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Kokuyo Camlin: Profitability under cloud - Outside View by Luke Verghese

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Kokuyo Camlin: Profitability under cloud
Sep 6, 2013

Painting the future says the headline on the cover of the annual report-NOT QUITE SO from the financial sustainability point of view

A fine branded company

This fine branded company changed hands in 2011. The majority shareholding passed on to the new Japanese incumbent Kokuyo S&T Co Ltd from its promoter shareholders, the Dandekars. The Japanese promoters today control 52.84% of the voting capital of Rs 69 m, while the original promoter family controls another 11.11% making for a total promoter holding of 63.95% in the company. The corporate entity is 66 years young and is still putting its best foot forward-- though it will have to try a lot harder if it wishes to remain financially viable. Camlin (a patched up acronym for 'Camel' the brand name of its products and, 'ink') was the original name that the promoters anointed the company with after it switched its profile from Dandekar and Sons. At the apex level the change of ownership has not led to a simultaneous change of guard so to speak. The chairman emeritus of the company continues to be family icon Subhash Dandekar, as are two other Dandekars, the chairman of the board and executive director, and the vice chairman and executive director. There are two Japanese executive directors too just to round out the picture it appears.

It is indeed a pity that this company of more than six and a half decades standing has fallen into indifferent times - inspite of rising revenues. The standalone net revenue from operations rose 13.5% to Rs 4.35 bn from Rs 3.84 bn previously. There is also other income of Rs 2.5 m against Rs 6.8 m previously. But at the bottom-line level the company could only muster a pre-tax loss of Rs 188 m against a profit of Rs 10 m previously. This is before providing for exceptional items etc. Taking into account a tax credit of Rs 56 m on account of deferred tax against Rs 6 m previously, the company arrived at a rock bottom loss of Rs 134 m against a profit of Rs 13.4 m previously.

Indifferent margins

Kokuyo Camlin uses couched language to atone for the indifferent margins that it has been able to muster. The copy states that 'during the year under review the company had strategically incurred heavy revenue expenditure in logistics, quality control and, sales and marketing by increasing manpower and other expenses. This ramp up did impact our bottom-line for the year 2012-13. But we are confident that this investment shall begin to bear fruits in the near future'. The company has also invested in ramping up its human resources base to encourage merit and innovation etc says the copy.

What the copy is saying may well be true but the most apparent reason for the slide in margin generation appears to be its inability to control the cost of in-house manufacture. So the company also buys out finished goods stock for resale on a large scale. For the matter of record its product portfolio comprises of three distinct compartments or some such. There is the 'Students and education products' set up, 'fine arts & hobby products' and, 'office products'. The three compartments consist of innumerable items on offer. Manufactured sales accounted for a slice over 59% of all gross sales, while traded sales rang in the balance.

Finished goods purchases

As stated earlier the company buys out finished products on a large scale. Cost of stock in trade outsourced amounted to Rs 1.31 bn against Rs 1.32 bn previously. Traded stationery items were the biggest contributor to revenues accounting for 33.7% of all sales. This was followed up by manufactured items comprising Chemical and Chemical products. This line accounted for another 30.4% of overall revenues. The other big contributor was manufactured stationary items-which is divided under two heads. The grouping which accounts for pencils, markers and such like accounted for 24% of all sales. The grouping which is made up of inks etc had a very small contribution, as did 'bought out' traded chemical and chemical products. This in sum total represents the revenue side of the equation.

Now flip to the expenditure side. Consider the following material data. The cost of material inputs including purchased stock in trade etc accounted for 67.7% of net revenues from operations against a lower 63.8% previously. This item of expenditure was the single biggest body blow to creating a dent to the bottom-line. The total purchases of traded goods included goods worth Rs 336 m from an associate company Excella Pencils and yet others during the year. Employee benefit expenses too went up by 23%, but this may be explained by the 'heavy metal' expenditure incurred to shore up the human resources section. The company boasted 1,185 employees on the rolls at year end. The numbers in turn would work out to a per capita payout of Rs 0.43 m per year. That does not look like much of a per capita payout to me. But let that be. The other outsized expenditure per-se is lumped under the sub head 'Other Expenses'. This relates to commission/ discount/ service charges etc which grew 45% to Rs 1 bn. It appears that employee sprucing up or not - the company has to give quite some to generate revenues. It is thus a double whammy of higher input costs and more discounts etc, and herein lies the rub.

In this context it makes eminent sense to market more bought out sales. The company appears to generate comfortable margins here. Assuming that the company was able to market all that it bought in the year during the year itself it would have made a gross margin of Rs 541 m on sale against a gross margin of Rs 353 m previously-on higher traded sales! The other costs associated with the sales are not known, but the company was definitely the gainer here and by quite some margin too. It would also imply that manufactured sales are operating at a loss. Probably then, the company should cut down on manufacture and concentrate more on trade. Also to be noted is that the spending on forex at Rs 387 m is much larger than the earnings from forex at Rs 88 m. In times of the fall in the rupee value Vis a Vis the dollar etc, it can spell more trouble for the bottom-line.

Capex spending

But that is not quite the route that the company is contemplating. The company states upfront that it spent Rs 121 m in updating its manufacturing facilities and in maintenance expenditure too. This sum was expended basically on plant and machinery and sundry other items. The fact of the matter is that it was out of pocket in generating cash from operations, and hence it had to borrow monies to splurge on capex. (The debt at year end upped to Rs 652 m from Rs 416 m previously). The bigger moot point is that the pre-capex expenditure gross block amounted to Rs 1.08 bn of which the plant and machinery gross block amounted to Rs 796 m. Thus the historical P&M gross block got a boost of around 13% in value. What this capex spending will do to further lubricate its manufacturing facilities is not known - but the management appears confident that it will lead to something positive. The spending also involved upping the value of its ERP assets by 50%. Also to be noted is that the company generated manufactured gross sales equal to 2.2 times the value of the year end gross block. Whether this amounts to optimum utilisation of manufacturing capacity is not known.

For the present, however, the year end financials have not quite gone out of shape though. The reserves and surplus of Rs 1.11 bn are relatively very large compared to the pipsqueak paid up capital of Rs 69 m. But the catch here is that the vast bulk of the reserves (72%) are made up of share premium reserves. The company is able to collect its trade dues without giving much away in terms of time to pay, and more importantly, the trade payables at year end are almost equal to the trade receivables. The value of inventories at year end is also most manageable. But the company needs to tone down the level of current assets Vis-a- Vis the level of current liabilities to cut down on working capital costs. And increasing the level of debt when the company is facing a problem of generating cash from operations is definitely not the right way to go forward.

Rights issue of shares

Towards the end of righting the cash flow situation the company has apparently made a rights issue during the year. At least this is what the annual report has to state. The report says that the board has approved the issue of rights shares to the tune of Rs 1.1 bn to bring in much needed permanent working capital. This is a step in the right direction. But more importantly the report fails to mention what other concrete steps the company is taking to generate margins and putting the company back on the rails.

The company also boasts of two piddling siblings, and they like the parent are making heavy weather-unfortunately. The investment in a third sibling, Camlin International, is fully provided for.

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.


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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