Hindustan Motors: Not quite in reverse gear yet - Outside View by Luke Verghese

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Hindustan Motors: Not quite in reverse gear yet
Nov 15, 2010

The two faces of Hindustan Motors

It is indeed a pity that this venerable pre-independence entity of bygone years, and the first Indian automobile unit to start tooting its horn domestically, in the 1950s, should have come to such a sorry pass. It also made the bread and butter predecessor of the Ambassador, the Landmaster. People of some vintage may also remember that Hindustan Motors also used to produce two iconic commercial vehicle brands, Dodge and Fargo, in collaboration with General Motors. The Fargo truck at one point of time had a monopoly in the manufacture of fire engines. All these good tidings have now sadly enough come to nought. In any event cut to the present. One who faces the misfortune of having to read through the 68th annual report will cry oneself asleep half way through. The company is but an axle less ship, with the management appearing to have lost all sense of purpose and direction. This is quite evident when one rifles through the report of 'the management discussion and analysis'. This despondency appears to be a contagion that is enveloping the G P Birla group, which is today spearheaded by his son C K Birla.

The 56 year old managing director, Mr. R. Santhanam, appears to have flown the coop, after spending 6 fruitless years, in the corner office, trying atleast to do a Harry Houdini act, if nothing else. His successor Mr. Manoj Jha has been making many noises in the media, in his initial bout of over enthusiasm, but it is difficult to see what rabbits he can pull out of the hat, given the perilous financial condition of the company.

BIFR Candidate?

By the management's own admission, more than 50% of its net worth is already written off - in effect a much higher percentage. Its subsistence today is purely due to its ability to borrow from the big lenders, and that ability is getting eroded over time. Lenders will part with the moolah only against the mortgaging of its real estate , and this precious capital stock is slowly getting depleted by the year. Its manufacturing facilities are almost completely depreciated, and these assets may still generate revenue, but do not help bring in any profits. The accumulated depreciation of its antiquated plant and machinery currently stands at 80% of the gross block value, you see. The company is now reduced to selling its family silver. It has already sold 314 acres of land in Hooghly, for development as an IT park, and as an auto ancillary park. Consequently the balance freehold land is now valued at Rs 70 m in its books, against Rs 101 m in the preceding year. This balance land is also obviously spread out amongst the remaining two factories that it has, both at Tiruvallur in Tamil Nadu, and at Pithampur in Madhya Pradesh. So there may not be much leeway left here. The company is however banking on revenue streams emanating from the development of the business park (which will house auto parts units, and an IT park) when it goes on stream. But this income is at yet indeterminate.

The company in a nutshell

Amazingly enough, the management proudly proclaims that the company sold 11,003 passenger vehicles in a year when the domestic passenger car industry sold 1.95 m units. Is this something to crow about please? It is hopeful of increased sales in the current year, riding on the back of the Mitsubishi SUVs that it markets, and new models that it hopes to introduce. This, after the Japanese collaborators agreed to reduce the kit prices of the SUVs, so that the company can remain competitive. But even this gesture had only limited help, as the kit imports meant having to suffer the negative effect of forex fluctuations, which ate into margins. In any event it sold a mere 56 such cars in the latest year. This sorry state of affairs is neither an either here or there situation. Looking ahead through the looking glass, the management claims that there will also be increased sales of Ambassador cars emanating from the Kolkata taxi market, and following the impending launch of the Bharat stage IV 'dudes'. This in reality is doing too little too late and, and can only delay the inevitable.

For the matter of record the company achieved gross sales and services income of Rs 7.4 bn, and more importantly, other income of Rs 666 m. The other income was largely a factor of the surplus realized on the sale of fixed assets of Rs 524 m, and separately, the surplus of Rs 65 m on the sale of investments in Hyderabad Industries, a group company. But even this largesse from the tooth fairy was not quite enough to stem the flow of red ink. It still recorded a loss before interest and depreciation of Rs 45 m, and after the provisions on the latter two accounts, it generated a grinding loss of Rs 332 m. This, unfortunately, compares quite favorably with the preceding year's loss of Rs 425 m. The auditors in their report state that the company has used short term funds amounting to Rs 840 m, to finance the losses of the company. In accounting parlance it is a cardinal sin to use short term finances to fund long term needs. In this dismal scenario it is nice to see the large number of apathetical individual and other shareholders who continue to bat for the company. It still boasts of 1.6 lakh shareholders, of whom 1.5 lakhs are resident individuals. The latter collectively own 48% of the paid up equity. But what is more telling is that even predators perhaps see little value in this company, inspite of the promoters holding a mere 27% of the voting stock. And, inspite of the straightened circumstances, the company has the gall to crank out a 140 page annual report.

Tardy reporting practices

The company does generate margins from some items of sales. But from the manner in which it reports the segment information of sales, the company is seeking the easy way out. This is also a statutory requirement which is much abused by corporations. Almost the entire turnover is shown as derived from automobiles. That is not wholly correct. A little over 8% of gross sales (and a much higher percentage computed on net sales basis) is derived from the resale of bought out components and parts. On the face of it the company is turning a decent profit on this exercise and it should have been disclosed separately. And another 3% comes in from the sales of bought out vehicles, and this piddly side business too may be inked in black. This income too should logically be shown separately. But the interpretation of the requirement to provide division wise accounting is so porous that anything goes is the mantra.

The subsidiary mantra

The company also possesses some subsidiaries which are throttling well above the benchmark plimsole line. It boasts three subsidiaries, Hindustan Motors Finance Corporation (an erstwhile non banking financial services company), HM Exports, and, a defunct sibling based out of the US (incorporated in the state of Delaware) and going by the name of Hindustan Motors Ltd. Strangely enough, two companies begetting the same name. How it suffixed its name with Ltd is not known, and equally perplexing is the fact that the US subsidiary's books of account are audited by an accounting firm based out of Kolkata. Not that there is anything much to audit, and besides, the company's investment in this subsidiary is fully written off, thank you.

Laughably enough, the best performer, Hindustan Motors Finance Corp, is the very subsidiary which finances the sale of vehicles that it makes, to buyers, and also makes a bomb by selling souped up bullet proof cars to neurotics. At least this is the inference drawn from a look see of the basic profit and loss account. On a gross turnover of Rs 557 m including other income, this company reported a pretax profit of Rs 10.4 m. It makes do with these numbers by merely producing and selling 38 bullet proof cars, and financing the sale of another 271 cars. Since the latter will not acquiesce to parting with any of its net income as dividends to the parent, the return on the parent's equity investment of Rs 2.5 m is a zero. But fear not. The subsidiary does have a soft corner for the parent, and has consequently advanced a loan of Rs 8 m to the parent at 11% interest! But this is small beer for the parent.

HM Motors, the next subsidiary, has an even more colorful history. Almost its entire paid up capital of Rs 500,000 is made up of bonus shares, implying that it has had a good run. It subsists today by purchasing and then reselling Isuzu engines, which bring in good margins, and by the export of auto parts which has not quite taken off as yet. There does not appear to be any set pattern in this business and cannot therefore be counted upon, unless the business park in the anvil becomes a game changer. Though a mere side business, the subsidiary generates sufficient cash. So much so that it has advanced a loan of Rs 13 m at 11% interest to the parent. But, as can be expected, it does not part with a dime as dividend to the parent.

It has an affiliate, AVTEC, which makes power units and power products, and was formerly a division of Hindustan Motors. But anticipating its own wretched fate, the management dutifully spun off this high performing division into a separate company, and acquired shares in the new entity at a premium of Rs 46 per share on a face value of Rs 10 each, and for a total consideration of Rs 691 m. Hindustan Motors currently purchases revenue items from this affiliate for its own in-house consumption. But sad to say, Hindustan Motors could realize a dividend of only Rs 2 m on its investment, in the latter year.

A sad ending?

Unless the management does some drastic streamlining and the business park starts yielding adequate cash flows soon enough, this company will be walking straight into the arms of the BIFR (Board for Industrial and Financial Reconstruction) paranjapole. It would indeed be a sad end to a one time beacon of Indian industrial enterprise.

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

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.


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