the secondary markets, given the holding pattern of the shares. It also appears that PSU companies have their own guidelines dictated by the capital markets regulator as regards the listing of shares for trading purposes.
The premier machine tool manufacturer
The company was originally incorporated in 1953 as Hindustan Machines Tools Ltd and is headquartered at Bangalore. (The company today makes do with three plant locations in the states of Haryana, Andhra Pradesh, and Maharashtra). As the original name suggests the charter was to make machine tools and the company had a number of foreign technical tie-ups for the manufacture of a wide variety of machine tools-including finally CNC machine tools. It built up a reputation for top notch quality which was fairly unsurpassed over the years. (Incidentally HMT was birthed by the government after efforts to cajole leading private sector houses like the Tatas to set up such an institution came to nought). The company over the years went on to expand its portfolio in diverse fields-be it watches, printing machinery, bearings, tractors, plastic processing machinery, metal forming presses, and GOD knows what else.
At some point in time its large portfolio of businesses also signalled the beginning of its downfall as the company was bitten by competition from more agile and smarter players with access to technology. Case in point being the advent of Titan Industries -previously Titan Watches-which the HMT management had no clue on how to combat, and initially even tried its level best to stall its incorporation, and subsequently erecting other road blocks in its functioning-but to no avail. The fact that HMT was 100% owned by the central government over much of its corporate existence also inferred that it was unable to raise permanent capital when it needed to, as the sarkar holed up in New Delhi had its own set of priorities. The present paid up capital made up of equity shares amounts to Rs 7.6 bn and separately there is share application moneys received amounting to Rs 4.4 bn.
A skeleton of its original avatar
Today there is very little left of the behemoth that it used to be, and what is left of it is a company standing on broken crutches. The financials are a lot gloomier than the figures tend to suggest, as the annual report is peppered with qualifications from the auditor's and from the notes to the accounts on the reality of the accounting. They are too numerous to be enumerated on here. It will be interesting to know the real reason why the government allowed HMT to go to seed, as a large number of central PSUs of similar hue and vintage are now shimmering under the arc lights.
Much of the original business has been hived off to wholly owned siblings for reasons best known to the management of its time. The company today makes tractors mainly, and some bits and ends consisting of food processing machinery, accessories, and by doing sundry jobs and through miscellaneous sales-whatever that is. It boasts of five siblings of which four are wholly owned and one is almost 100% owned. The five are HMT Machine Tools Ltd, HMT Watches Ltd, HMT Chinar Watches Ltd, HMT International Ltd and HMT Bearings Ltd. Needless to add, like the parent they are all gasping for breath -the only exception being the International concoction. This is about as depressing at it can get.
And what does the parent have to show for its troubles? It is a zero sum situation really. The net revenues from operations declined to Rs 994 m from Rs 1.6 bn previously. Other income contributed a hefty Rs 475 m against Rs 465 m previously. This is largely made up of interest income supposedly received from its siblings. As I stated earlier the bulk of the revenues from operations emanate from the sale of tractors. To be precise over 80% of its gross revenues from operations came from the sale of tractors against a slice over 88% previously. The 'other revenues' from operations cobbled together Rs 197 m against Rs 182 m previously. In other words the fall in the revenues from tractors led to the precipitous fall in revenues from operations. On the revenue expenditure side, the company was not able to reduce the consumption cost of materials by a like extent indicating that the pricing of its tractors in the market was badly affected. What led to the fall in revenues from tractor sales has not been adequately explained. Not only that, two other mega expenses---employee costs at Rs707 m(Rs 750 m previously) and finance costs at Rs 1 bn (Rs 895 m previously) were also uncontrollable. The former predicament indicates that being a PSU, the company is not able to retrench staff in line with the fall in revenues. This bit of news is not surprising. Incidentally, the interest cost added back in the cash flow statement is limited to Rs 689 m against Rs 542 m previously and not the figures debited in the P&L account.
But where the going gets bizarre is in the state of its finances. At year end the company had pure borrowings to the tune of Rs 5.6 bn against Rs 5.3 bn previously. This total excludes overdues on interest account now capitalised amounting to Rs 3 bn against Rs 2.28 bn previously. The overdues on interest account largely refer to interest payments due on GoI borrowings. The borrowings include a loan of Rs 4.16 bn from the GoI. Thankfully, the PSU banks have not been saddled with the task of bailing out this non-performer-or even its doddering siblings. The situation is further compounded by the fact that the parent has advanced large dollops of moneys to its siblings. Such amounts categorised under the category of loans, and separately under advances, together amounts to another whopping Rs 5.85 bn against Rs 5.57 bn previously. It is one big merry go round here. But since the sarkar is funding the tamasha there is really no one to look askance including the Comptroller and Auditor General of India (CAG), the apex govt. auditor.
What is interesting in this masala mix is that in the 'other income' schedule the company has booked interest income of Rs296 m against a similar amount in the preceding year on loans advanced to its siblings. It is not known whether this interest income is only a book entry or whether it constitutes incomes actually received. (The cash flow statement shows a receipt of only Rs 25 m against Rs 5 m previously on this count). The cash flow generation of the parent itself is an eye opener of the cash deficit that the company faces in its operations. It generated a negative cash flow of Rs 184m against a negative flow of Rs 400 m previously. Interestingly, the company did not spend a dime on fixed asset replenishment in both years, showing further, the rot in the organisation. (On a depreciable gross block of Rs 1.38 bn the accumulated depreciation amounted to Rs 1.07 bn leaving very little left to depreciate. The plant and machinery is depreciated to the extent of 81%). In other words the company may possess good technology but possesses fully depreciated machinery to carry out its task. With no other receipts to fund the deficit in operations, the company had to borrow still more to stay afloat.
Humungous group investments
The other big iffy is that it is saddled with investments in group companies with a book value of Rs 7.65 bn. The vast bulk of this investment is plonked down in just one sibling-in the equity of HMT Machine Tools Ltd (Rs 2.76 bn) and in its preference capital (Rs 4.43 bn). The dividend from its siblings collectively amounts to a princely Rs 1.4 m. It is however unlikely that the company paid any money upfront to acquire these shares-rather it was issued shares in lieu of the transfer of assets. Hence there would not have been any cash outgo on this count.
And, how are the siblings faring? HMT Machine Tools which has an issued capital as big as the parent is badly haemorrhaging. The negative reserves of Rs 9.21 bn against a paid up capital of Rs 7.2 bn tells the full story. On revenues of Rs 2.36 bn it ponied up a pre-tax loss of Rs 436 m. But the other siblings fare even worse-if that is the right term. HMT Watches Ltd has a paid up capital of Rs 65 m and accumulated losses of Rs 20.2 bn. This is simply preposterous. This company still functions somehow. On revenues of Rs 110 m it ran up a pre-tax loss of Rs 2.4 bn. Why does not the management administer euthanasia to this unit? What earthly purpose is achieved by continuing in this manner?
HMT Chinar Watches is only on slightly better ground is that is any consolation. On a paid up capital of Rs 16.6 m, it has negative reserves of Rs 4.84 bn. It is operating at a dead loss. HMT Bearings is another nugget. On a paid up capital of Rs 377 m it has negative reserves of Rs 1.14 bn. It too is operating at a loss. Only HMT International is up to any good-but just about. The dividend that the parent company received came from this worthy.
It would appear that the management has run out of ideas, and more likely than not that they do not have any leeway in taking decisions of import given its PSU character. But this is getting to be simply ridiculous to say the least. Putting in more good money after bad is not any way to take matters forward at this juncture. It would appear that the entire group operation is beyond repair. It is the equivalent of flogging a dead horse. And it will take more than a man to say so in public. Till then it will continue to eat into government finances, with no accountability, and with no idea of what the morrow will beget.
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.