How the mighty fall
How the mighty fall from their high perch. Right through the 1970's and up to the 1980's, 'brand' Mafatlal shone like a lodestar in the Mumbai stock exchange, especially post commissioning of its two big ticket ventures, National Organic Chemical Industries (NOCIL) and its downstream unit, Polyolefin Industries. Standard Mills (as it was known then), the composite textile manufacturer of yarn and garments, and an amalgam of several textile mills, including New China Mills and Surat Cotton Mills, was a star of its own. Frequent issue of bonus shares was one of the rituals of this company. Since the late 1970's, this company has been managed by the Rasesh Mafatlal branch of the family. The subsequent fall from grace of the group, was in large part due to the older generation promoters suffering from a severe bout of gerontocracy. This was compounded by the vexatious and complex intra-family group holdings, which could not be parceled amicably, and became the game changer. The fact that the GenNext were found wanting in all aspects of the game, was the final nail in the coffin.
Unable to cope with change
Geriatricity, and the inbred inability to adapt to the forces of change, appears to be the critical factor in the continued wellbeing of corporates. Standard Industries was incorporated as far back as 1892, for the manufacture of textiles, and is now showing its age. The management is today literally stooping down to looking for crumbs from under the table for sustenance. It has completely mothballed all the manufacturing facilities for textiles, and assorted add-ons, including caustic soda, chemicals, bleaching powder, chloroform, etc. (Probably as a mark of respect to its past glory, it still continues to show the licensed capacities of its looms and spindles under the quantitative information schedule). The situation was so desperately hopeless in the last decade that the company had to repeatedly change its accounting year end, just so as to enable it to cobble up some decent looking figures in its publicly available annual report. For the matter of record there were three 18 month year ends, and one 6 month year end. It apparently took quite some doing before the management was able to arrive at an agreement with the employees of its Mumbai based mill lands, on an amicable voluntary retirement scheme, and then get the regulatory nod to commercially develop these lands.
Looking for crumbs
In some sort of gallows humor, the company presently trades in textiles and caustic soda, (which it had been making and selling for decades), and makes a royal mess of it too. The company sold bought out cloth and made ups worth Rs 69 m, and caustic soda worth a piffling Rs 1.6 m. It eked out a gross margin of Rs 5 m from this exercise. Since this margin is not enough to cover other costs, this line of business was a dead loss. What in heaven's name is the purpose of conducting business in such a manner in the first place? The management contends that the market for textile fabrics is sluggish (with the net addition to our population growing by some 19 m per year, or putting it another way, an Australia every year, how sluggish can it get?).
It has difficulty marketing caustic soda, it contends, as consumers prefer to indent from approved dealers of certain manufacturers (and to think that it was a major manufacturer/consumer of this product not that long ago). And even in this pitiable scenario, it cannot get its deals right. On a traded turnover of Rs 70 m for FY10, it had debtors toting up to Rs 51 m, and guess what, Rs 40 m of this debtors' figure, was considered bad and doubtful, and provided for. In the preceding year the respective figures were Rs 313 m, Rs 78 m and Rs 54 m. No wonder the company is scraping the very depths of a wormhole. As a matter of fact, the company is so hard up, it does not even have a dedicated website.
Finance department proves its mettle
That is when the creative juices of the finance department really got flowing. It was able to drum up 'other income' of Rs 311 m, (Rs 2.2 bn in the preceding year), but mostly through some extraordinary steps. Through the route of write back of electricity duty provisions (which was beautifully timed), indirect tax refunds, reversal of doubtful debts, write back of credit balances and such like, such entries accounted for a cool 64% of all such other income. Since there was also some genuine other income the company also decided to enrich the exchequer, and made a small provision for tax during the year. Needless to add, it generated a negative cash flow of Rs 180 m from operating activities during the year.
Now that the company has finally got going on the real estate development exercise, the management will be spared the embarrassment of dabbling in textiles and caustic soda to try and generate some wealth. The question that arises is what happens after all the real estate is fully developed. It has a few forgettable subsidiaries, including Standard Salt Works, which currently operates on oxygen provided by the mother unit. So quite obviously the management has to get its act together sooner than later. For the present, the current management must be thanking their stars, at the unwitting foresight of their forefathers, for leaving them invaluable real estate from the rubble of their own ineptitude.
Last but not the least is the very interesting shareholding pattern of this company. On paper, the promoters and group companies hold a shade less than 18% of the outstanding equity of Rs 322 m. In effect therefore the company is an easy target for any predator. But look more closely. Close to 40% of the equity is also held by NRIs/OCBs (or overseas corporate bodies), which in effect means that collectively more than 57% of the paid up equity is very tightly held. That should help the management ward off any unwarranted attention.
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.