From Cloud 9 to ground zero in less than one generation is not exactly an achievement to cherish - especially for brand Firodia. That unfortunately was precisely the unintended trajectory of this enterprise. Kinetic Motors is the almost moribund avatar of Kinetic Honda Motors (KHM). KHM was incorporated in 1983, following a collaboration agreement between Kinetic Engineering and Honda Motors which brought to the Indian market the latter's latest generation futuristically designed, electric start, 99 cc, 2 stroke engine scooters. Its public issue which I think materialised in 1985, created history of sorts in the Indian bourses for the amount of money that it pulled in from investors, and the resultant oversubscription. The venture lasted all of 15 years and was terminated in 1998 when Honda Motors threw in the towel. The product appealed well with the ladies, but the plastic superstructure, the perceived flimsy get up, and the high fuel consumption, never really cut much ice with the public. The company took on its present name in 1999. It was also a sign of the good times that the company enjoyed that it still has a 25% share in an aircraft!
Following the breakup, the company tried to remain in business by introducing flashily designed Italian made (Italia) scooters, but this too became a cropper over time - for whatever reason. Remarkably enough, the person presiding over the demise of this company is Sulajja Firodia Motwani, the managing director, who not many moons ago was featured on the cover of a leading English business periodical as a CEO of eminence.
Transfer of business assets
The management finally decided that enough is enough and very wisely transferred the bulk of the business assets of the company to Mahindra Two Wheelers, of the Mahindra and Mahindra (M&M) group in 2010. The decision was apparently taken after the management realised that the company was slowly being sucked into a black hole. The accumulated losses in FY10 before adjusting against reserves, was an insufferable Rs 1.6 bn against a loss of Rs 1.5 bn in FY09.
The upshot of the agreement with Mahindra Two Wheelers is that, Kinetic Motor Company now holds 29.5 m equity shares of Rs 10 each in the former for an enterprise value of Rs 295 m. This obviously is a part of trade off between the vendor and the acquirer when the net asset transfer took place. The bulk of the transactions on capital account between the two took place in the preceding year. In FY09 the assets were apparently sold for Rs 1.3 bn and the company apparently turned a profit of Rs 861 m on the exercise. (On paper this looks like a fabulous deal given the depreciated value of its manufacturing assets). Simultaneously however it also 'created' extraordinary other income which was larger than its net sales, and it was further topped up by a phenomenal write-back of Rs 974 m, constituting extra ordinary items. In FY10 there was less insanity, though it managed to conjure up other income (Rs 71 m) which was infinitely larger than its turnover (Rs 5 m).
Following the transfer of assets in the second half of FY11, the company has not produced any two wheelers. The directors' report states that following the transfer, the company sold 100 two wheelers from its stock as against 996 vehicles (or is it 2,301 vehicles as shown in the schedule) in the preceding year. However at year end it still retained a licensed capacity to manufacture 100,000 vehicles (700,000 vehicles previously) and an installed capacity to make 60,000 vehicles (235,000 vehicles previously) in its books. But quite obviously this is only a mere book entry figure as the notes to the fixed asset schedule says that almost the entire value of the balance plant and machinery of Rs 230 m that is remaining in the books is held for disposal. The notes to the accounts states that the balance manufacturing capacity with a post depreciation value of Rs 37 m has been sold after September 30, 2010.
It is remarkable that the company even saw value in producing and selling two wheelers in FY09 and then flogging it in the market knowing full well that it would be a fool hardy proposition in the first place. Mercifully, in FY10 it merely sold 100 vehicles that it had in its inventory pile. In reality, there does not appear to be any clear documentation in the P&L (profit and loss) account on how the company achieved its turnover figures of Rs 177 m, and Rs 5 m, in FY09 and FY10 respectively. What is more, in FY09, out of total trade debtors of Rs 156 m outstanding as on the date of the annual report, it had provided for doubtful debts to the tune of Rs 120 m! Did it sell its scooters on a gratis basis or what? Besides, as stated earlier, the wafer thin operational profit that it documented in FY09 was purely due to the alarming dexterity of the company's accounts department - period.
The promoters come first
The basic reason for putting up this act of producing and selling appears to be that both the Chairman A. H. Firodia and Sulajja had to be paid their share of 'tithes' for the good work that they put in. I do not have the breakup of the remuneration paid to them in FY09, but there is clear evidence of such a 'subterfuge' in the annual report for the year FY10. In this year the company clocked a loss of Rs 49 m on a turnover of Rs 76 m including extraordinary other income of Rs 71 m. (The company also wrote off bad debts of Rs 152 m during the year. Who were these lucky defaulters please?) The total emoluments that it paid out during the year, and which added to the loss, was Rs 12 m. But the catch here is that the emoluments paid to the father/ daughter duo in this omnibus figure amounted to Rs 7 m - or 58% of all emoluments. This is truly preposterous. What type of managerial remuneration package is this? The top management is being lavishly compensated for running a company to the ground!
The company still retains borrowings to the tune of Rs 246 m in its books. These loans are dues in their entirety to two group companies - Micro Age Finance and Ajinkya Holding. The company also has substantial sums payable to trade creditors for purchases made from them. How the company plans to extinguish these debts is not known especially since the working capital position is acutely in the red. The only redeeming factor here is that the bulk of the dues is payable to privately held group companies. But, trust the management to have a trick or two under their sleeve. For, why would they allow privately held group companies to suffer a fate worse than a listed group company?
Evaluating different avenues
The directors' report also states that the company has been evaluating different avenues for newer businesses. The company has introduced power driven light duty three wheeler carriers intended to be used by the postal services. The company expects the concept of Postal Soleckshaw, as it calls it, to get accepted well in the market. It is also exploring newer applications of the concept. For the uninitiated a Soleckshaw is the brainchild of our very own CSIR (The Council for Scientific and Industrial Research). It is an eco-friendly tricycle which is partly pedal driven, and partly driven by electric power, through a battery which is charged from solar energy. Any returns from this gamble looks like a very long shot - but let the devil get its due. The point is that it has not stated whether it will be creating an asset base to make this product, or whether it will only market it on behalf of the CSIR.
Little cheer to offer
The report has little cheer to offer to minority shareholders who may still be holding out. When the company's investments in Mahindra Two Wheelers will reap any benefits is at present purely a matter of conjecture. The footnotes do state that the management is planning on setting up a manufacturing facility in Pune to make the power driven 3 wheelers that the CSIR has innovated. But this 'clever idea' appears more to do with the company wanting to prepare the statement of accounts on a 'Going Concern' basis.
A sorrowful end, so to speak, to a company which had initially sparkled with promise.
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.