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Kale Consultants: Leading solution provider - Outside View by Luke Verghese
 
 
Kale Consultants: Leading solution provider

A company without much spunk which will hopefully turn shift to another gear under its new proprietors

Turning a new leaf?

In the 25th year of its corporate existence, otherwise called silver jubilee year, Kale Consultants has decided to turn a complete new leaf, including a new owner. For one the accounts are for the 15 months ended June 2011. (The company has proactively aligned its accounting policies with international standards, as well as the accounting year with that of Accelya). For another the board of directors has also taken on a new sheen with the exit of some directors and the induction of yet others including Mr Philippe Lesueur, President of Accelya, which is a global Spanish IT company. Besides, Kale Consultants is now a part of the Accelya group which the company says is a respected and leading solutions provider to the airline and travel industry.

The promoters, the Kale family and the Jain family, have together, sold their stake in the company to Accelya. Accelya in turn has also bought shares from the public in accordance with the listing requirements and now controls 70.2% of the voting stock. Along with Kale Consultants, Accelya also got as bonus three subsidiaries of the company - Kale Softech Inc (denominated in US dollars) Synetairos Technologies, (which has since been sold to Saksoft Ltd) and Kale Revenue Assurance Services (denominated in pound sterling).The parent has a total portfolio investment stake of Rs 411 m in its siblings. Together, Kale and Accelya is today the world's largest solutions provider for financial processes related to the airlines industry. They serve over 200 airline customers around the world.

It is also a supreme irony of sorts that not a single person sporting the surname Kale continues to sit on the board of directors presently. But fate has been kinder to the co-founder Vipul Jain. The latter today officiates in the dual role of CEO and managing director of the company (what is the difference between the two designations?), thanks to the benevolence of the new majority shareholders. Wonder however whether the company will affect a name change some time soon.

An eyebrow raiser of sorts

But all is not lost for the original founders of the company. Kale Consultants has sold during the year its logistics business undertaking to Kale Logistics Solutions Pvt. Ltd on a slump sales basis. Slump sale in effect means the sale of a business concern as a going concern - lock, stock, and barrel. This sale led to a loss of Rs 44.6 m to the parent. Who owns Kale Logistics Solutions please, and why did a running business have to be sold at a loss?

The entry of Accelya, going by what Jain has to say, is either hyperbole, or is plain manna from heaven for Kale Consultants. The company he says is now entering a new chapter in its progress. Even more opportunities are opening up for the company. A future with broader horizons, bigger mountains to climb he adds.

Spring cleaning

The new management has also resorted to some deft spring cleaning after taking charge of the company. It has resorted to charging off exceptional items amounting to Rs 69 m in two separate tranches of Rs 34 m (loss on sale of the logistics solutions biz, less the profit made on the winding up of the UK subsidiary) and Rs 35 m separately from the profit and loss account. Why was the profitable UK subsidiary wound up? Besides, the provision for doubtful debts has accelerated to Rs 31.4 m from Rs 6.6 m previously. On the plus side though, it saw wisdom in writing back credit balances of Rs 11.5 m against a NIL entry previously. Presumably its slate is now clean, for the time being at least. In this mirch masala mix the other income suddenly accelerated to Rs 47 m from a meagre Rs 6.7 m previously. Other income is a big player in the pre-tax profit during the year. Such other income (including the write-back of credit balances and dividend receipts of Rs 6.5 m) accounted for a slice over 23% of pre-tax profit before provisions for exigencies, against 3.3% previously.

Kale Consultants presently is one of the more teeny weeny Information technology software companies in the listed topography, with razor thin margins to boot. In 2010-11 it trotted up revenues from services of Rs 1.7 bn, with a pre-tax profit of Rs 170 m, and on a paid up capital of Rs 159 m. It is however a leading solutions provider to the airline and travel industry. But, as stated earlier, the two companies together form the world's largest solutions provider for financial processes related to the airline industry.

Registering low margins

As stated earlier in the first year under the tutelage of the new proprietors the IT company registered lower margins on gross revenues. Though turnover excluding other income grew by 34% to Rs 1.7 bn, the profit before tax and before extraordinary items was stagnant at Rs 204 m. (But to be fair the company is able to realise its trade dues in double quick time which helps to reduce working capital costs). After setting off of extraordinary debits, the net pre-tax profit fell to Rs 135 m from Rs 205 m previously. If that were not depressing enough, the company has made a higher tax provision on a lower pre-tax profit. The tax provision is higher at Rs 5 m against Rs 3.5 m previously - perhaps suggesting that the several debit entries do not qualify for a tax break. Not exactly a very auspicious start for the new incumbent, but who knows what they have on offer.

It is an insipid run of the mill operation from what one can make of it. But at the same time the company is also self sustaining and is able to generate enough cash from its operations for its sustenance. It would have been able to generate still more cash if only it had some more control over its net current assets position which appears to be lopsided. The previous management was also very judicious in its use of funds and appears to have paid out miniscule dividends - in favour of higher retained earnings. For example, on a paid up equity of Rs 138 m, the company boasted reserves and surplus of Rs 977 m at end March 2010.The new management appears to be living by that principle. The reserves and surplus at end March 2011 stands at Rs 1.1 bn on a paid up equity of Rs 159 m. The funds generated from operations in 2010-11 was not exactly sufficient to meet the dual requirements of capital expenditure, and other capital considerations like the additional investments that it made in one of its subsidiaries, but the deficit was made good by a further issue of capital while reducing borrowings along the way. The total borrowings at year end were down to Rs 13.6 m from Rs 45.6 m previously.

Some anomalies

There are several anomalies of course on how its accounting figures add up. Though it did reduce its year end borrowings to Rs 13.6 m from Rs 45.6 m, the fact of the matter is that the interest and finance charges payout debited to the accounts stands at an impressive Rs 9.2 m. Therefore, whichever way one looks at it, that amounts to a very heavy payout on revenue account, taking either balance sheet figure. It could therefore mean that there was a very heavy dependence on loan funds during the year (assuming that the finance charges pertain to interest payment). If so, then the debt figure at year end was dressed up to make it look extremely respectable.

The company says that it received dividends of Rs 6.5 m during the year, against NIL receipts in this count in the preceding year. The dividend receipts could only have emanated from its siblings or from its piddly other holdings. It has three direct siblings at year end, and that excludes one non-entity of a sibling that was liquidated or some such. Separately, it also makes do with three step-down subsidiaries. The parent also boasted of shares of miniscule sums in two co-operative banks. According to the results of the six siblings that it has appended, only one declared any dividend. The dividend paid by Kale Softech, Inc. amounted to Rs 1.2 m, which incidentally is all of 5.5% of its post tax profit. But still! I am unable to reconcile where the balance dividend monies came in from. Besides, why are the other companies fighting shy of paying any dividend, especially since several others are also well heeled?

The bigger issue is the amount spent on capital assets. Unlike other manufacturing companies software companies mainly make do with land and buildings and other IT assets. Their biggest asset is in human resources - though such assets are classified as current assets rather than as fixed assets. The company spent Rs 121 m on fixed asset expansion compared to Rs 79 m previously. But the fact of the matter is that its gross block is substantially written off. Overall, the accumulated depreciation on gross block amounted to 78% at end March 2011. But a breakup of this gross block is even more revealing.

The gross block is broken up into intangible assets and tangible assets. The intangible assets, consisting of developed software and acquired software, amounts to Rs 359 m, and accounts for over 50% of the gross block. The tangible assets, consisting mainly of buildings, and plant and machinery, accounts for the balance. The two intangible assets are written off to the extent of 75% and 87% respectively. The plant and machinery is depreciated to the extent of 82%. I do not know the exact implication of such overall depreciation figures in the context of the IT industry, but in the competitive manufacturing industry such a write off could spell trouble - serious trouble at that.

Yet another anomaly pertains to the share capital figures of its subsidiaries vis-a-vis the holding of the parent which are detailed further on in this copy.

The siblings

This brings us to the several siblings that it boasts of, including the fair mix of companies incorporated offshore. The investment of the parent in its directly held siblings amounts to Rs 411 m. This includes two offshore companies. There are also three step-down subsidiaries, all of which sport the first name Zero Octa whatever that means. Some of the siblings are into such exotica as Assurance services, Selective sourcing, and Recruitment and training. The subsidiaries, from the look of it, are not of much value addition to the parent, though they collectively toted up a turnover of Rs 911 m and ran up a pre-tax profit of Rs 134 m. (There is also a considerable discrepancy between the paid up share capital of these companies and the parent's holding pattern in these companies. For example, the parent holds 100% of the equity capital worth Rs 324 m at Rs 78 per share (pounds sterling) in Kale Revenue Assurance Services. But this company has a share capital of only Rs 297 m).Were these shares acquires at a premium to the face value of something? The parent rendered services to the subsidiaries to the extent of Rs 173 m in 2010-11. Whether it refers to sale of software services or it pertains to some other services is not immediately clear. But such services rendered amounted to a slice over 10% of its revenues for the year. The parent in turn has availed of services worth Rs 9 m from its siblings. Then there are several inter-se expenses doled out between the parents and the siblings. It is difficult to make any sense of all this.

Importantly, the biggies in this siblings list are Zero Octa UK Ltd, Kale Softech Inc, Zero Octa Selective Sourcing, and Synetairos Technologies are all self sustaining. As a matter of fact Zero Octa Selective Sourcing on a miniscule paid up capital of Rs 1.5 m, managed to drum up revenues of Rs 232 m, on a total asset base of Rs 186 m. It also lodged a pre-tax profit of Rs 36 m. This is no mean achievement by any yardstick. But the knockout company here is Kale Revenue Assurance Services. (Assurance services are a professional niche service with the goal of improving the information content so that decision makers can make more informed and presumably better decisions). It has the highest equity by far among the siblings of Rs 297 m, and a total asset base of Rs 382 m. This company appears to be the most inefficient of the list in terms of return on assets. It could not drum up any revenues, but still managed to post a pre-tax profit of Rs 17.5 m. This is simply far out stuff. The company should share its secret with others too so that everybody gets a chance of generating incomes without having to work for it.

It will be interesting to see what the new owners have to offer to the Indian shareholders as the clock ticks on.

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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