What shows up very prominently in this annual report is the blind and probable fatal attraction that the promoter group of Navin Fluorine (NF) - read the Arvind Mafatlal (AM) Group - has for the almost defunct Mafatlal Industries (MIL). In reality, there has got to be a more material connection here. What is that cross connection, however, is not easily fathomable. At times one is moved to ponder as to what exactly are the motives of the management of NF. Fortunately for the AM Group, NF operates in a very profitable niche segment, and can therefore 'afford' to cut a few sharp corners. The management claims that NF is one of the largest producers of fluorochemicals (refrigerant /AC gases, etc) in the country. NF also imports the vast bulk of the raw materials that it consumes, and, exports more than half of what it makes, or some such-which is probably why it has the suffix 'International' appended to its name. The more interesting fact is that the manufacture of hazardous ozone 'depleting' gases is being phased out in the West.
Spreading finances razor thin
NF's inte-rse dealings with MIL, either directly or indirectly through its subsidiaries, is truly flummoxing. Anyway, for the matter of record, the annual report, through the notes to the accounts, nonchalantly informs the shareholders that MIL was declared a BIFR company and that its chemical division was merged into NF in 2002. So far so good. This merger netted NF some Rs 800 m worth of net assets of MIL, based on some valuation. Implying perhaps that NF is the winner. NF also decided at some point to go the whole hog and revive what was left of MIL. So NF floated a wholly owned subsidiary called Sulakshana Securities (SS) in which NF invested Rs 1.5 m as equity and then advanced Rs 280 m as loans to it - which was apparently used by SS to clear up some of the liabilities of MIL. By this process, the directors inform, SS took over certain assets and liabilities of MIL, and paid off the liabilities, on the understanding that the subsequent sale of the assets by SS will help SS to recover what it paid MIL's creditors. But to play it safe for the time being, NF has fully provided in its books, for its equity holding in SS and for the outstanding loans due from SS. NF also apparently at some point invested Rs 600 m in the preference shares of MIL - and here too it has fully provided for these outstandings. That not being good enough, NF also issued a corporate guarantee for Rs 100 m for the settlement of dues of MIL, and this outstanding too is fully provided for. So now do you get the big picture? It appears the management of MIL had made a neat job of sinking MIL. One may also add here that SS' accounts for the period ended March 31, 2010 have not been appended to the annual report. (There are 13 other group companies - excluding a partnership firm - in which the promoters have a significant interest in, and it will be fun to see the action if the management decides to bail out each and every one of them also).
Gross mismanagement of resources
The picture gets more titillating as you read on. SS, as per the latest balance sheet, owes a further Rs 278 m to NF, while MIL owes Rs 610 m to NF, and Sunanda Industrial Machinery owes Rs 467 m to NF, for other transactions. Then during 2009-10 NF paid Rs 31 m to an 'entity' called KMBL to acquire the debts of MIL on an assignment basis! Now this is getting really creative. But wait, there is even more intrigue, folks. During the latest accounting year NF wrote off its equity investment of Rs 155 m in Mafatlal Denims (MD), an affiliate. The latter appears to be well and truly sunk. What other liabilities accrue to NF as a result of MD's demise is not known. What is known is that MD's accounts for 2009-10 could not be prepared!!! So, who cares?
NF standing on strong foundations
Amazingly enough, the end result of this tamasha is that NF is still standing on very strong foundations. On a marginally higher turnover including other income of Rs 4.3 bn, the company recorded a significantly higher net profit of Rs 744 m and declared a dividend of Rs 14 per share on a face value of Rs 10 per share. A fall in the cost of raw material inputs, along with a sharp decline in holding costs of inventories and debtors, did the trick. Consequently the cash generated was used to reduce long term debt by a significant Rs 375 m. The net profit was achieved after a very significant expense item of Rs 312m (Rs 65 m) under the head of 'legal and professional' charges. A footnote explains that this refers to the current market value of carbon credits given to overseas marketing providers, etc. Why was this credit given away and then expensed in its books?
Probably feeling very apologetic about the state of affairs, the directors praise the functioning of NF to the high heavens, including about its strategic plans and, medium term objectives and, the focus of the R&D department on developing new molecules which will drive growth in the future. Hopefully by then le affaire MIL will be post script factor.
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.
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