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De Nora India: Not the best way to electrolyse please!! - Outside View

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De Nora India: Not the best way to electrolyse please!!
Jul 2, 2010

Even two bit companies like De Nora India find a place under the sun in the Indian bourses, and, not for lack of trying. It also represents a classic case study of a subsidiary which is trashed around by its principals, but yet manages to continue to stand somewhat ramrod straight, on its spindly legs. Originally christened as Titanor Components, the company is now a 51% subsidiary of its Italian collaborator, De Nora. After 20 years of flogging its wares, it hasn't gotten very far in walking the talk, or, even in expanding its product range. Sales and service income in 2009 dropped sharply to Rs 155 m from Rs 226 m in the preceding year. The company's sales are so structured that its service income and recoating charges together constitute a vital element of its total revenue, along with product sales. The problem is that the revenue realized from all three segments is drooping. Profit before tax took a corresponding dive to Rs 13 m from Rs 30 m previously. But for the judicious help of book entries, the bottomline may have looked a bit more precarious.

Engaged in the manufacture of coating for cathode and anode tubes --metal electrodes--for the electrolytic process in chlor alkali and chlorate plants (primarily, the manufacture of caustic soda and hydrochloric acid) it is finding the way forward a bit turbulent of late. Technology advances in manufacturing is robbing the company of its ability to service customers with the same frequency, as the power intensive chlor alkali sector has converted its mercury cell plants to membrane cell plants to reduce energy costs.

The flip side of this development is that the substantial income, under the recoating business head, has declined, as the recoating in membrane cell plants lasts much longer. Besides, the production of coated metal electrodes fell dramatically by 85% in 2009 to 132 sq meters, with a production capacity utilization of a mere 1.3%!!!!

For the matter of record, caustic soda has multiple industrial uses ranging from the newsprint sector which consumes 21% of the caustic soda, to viscose fibre, water treatment, soaps and detergents, aluminium, textiles, pharma, dyes and pesticides.

Though its revenues may be sputtering, the company somehow manages to hold its head well above water. It had for example liquid investments of over Rs 110 m at end 2009, on which it earned a not so impressive 4.5% return. Its treasury department also appears to be quite adept at rolling funds in and out of short term liquid investments, though it does not appear to generate any return for its troubles. And, judging from the many expense entries in the schedules to the P&L account, it is indeed in a very tricky business. More to the point, inspite of a drop in business, the parent De Nora is more than able to get its money's worth, thru revenue churning. The company has assorted myriad dealings on both revenue and capital account with the affiliates of De Nora in Italy, Germany, USA, Brazil, Netherlands, Singapore and possibly China.

The parent also continues to levy the pidgin desi company its Shylock pound of flesh, thru royalty payments (Rs 4.7 m against Rs 4.1 m previously) in a year of declining sales which please note. All this when the directors' report also states rather sorrowfully that the company is facing acute competition from small competitors, implying perhaps that the technology on tap is in itself not of a very proprietary nature in the first place.

What is most remarkable is that both in 2009 and 2008, some 20% of its outstanding debtors is shown as bad and doubtful and provided for. This is indeed an eye opener. What type of business is this please? Fortunately, the credit sales to its foreign affiliates are shown as good and realizable. The earnings in foreign currency during the year however, seems to be quite unrelated to the sales. Then, there are large provisions for doubtful deposits and advances, provisions for warranties, provisons for items in stores, and, writebacks to the P&L account under some of these heads. A truly bizarre scenario. Its spending on legal fees appears to be totally disproportionate to the revenue generated. It also spent some Rs 16 m in forex on the purchase of services. Gets even more bizarre doesn't it?

In some sort of gallows humor, the directors state that the company hopes to keep its top dog status in its line of business and that its ongoing efforts made in the field of Chlorate cell fabrication and Platinized titanium anodes would pave the pave for the future growth of the company. It will also help if it simultaneously took care of the interests of its minority shareholders too.

Disclosure: Please note that I am not a shareholder of this company

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.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
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