Any stockmarket listed manufacturing entity incorporated in Kerala and having its manufacturing facilities and head office within its confines, and which continues to prosper, and which celebrates the 28th year of its existence deserves nothing short of a Noble Peace Prize, or some such equivalent. Ok, the company has a 2nd manufacturing facility at Bangalore, but the latter facility came up much later. Originally a 100% Indian owned enterprise it went in for financial and technical collaboration with Framatone Connectors of France (now FCI) in the late 1980s, with the collaborators holding a minority stake. But thanks to the subsequent 'benevolent' attitude of the descendants of the original Indian promoters, (it couldn't be only because of the technology benefits on offer) the collaborators were able to muscle in quite easily over time, and today hold over 97% of the outstanding equity stake.
The company's shares are currently delisted for trading as the French principal slowly nibbles away at the balance 3% minority Indian shareholding. It has also stopped paying any dividend under questionable guises, probably also in the hope of coaxing reluctant minority shareholders to exit in the process. For the matter of record the company manufactures a whole gamut of connectors used by telecom switching and transmission equipment manufacturers, and the industrial equipment manufacturing sector, along with accessories and cable assemblies.
The principal's writ runs riot over the company and the impotent subsidiary jiggles to the parent's tunes. It appears to import just about every nitty gritty that a company could possibly think of importing. From raw materials, to components, to capital goods, to machinery spares, tools and consumables. Not to mention the imported value of traded goods. On the face of it the company appears to have a made a thumping profit in the purchase / sale of traded goods. A profit of Rs 41.8 m in 2009 (Rs 19.2 m) or there-abouts. It also pays out sums on trademark royalties, patent costs, management fees, and information system support expenses - all of it presumably pays to its principals.
The company lent Rs 350 m to a group affiliate on which it earned an 8% interest return in 2009. FCI OEN has no equity stake in the group affiliate, and the latter is probably owned by the parent. With the parent getting returns like this every which way, what's wrong in turning off the dividend spigot. The company also makes profits. It also made a pre- tax profit of Rs 37.9 min 2009 (Rs 35.9 m) on a turnover including 'other income' of Rs 2.7 bn (Rs 2.6 bn).
But it is the composition of 'other income' which catches the eye. Other income for 2009 stood at Rs 263 m (Rs 299 m). Of this, export entitlements and sale of scrap (which should really be classified under sales) brought in Rs 190m (Rs 209 m) respectively. Suffice to say that, if the export entitlements were not available and if there was no scrap sales, the company may well have been deep in hock. The point is that export entitlements and scrap sales are indeterminate and also depend on government policies and, the efficiency of the manufacturing process, and the difficulty in predicting scrap sale prices. Add to this the profits made on traded sales and the picture gets a little bizarre. Or, is there a method in this madness?
The company continues to chug along in this setting and, inspite of the bulk of the production being exported, apparently to its affiliates, it has to give considerable dollops of trade credit to realize the sale proceeds, and in the process got whacked in the forex front also.There was also a marked shift in inputs consumed and the output volume was significantly lower by 30% at 83 m pieces. But the company generated a significantly higher price of Rs 23.4 (Rs 13.3) per connector sold. Sales of connectors bringing in almost 90% of all rupee sales. Probably the company switched to higher value connectors or some such. There was also a 39% drop in the value of cable assemblies sold, at Rs 206 m.
So is it the efficiencies in the manufacturing processes of the Indian subsidiary that allows FCI OEN to grow and prosper, or does it do so by getting a leg up by other means?
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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