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Hi-Tech Gears: Hit by slow auto demand - Outside View by Luke Verghese
 
 
Hi-Tech Gears: Hit by slow auto demand

The company is a 27 year old one product auto ancillary unit with a mix of domestic and export sales. But it is at the receiving end of the mother units both in India and abroad. Not really an enviable situation to be in.

A one product wonder

Hi-Tech Gears Ltd as the name plate infers is an auto component unit which started life in 1986 as a supplier of parts to Hero Honda. Currently it is a supplier to some 23 branded units according to the pictograph– ranging from Daimler to Caterpillar, to Bosch to Tata, to Mahindra, TAFE and so on. It also has three manufacturing facilities divided between the two states of Rajasthan and Haryana. The company today manufactures transmission gears and shafts which it sells both in the domestic market and for export. It also buys out transmission gears and shafts for resale. It also earns some bread by doing job works. It also exports software which is totally at odds with its mainline business. This in a nutshell is what this company is all about.

The fate of the auto ancillary industry can be safely judged from the performance of the mother industry. At the first sign of a downswing, the orders permeating to the ancillary units take a dip on the one hand, and on the other the mother unit also demands more time to pay up. This is the unfortunate predicament of most ancillary units as they lack a backbone to stand on. The one big exception to this rule is industry heavyweight MICO now christened as Bosch.

Hitting a rough patch

Hi-Tech Gears went through a difficult patch in the latest accounting year judging from the drop in sales and from the sharp fall in the bottom-line. But the fall in fortunes was occasioned by the fall in exports which could not be set right by an increase in domestic off take. As a matter of fact domestic sales too took a drop. But this company also has umpteen deals going with group companies who in turn appear to be closely held entities.

But, first, there was a fall in sales net of excise to Rs 3.6 bn from Rs 4.8 bn previously. Of this sum, export sales of both manufactured and bought out gears and shafts amounted to Rs 607 m against Rs 1.27 bn previously. The export sales of just manufactured gears and shafts fell sharply to Rs 324 m from Rs 1 bn previously. In other words the export sales of traded gears and shafts rose to Rs 283 m from Rs 180 m previously. Such statistics do not quite jell-but this is the reality of the matter. (It would appear from the above that the automotive industry abroad was facing a far bigger slump than the domestic auto sector). But, is one to also assume that exports of bought out gear shafts are more profitable than of the manufactured variety? And, that the company preferred to favour group affiliates in the export effort, or some such? It also realised revenues of Rs 34 m from the sale of software services, and generated job work income of another Rs 38 m. Not to forget the substantial 'other operating income' of Rs 98.5 m derived from export incentives, and from the sale of scrap. That is to say the total revenues consist of many parts which go to make up the whole. Add to this masala mix the 'other income' of Rs 20 m against Rs 35 m previously and one gets the full picture of the top-line. The other income is inclusive of cash discount received of Rs 10 m against Rs 12 m previously.

The revenues

If the top line dunked 25% to Rs 3.75 bn, then the pre-tax profit fell even more sharply by 62.2% to Rs 236 m. Can we deduce from both the top line and bottom-line figures that export sales per-se are more profitable than domestic sales? The reason for the sharp decline in the bottom-line is also because certain standing expenses like employee benefits, finance costs, and deprecation provision cannot be tailored to meet the exigencies of the accounting year. (For example, the gross block at year end toted up to Rs 3.3 bn-- and comprised largely of plant and machinery-and this figure has to be juxtaposed with the net revenues from manufacturing operations of Rs 3.4 bn. This implies that the gross block to revenues was just about even or 1:1. It also implies high capital costs in relation to revenues).

The saving grace for the bottom-line in a year of declining profitability is the contribution of extraneous income amounting to Rs 119 m against Rs 167 m previously. Such 'other income' together with the 'sales related other operating income' as a percentage of pre-tax profit rose exponentially to 50% from 27% previously. It is not known whether there is any direct connection between manufactured sales and revenues from scrap sales. But, based on the figures available, the sale of scrap amounted to 2.5% of such revenues against a lower 2.2% previously. Incidentally, the export incentives that it has accounted for appears to be pitifully small given the value of exports.

Delectable management of working capital

But in an effort to get even with the slump in business, the company did resort to a neat little trick to try and defuse the difficult situation. At year end the trade receivables fell to Rs 297 m from Rs 701 m previously, while it was able to temper the fall in  trade payables much more sedately to Rs 442 m from Rs 613 m previously. That it was able to perform such a feat in a year when its revenues fell so sharply makes for a most enviable achievement. To put it in a different perspective, the trade receivables at year end fell to 8% of revenues from operations against 14% previously. But there are also other asides arising from its ability to step on the brake pedal. With a tightening of working capital management, and a reduction in capex expenditure to Rs 117 m from Rs 657 m previously, the company was simultaneously able to reduce borrowings at year end to Rs 473 m from Rs 837 m previously. The net result of the belt tightening exercise on the working capital front is that the company was able to generate considerably more cash from operations during the year than it did in the preceding year!

How the revenues add up

The makeup of the revenues from operations is a complex mix which makes for interesting reading. As I had stated earlier the revenues include sales of traded products amounting to Rs 283 m. But the schedule of related party disclosures states that it purchased goods worth Rs 674 m from two other group companies---Vulcan Electro Controls, and from Getrag Hi-Tech Gears India Pvt Lt, and possibly relates to finished goods purchases. Presumably both these companies are unlisted entities. But as one can see, the breakup of the sales schedule shows traded sales which are far less than the traded purchases. In which event what happened to the balance goods purchases? The company also sold goods worth Rs 170 m to group companies –so it looks like more than a two way affair on the finished goods front. There are also group interactions for job works rendered by the company and for job works received by the company. The cost benefit to Hi-tech Gears from such transactions is not readily available as the company lumps all the businesses under one head. There is also the rent paid to another group company by Hi-Tech Gears. It is all in the family sort of.

Hi-Tech Gears appears to have a number of group companies. The total number depends on which page of the annual report one is looking at. If one is looking at the column which gives the details of the promoters' holding in the capital, then there are three group promoter companies. If one looks at the schedule of related party transactions, then there are four other group companies too. If one looks at the directorships held by Anuj Kapuria, the son of the chairman of the board, he is a director of a string of yet other companies. It is not known how these companies fit into the promoters' kitty if at all.

Very little to show

Overall there is very little to commend this company to an investor. The business comes under the classification of ancillary unit and that in itself is a negative connotation. It is also basically a one product wonder. Add to it the dependence of closely held group companies, and on exports, to earn its succour. The share price (Rs 10 paid up) moved within a range of a high of Rs 160 to a low of Rs 71 during the financial year, but on very low volumes of trade. The paid up capital of Rs 188 m is however backed up by reserves and surplus of Rs 1.5 bn. But these reserves include revaluation reserves of Rs 302 m.

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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