John Oakley & Mohan: Not generating heat

Apr 4, 2011

What's in a name?

The name Mohan in the corporate name plate of this company apparently stands for the late N. N. Mohan, who in 1949 acquired Dyer Meakin Breweries from its English proprietors. In 1967 it affected a name change to Mohan Meakin Breweries Ltd, after N. N. Mohan decided to capitalise on his perceived branding into the nameplate.

John Oakey & Mohan was incorporated in 1962, when N. N. along with B. S. Mohan set up this venture to manufacture coated abrasives in collaboration with an English firm John Oakey. (And in a show of gratitude, John Oakey & Mohan also hold 200,000 shares in Mohan Meakin Ltd.) The English company according to John Oakey & Mohan were the pioneers in introducing the concept of coated abrasives, and they rendered technical assistance to the project. Whether the English collaborators today continue to have any association with this company or not is not known, but the name John Oakey continues to be appended to the name plate nevertheless. There is no expenditure on royalties or license fees or any such to no one. John Oakey Mohan is also the more down and out country cousin of the rapidly out at sea Mohan Meakin.

What it spews out

Presently it boasts a licensed capacity to make both coated and bonded abrasives, but in effect it makes only coated abrasives. For whatever reason, the license issued to make bonded abrasives was not implemented. In the interim the company has not covered much ground in what it makes, but soldiers on nevertheless. It has a capacity to make 212,000 reams of coated abrasives and Resin discs, and in FY10 it made 184,000 reams and 232,000 numbers of these items. What numbers of the two items it makes is not known. There also does not appear to be any connection between the numbers it is licensed to make, and the numbers that the factory churns out. Why then parade such meaningless information?

Whatever, the company produced less reams and more numbers of what it makes, and it did a similar take on the sales front. It generated an 8% higher gross sale of Rs 301 m (Rs 279 m previously) and remarkably enough rustled up a 12% higher net sale of Rs 280 m. The latter feat was achieved as it paid 28% less excise duty at Rs 21 m (Rs 30 m previously). It may be noted here that the FOB (Freight on Board) value of exports at Rs 26 m accounted for 9.2% of net sales against 9.4% previously. (The company also dabbled in a meagre slice of traded sales which added a pinprick to overall sales). The higher gross sales generation also led to a disproportionate increase in gross working capital management. Gross current assets at year end at Rs 107 m was 38% higher than in the preceding year. And this in turn was the after effect of a 32% growth in trade debtors to Rs 63 m, and a 54% hike in inventories at Rs 33 m. The higher inventories in turn were due to a higher valuation in the closing stock of work in progress and finished goods. But to the company's credit it was somehow able to flex its muscles and ferret out a substantial increase in what it owed to creditors in the ordinary course of business - thus restoring some sanity into its working capital finances.

The sales generation path

What this in effect means is that the company was able to push sales only by offering much larger dollops of credit to buyers on the one hand, and on the other by affecting a mismatch between what it produced and what it was able to sell. Why would a company want to use such a convoluted route to generate more sales? With the company also simultaneously deciding to splurge on gross block - a gross addition of Rs 17 m on a historic gross block of Rs 53.5 m - the company was in a sense out of pocket and had to raise its debt capital by Rs 7 m just to be on the right side of the law. The addition to this gross block was largely swallowed up by acquiring more vehicles in exchange for vehicles sold, and a wee bit of additions through buildings, and plant and machinery. To add to the confusion, the investment portfolio of Rs 4.4 m gave a thumping revenue return of Rs 10,000 during the latest financial year!

Miserly returns

The company ekes out miserly margins at the pre-tax level, and these margins can go either way if there is a change in the valuation of stocks. Post tax the company barely makes do with anything and fortunately it is more than content with paying out a dividend of 8% on the face value of Rs 10 each. And this conservatism in dividend payment has helped the company to remain afloat if nothing else. Against equity capital of Rs 5 m the company however boasts a reserves and surplus of Rs 61 m as on March 31, 2010.

Opaque concerns

The directors' report is more concerned about affecting a hike in the remuneration to the CEO, Mr Satish Mohan from Rs 50,000 to Rs 80,000 per mensem, with perquisites of Rs 70,000 per mensem, than in charting any concrete moves to put this company on a better footing. As a matter of fact the report is as bland as a meal can get without any seasoning in it.

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