From the looks of it this is a company which appears to be operating beyond the realm of reality. How the management plans to put it all together is a scenario which I would not like to imagine.
Extended period working results
The working results under the scanner have been prepared for an 18 month period ending June 2013. The reason to extend the resultsto 18 months is not adequately explained but the principal reason for doing so appears to have been to present a less unfavourable pre-tax loss, than would have been possible for a 12 months accounting period, rather than for any other earthly reason. The declared loss for a 12 month period may well have had the effect of frightening the wits out of both its creditors and shareholders' perhaps. The directors' report states that 'the period was a very tough period marked by challenges in both internal and external environment, and the consumer electronics & home appliances industry was not an exception to this'. How true!
Companies should be debarred under law from affecting changes to their year-end just to find succour from the ire of their creditors, shareholders and other business associates. There should be a very valid business reason for doing so. An accounting year should be as commonly understood as being for 12 months, and no more or no less, unless legal exigencies demand a change in the accounting year. How does extending an accounting period alter the ground realities please? For tax purposes-direct and indirect -- it is still a 12 month period, right?
A pre-tax loss
Videocon Industries has declared a pre-tax loss of Rs 1.14 bn on total income of Rs 185.7 bn against a pre-tax profit of Rs 7.7 bn and total income of Rs 127.5 bn in the preceding year. Note that the total income includes 'other income' of Rs 4.18 bn for the 18 months against Rs 1 bn in the preceding 12 months. The vast bulk of the other income amounting to Rs 2.97bn in the latter year was accounted for by a seemingly innocuous item called 'other non operating income' -suggesting that it was of a one off nature --with the profit on sale of fixed assets tossing in Rs 637 m. There appears to be no separate schedule explaining this mega resource. This is a rather strange entry. Hence, it would appear that a sincere effort was made to rustle up an impressive figure of 'other income' in the 18 month accounting period. But for this manna from heaven, the bottom-line would have been a MAHA washout. Rising finance costs of Rs 27.1bn for the 18 month period against Rs 9.8 bn previously added to the burden of the bottom-line.
The company it seems has also achieved a unique first of sorts in that it is the first instance where a company has paid out a dividend to only its non-promoter shareholders for the accounting year. Atleast this is the first time that I have come across such a restricted dividend payment decision. I was not even aware that this was possible. The non-promoter shareholders hold 30.61 % of the outstanding equity capital of Rs 3.18 bn made up of shares of the face value of Rs 10 each. The dividend of Rs 2 per share amounted to Rs 233 m. The company also boasts preference share capital of Rs 153 m.
Still operating in its primary business
The company is still primarily in the business of consumer electronics and home appliances. The principal character of the standalone parent is unlikely to effect a change in the near future. But that of the consolidated entity will undergo a dramatic change if the humungous investments that the parent has made in its siblings bears fruit in times to come. The parent has investments of the book value of Rs 49.3 bn in the share capital of assorted companies. But the principal investments of Rs 46.3 bn at present lie in just six siblings-- out of the 13 siblings that it possesses-- Liberty Videocon General Insurance Company which has yet to get off the ground, Pipavav Energy Pvt Ltd, Videocon Energy Ltd, the colourfully named Videocon International Electronics Ltd, Videocon Oil Ventures Ltd, and Videocon Telecommunications Ltd. (A whopping chunk of shares held by the parent in these companies have in turn been pledged with banks to avail of loans). The parent also has abillion bucks invested in the preference capital of an affiliate I think.
Gravitating to a holding company
In other words, the standalone parent has now become the holding company of the Dhoot family business and this is not a very happy augury from the point of view of the non-promoter shareholders. Not a happy augury, as the returns from these massive investments will take time to yield any dividend if at all. (Note, however, how the promoter family is keeping the non promoter shareholders happy!). This investment excludes upfront advances made to the siblings in the form of short term loans which may or may not be interest bearing. And the sums involved are substantial. Incidentally, only Venugopal Dhoot from the immediate promoter family is a member of the board of directors of the standalone parent. I say this is the context of the fact that both Venugopal N Dhoot and his brother Pradipkumar N Dhoot have guaranteed the unsecured rupee loans taken by the company from the banks. Apparently the guarantees are of a personal nature.
The investments in its siblings have led to the independent auditors raising a red flag in respect of one of the investments. The language that the auditors have used in their noting is a bit convoluted and appears to missing the wood for the trees. The note states .....'the company has directly and through its subsidiaries made investments of Rs 49,337.50 m and advanced loans of Rs 782.74 m to Videocon Telecommunications Limited (VTL)......However in view of the accumulated losses of VTL, we are unable to express an opinion on the extent of realisability of aforesaid investments in and advances to VTL. The consequential effect of the above on the assets and liabilities as on 30 June 2013, and the loss for the period ended on the date is not ascertainable'.
The investment schedule
Well to start with the total value of the investments in its siblings combined amounts to Rs 49,327.79 m if my understanding is right. Secondly, the wording that the auditors have used would imply that the investments are concentrated in VTL, and only the loans advanced to VTL is under the scanner, especially as regards the realisability of the investment and the loan. The total value of the investments in VTL amounts to only Rs 5.6 bn. The largest investment by far at Rs 30 bn, and as stated earlier is in Videocon International Electronics Ltd. And, what about the realisability or otherwise of the investments and advances made to the other siblings also please?
In 2012-13, as stated earlier, the company earned gross revenues from the sale of products and services of Rs 187.3bn (for an 18 month period). The revenues are before deducting discounts and other incentives of Rs 6.9 bn against Rs 5 bn previously. On an annualised basis the discounts on offer actually shrank! However on an annualised basis, the revenues also actually shrank to Rs 124.8 bn from Rs 129 bn previously. On an individual basis the revenues from the sale of electrical and electronic items amounted to Rs 167 bn, crude oil and natural gas at Rs 19.7 bn and electrical energy-power - at Rs 234 m. Thus the company even today operates within the ambit of the original statute, though the bread and butter business did suffer marginally in terms of revenue generation. So, in a sense, the company is right in saying that it was affected by the slowdown in the consumer electronics and home appliances business.
The company lodged pre-tax loss of Rs 1.14 bn for the 18 month period against a pre-tax profit of Rs 7.7 bn implying a negative turnaround of Rs 8.87 bn. The input cost of materials including that of oil and gas production costs are substantial and amounted to 70.4% of net revenues from operations against 69.5% previously. The import value of materials purchased is also humungous at Rs 23.9 bn against Rs 14 bn previously. Thus the dollar value has also got to be factored in, and the company still managed it! (The input costs include purchase of stock in trade amounting to Rs 59 bn against Rs 38.5 bn previously. The company does not separately give the sale value of purchased stock in trade -hence it is not possible to calculate the gross margin on such sales. But given the massive purchase values involved the gross margin has got to be substantial). So the rub does not lie here. Besides, employee benefit costs also did not surge. Deprecation provision too was kept well under control. So the whack was actually taken by the sharp surge in 'interest and finance' costs. This expense item surged from Rs 9.8b from Rs 27.2 bn. The totalborrowings on the other hand rose less appreciably to Rs 229.8 bn from Rs 186.5 bn. With the mega bucks at stake is it any wonder that the company has 28 bankers on call!
How it managed to contain the depreciation provision is a bit difficult to comprehend. The addition to gross block was as much as Rs 12 .1 bn against Rs 11.5 bn previously. The total gross block at year end amounted to Rs 117.8 bn-up from Rs 107.3 bn. The vast bulk of the gross block -Rs 102.1bn-is featured under the head 'plant and machinery'. Another Rs 6.6 bn is accounted for under the head 'Building'. But the depreciation provision moved only to Rs 8.2 bn from Rs 6bn previously. As one can also see the gross block relative to manufactured sales is not very healthy.
Where the fault lines lie
It is not difficult to see where the fault lines really lie. Though it reported a pre-tax profit in the preceding year it was severely out of pocket on the cash flow front. In the preceding year the company was out of pocket to the tune of a massive Rs 51.6 bn from operations against a much lower Rs6.8 bn in the current 18 months period. This shortfall was mostly occasioned by the large advances under the head 'Loans and Advances' of Rs 87.3 bn that it had to fork out previously against Rs 43.4 bn in the current period. The advances are categorised under two heads -Long term and short term -and further under advances to 'related parties' and advances to 'Others'. The amounts under the two subheads are humungous at the latest year end-Rs 53.43 bn and Rs 144.1 bn respectively. What in heaven's name does advances under the category 'Others' pertain to? Is it advances for capital goods purchases-perhaps? And guess what not a dime is apparently earned as interest under either category-though there is an interest receipt of Rs 491 m in the latter year against Rs 487 m previously. This amount may pertain to bank interest etc-who knows.
The other equally pertinent issue is that the company had to spend on gross block and given the sums involved it went totally belly up -and had to resort to borrowings in a lavish manner so to speak. In the preceding year debt rose by Rs 70 bn while in the latter year it rose by a further Rs 43.3 bn. This is an accretion to debt which the company will not find easy to discharge not only on the revenue front but also on the capital account front. What really adds to the mess is that the permanent capital consisting of shares is a pittance compared to its scale of operations. The company boasts of a permanent capital of Rs 3.3 bn which is really laughable given the extent of debt that it has taken on, and the exigencies which led to the accumulation of debt. It is another matter that the reserves and surplus weigh in at Rs 97.8 bn. But this figure is inclusive of 'securities premium' account of Rs 46.2 bn, which represent sums received on capital account.
And what of the siblings which are living off the parent? According to a schedule in the consolidated statement the company presently has seven siblings(this is at variance with the number of siblings listed in the investment schedule of the standalone parent)and 21 step down siblings, the bulk of which are 100% owned or near abouts. Some of the siblings were incorporated during the year and some got axed out. The list includes 12 videshi companies the majority of which are incorporated in tax havens. There are a further three companies which are designated as joint ventures or some such. This is getting to be a bit difficult to comprehend.
In any event it has displayed the brief financials of 29 companies under its wing. At the top of the heap in terms of paid up capital is Videocon Telecommunications Ltd. With a paid up capital of Rs 54.3 bn it ranks way above the rest of the underlings. But the holding of the parent in this capital is only Rs 5.6 bn. Presumably then, the rest of the capital is held by other underlings or some such. It has negative reserves of Rs 40.3 bn, generated revenues of Rs 6 bn and recorded a pre-tax loss of Rs 23.6 bn. It can't get more colourful than this in any sense of the term. Next in line is Videocon International Electronics with a paid up capital base of Rs 30 bn -all entirely held by the parent. It has negative reserves of Rs 6 bn, an investment portfolio of its own of Rs 2.7 bn, recorded NIL revenues, and posted a pre-tax loss of Rs 5 bn. This is getting to be bizarre to the extreme. Not only is the paid up capital not generating any returns, even the investment portfolio is following suit. This company is some sort of holding company no doubt. But what is the explicit purpose behind it all? And, what exactly is the game plan of the promoters please? I would love to get their reply to this question.
Yet another sibling Videocon Hydrocarbon is another nugget in the making. It has a paid up capital of Rs 12.2 bn -of which a mere Rs 93 m is held by the parent, share application moneys of Rs 4 bn, and reserves and surplus of Rs 111.7 bn. It has a humungous asset base of Rs 131.6 bn. It generated revenues of Rs 143 bn, and believe it or not posted a pre-tax profit of Rs 125.3 bn. This is a stupendous show on the bottom-line front and will beat anything that Mukesh Ambani can conjure up at Reliance. This company is also located in a tax haven going by the name of Cayman Islands. It has even made a tax provision of Rs 13.4 bn on the pre-tax profit. No dividend has been declared though.
There are other nuggets galore. Videocon Mauritius Energy for example. On a non-existent capital base it has pumped up assets of Rs 155.5 bn, but boasted negative reserves of Rs 7 bn. On pitiful revenues of Rs 1.3 bn it posted a pre-tax loss of Rs 7 bn. Does this company not believe in making its assets sweat or what? Videocon Energy Brazil is another show piece with figures that boggle the imagination. And so on and so forth the show goes on.
To sum up, this company beggars the imagination, and its financials beats me all ends up.
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.