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Oswal Chemicals: A directionless company - Outside View by Luke Verghese

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Oswal Chemicals: A directionless company
Nov 15, 2011

A name plate which does not add up

Oswal Chemicals and Fertilizers is a tad different from the others that I have analysed so far. Its name plate infers a particular intent, while its revenues reveal dramatically different income streams. It should be made mandatory for companies to anoint themselves with name plates which give a fleeting resemblance to their mainline activity. Okay this was also the mother unit which apparently acquired the petrochemical assets of Union Carbide, at Chembur in Maharashtra, decades ago. (Union Carbide is now known as Eveready India). It still boasts of the capacity to make 13,000 tonnes per annum of low density polyethylene, but this unit has apparently long since been mothballed. It also has the capacity on paper to make solvent extraction, but this unit has also sung its swan song. There is a time and a place for everything I guess.

It is nice to know that the directors also feel that the name that the company is presently saddled with does not reflect its 'core values'. Among the points for consideration at the AGM is a note proposing that the company name be changed to Oswal Green Tech Ltd, now that it has exited the fertilizer business. How this name change dovetails into its new found activity beats me all ends up.

Real Estate development is the way to go

Chaired by Abhey Kumar Oswal, the company's focus in future will be in real estate development - a market which is fraught with game changing uncertainties. But as the story is played out presently, in 2010-11 the company clocked revenues of Rs 2.3 bn and reported a pre-tax profit of Rs 1.03 bn. That was a marked improvement over the performance sheet of the preceding year when it took a sizeable dunking of Rs 118 m on the bottom-line front on revenues of Rs 1.4 bn. (A major unsaid reason for the loss before tax for the year 2009-10 is the donation of Rs 155 m that the company made during the year. Just who pray is the lucky recipient of this manna from heaven, and, besides, is the company entitled to a tax break on this magnanimous gesture? The donation in 2010-11 was a miserly Rs 7.8 m). To be noted is that the revenues for 2010-11 included other income of Rs 350 m, against a polite Rs 15 m previously.

During 2010-11, the company drummed up business from four totally disparate lines of activity - fertilizers, investment activities, trading goods and real estate, and an item going by the name of 'Unallocated' according to the 'segment revenue' schedule. The revenues in the preceding year accrued on a like basis. In both years however there was no manufacturing activity. Significantly, the sales revenues for 2010-11 included export revenues of Rs 1.03 bn. That is to say exports accounted for 53% of all sales revenues, against 24% previously.

A breakdown of sales revenues

In the breakdown of sales revenues, it is the 'trading activities' that were the biggest contributor to earnings at Rs 1.03 bn. This was followed by 'investment activities' with Rs 721 m, 'unallocated income' of Rs 311 m, and 'fertilizer sales' of Rs 225 m bringing up the rear end. No revenues are shown as accruing under real estate, though it recorded a loss of Rs 30 m here! The biggest contributor to revenues in the preceding year was income from real estate, though it was backed up by a whopping loss too! The commodities (trading activities) that it bought and then sold in 2010-11 were entirely exported. It appears to have has suddenly equipped itself with all the tools required to dive pell mell into the export biz. Besides, it realised a fair gross margin of Rs 113 m from this exercise. But the trading in fertilizers brought in an absolute bomb. On revenues of Rs 225 m it realised a segment margin of Rs 201 m. This is simply a fantastic and possibly an implausible margin to obtain. Why then has the management decided to exit the fertilizer biz please?

Keeping in tune was revenues and margins from investment activities. On revenues of Rs 721 m from investment activities, it realised a margin of Rs 623 m. This is really far out stuff man! The investment activities appear to have been concentrated in the buying and selling of debt securities. The 'unallocated revenues' gave rise to a gross margin of Rs 175 m. Overall these guys are a bunch of geniuses, that is for sure. But how come they could not do a similar in the preceding year please?

A twist to the tale of revenue generation

There is however another twist to the tale of how the revenues were generated. Now if one looks at the schedule detailing the breakup of 'sales and other business income' for the year, the picture is rather different. The biggest revenue grosser is 'export sales' at Rs 1.03 bn. The interest on bonds, ICDs and FDRs raked in another Rs 751 m. Income from shares and mutual funds clocks in at Rs 174 m. The sale of fertilisers (retention price support) is a negative Rs 16 m! But the figures somehow all add up. What is one to make of all this please? The notes to the accounts also state that the Government of India has raised an interest demand amounting to Rs 1.08 bn on delay of refund of subsidy for VII and VIII pricing periods. No provision has been made for this disputed demand. Separately the company has outstanding demands totalling Rs 1.1 bn under sales tax, VAT and service tax -all of which remain un-provided for. At least it gets to use the money till the cases are ultimately disposed of.

Add to this concoction the mirch masala in the form of 'Other income'. As stated earlier the receipts under such income simply accelerated faster than an Formula 1 car to Rs 350 m. The breakup of this figure is fairly illuminating. The biggest contributor is 'provisions no longer required' of Rs 242 m, followed by interest income of Rs 107 m. The latter is very explainable given the cash pile that the company is sitting on. But, pray, what exactly was the point that the management was trying to prove in all this? Namely, trying to record a very favourable bottom-line for the year at any cost.

Yet other oddities

What adds to the mystery of sales revenue generation is the trade debtor balances at year end. In 2009-10 the trade debtors at year end accounted for over 100% of the sales revenues. Mercifully for the year under review the trade debtors had dropped to 32% of sales revenues. What adds to the tale is the note in the accounts that certain debit/ credit balances which will have an effect on the profit and loss account are subject to confirmations and reconciliation. What is not expressly stated here is the quantum of such balances, the ability of the management to make good the balances, and the effect of any default on the Profit & Loss account. This is indeed a very wishy washy way of going about compiling the annual report of a listed company. It is irrelevant that the management has an over 60% stake in the outstanding equity.

There are a number of other incongruities in its functioning. Take for example the 'pagaar' drawn by the chairman Abhey Oswal and the executive director Mr Anil Bhalla. In 2010-11 the total remuneration drawn by these two directors accounted for some 57% of all employee cost. In the current year running, this percentage figure could go even more haywire if the new salary scales proposed for the two directors by the Board are implemented. What's more, the wife and son of Anil Bhalla also appear to be employees of the company. Besides, is one to understand that this company is a two man show or what?

At year end, the company has funds to the tune of Rs 15.1 bn locked up in advances recoverable in cash or for value to be received against Rs 8.6 bn previously. These advances probably refer to moneys paid for property to be acquired or some such. The work in progress on the lands on hand is Rs 1.4 bn. On the flip side though, the company had received advances from customers to the tune of Rs 943 m, probably being upfront money for future ownership of built up space. Accounting for incomes and expenses in the real estate business is a tricky exercise as it is.

Its twin siblings

The company has an investment in two wholly owned subsidiaries, Universal Projects FZE for a value of Rs 134 m, and in Oswal Engineering Ltd for a value of Rs 0.1 m. Both these businesses are based out of the UAE, but for what reason it is not stated. The parent has not provided a brief statement of the financials of the two siblings. But, apparently, they are as yet not up to any tricks of any sort as yet. Suffice to say that the revenues of the consolidated company are the same as that of the standalone entity. In a sense it is nice feeling that the two siblings have as yet to get into the revenue generation mode.

The directors' report of Universal Projects says that the company is looking for a good business opportunity in the international market. During the year it explored various possibilities of acquiring natural resources in the field of mining, power and fertilizers. For the present the company makes do with a share capital base of Rs 133 m, which is counterbalanced by advances for capital purchase of Rs 136 etc. The second sibling Oswal Engineering is at present not more than a shell with a capital base of Rs 0.1 m. But the directors' report here too is in consonance with that of the report of Universal Projects, right down to the last T that is. It has the same lettering along with the same business objectives. Why two companies for the same objective please? One can only hope that the efforts if they bear fruit will be less chaotic than that of the parent.

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.

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