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KEC International: Not a well-oiled business - Outside View by Luke Verghese

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KEC International: Not a well-oiled business
Nov 27, 2013

A company with meandering businesses and cross border operations by the score, and the many fallouts of its humungous operations are there for all to see

A global operation

The front pages of the annual report proudly advertise that the company has a global presence and boasts offices in 48 countries across the globe spanning all continents except the Arctic and the Antarctic. As is the wont with all RPG group companies, it makes do with a rash of add ons---six direct subsidiaries, 15 indirect subsidiaries, and 16 jointly controlled entities. Four of the direct siblings are foreign incorporated as are all the indirect siblings and two of the jointly controlled entities. These entities feature in the consolidated statements. The company earned forex of Rs 25.6 bn during the year while expending Rs 16.8 bn of the same to earn its keep. It has a presence across six business verticals from power transmission to power systems, to cables to telecom to railways and water. It is an infrastructure, engineering, procurement and construction (IEPC) company, and is the flagship company of the RPG group. It now operates under the domain of Harsh Vardhan Goenka (HVG) the elder beta of the late Rama Prasad. It was acquired by the RPG group from its former promoters, the Kamanis, in 1982. Since then KEC International has also grown through acquisitions including the acquisition in 2010 of the global operations of SAE Towers - one of the largest producers of steel lattice towers--whose India operations-SAE India- is now a division of the company. The latter makes transmission poles.

The company currently makes do with nine plants including a plant each in Mexico and Brazil. The company literally commenced corporate life by supplying transmission towers for power projects which for long was its only line of business. It now has a very broad canvas to paint on-a presence across six business verticals. The power transmission vertical which is the oldest and the largest manufactures transmission towers and undertakes their installation, the power systems division is the second largest vertical and offers complete solutions from concept to commissioning for air insulated and gas insulated substations. The cables division which I think is an amalgam of group companies such as The Asian Cables Corporation, UPCOM Cables, Karnataka Telecables and innumerable other offshoots, manufactures a wide range of power and telecom cables, the railways division which has a presence in all railway construction areas, the telecom business which lays optical fibre cables and installation of microwave and GSM and CDMA equipment, and the water business which constructs sewage water treatment systems, and canal and water system civil works for thermal power plants. It is also nice to know that this HVG group company has actually chalked out an agenda.

The financials

This company is considered the flagship of the RPG Harsh Goenka group. It is a big operation alright what with the standalone company toting up net revenues from operations of Rs 55.9 bn and other income of Rs 206 m. The corresponding figures for the preceding year were Rs 46.04 bn and Rs 851 m respectively. The net revenues from operations rose 21.4% over that of the preceding year. The biggest constituent of the revenues is the income from turnkey contracts (transmission and distribution and, others) of Rs 39.17 bn or 68.3% of all gross revenues followed by towers and structurals and, cables of Rs 16.5 bn or 28.8% of all gross revenues. The two together collectively brought in 97.1% of all gross revenues. Sales of services, and, other operating revenues brought in the balance. The contribution of the latter which is made up of scrap sales, export incentives and others brought in a sizeable Rs 1.08 bn. How this income dovetails into that of the main body of the revenues is not quite known. Though the company appears to be involved in different verticals, it is of the view that it is primarily engaged in the engineering, procurement and construction (EPC) business, and as such not displayed the segment wise break up.

But, in any event, there was a drastic drop in the profitability at the end of the day.  The pre-tax profit before exceptional items fell sharply to Rs 438 m from Rs 2.56 bn previously. To add to its woes the other income fell to Rs 206 m from Rs 851 m previously. (In the preceding year it booked a large profit from the sale of fixed assets). The fall in the pre-tax profit was due to two major operational factors. The cost of inputs including erection and subcontracting expenses rose to 79.4% of net revenues from 77.6% previously. The cost of such inputs is quite lethal and this factor holds the purse strings to the company’s wellbeing. An item called other expenses grew 40% to Rs 6.3 bn. The big ticket increases under this head came from commission, insurance, bad debts, forex loss, bank charges, etc. These are tricky items of expenses indeed, and hence difficult to put a finger on when the next set of accounts is prepared.

Some balance sheet pointers

The distinguishing feature of this company like all RPG group outfits is the small capital base of Rs 514 m but backed up by bountiful reserves and surplus of Rs 9.25 bn. The vast bulk of the reserves are made up of surplus lying in the P&L account. But borrowings at Rs 10.96 bn are hefty on a net book enterprise value of Rs 51.7 bn. But the most distinguishing feature of the company is that the group company investments are limited to a book value of only Rs 64 m! It is another matter that the company boasts a host of step down siblings and affiliates in keeping with the RPG group traditions. Even the loans that it has extended to group companies of Rs 989 m are within manageable limits. (It is not readily known if the company charges any tithes on the loans). It has inter-se transactions with myriad group companies on revenue account both in terms of sales and purchases, but collectively, the sales tote up to Rs 1.45 bn, and the purchases tote up to Rs 401 m. And, that is indeed a relief.

The interest payout on account of accumulated debt is also a point to note. Needless to add the company operates on a large debt load which at year end amounted to Rs 10.9 bn against Rs 6.78 bn previously-up Rs 4.12 bn This sizeable increase appears to be a factor of the significant jump in gross current assets during the year, and which in turn reflects the higher revenue accretals. The interest payout debited to P&L account amounted to Rs 1.64 bn against Rs 1.33 bn previously. How the company runs up such a large interest payout is not very clear. True it has large trade debtor outstandings of Rs 26.2 bn but this is partly negated by advances from customers of Rs 4.18 bn and dues to customers of Rs 1.4 bn. Further, the trade receivables at year end are almost matched by trade payables of Rs 22.26 bn. This amount again is negated by gross amounts due from customers of Rs 1.9 bn. Besides, the gross current assets at year end are only marginally higher than the gross current liabilities. This too would have helped save moneys on working capital costs.

But the cash flow statement has a pointer to why the company has such a debt overhang. In 2012-13 the company generated minus cash from operations. That is to say it was out of pocket on its day to day operations, and perforce had to borrow at the end of the day. It was out of pocket to the tune of Rs 1.5 bn against a positive flow of Rs 4.4 bn previously. Since the company also spent over a billion bucks on capex, and add to it the interest outflow, and it had to borrow big sums to balance the books. In effect the dividend payout was also made possible by dipping into the additional borrowings.

The siblings

The parent makes do with six direct siblings and one joint venture. It has no stake in the JV and the collective investment in the siblings’ amounts to peanuts or something. The consolidated statement has however very graciously provided the brief financials of 21 siblings and or step down siblings-and the financials make for an interesting mix.  Of this list, 19 companies are foreign born-and 17 of them are capitalised in US greenbacks. The other interesting feature is that 10 of the siblings’ have the prefix SAE attached to their nameplates and another nine have the KEC label attached to their nameplates. Just one sibling KEC Power India Pvt Ltd is incorporated in Bharat. Only six of the siblings have generated any revenues during the year. Significantly, none of the 21 companies declared any dividend. But the parent has shown dividend income of Rs 52 m as received from its siblings.

The largest company in terms of paid up capital is SAE Towers Holdings based out of the USA. It has a paid up capital of Rs 1.43 bn. It appears to be the holding company of all SAE companies, and also did not generate any revenues. But the interesting factor here is that it generated a pre-tax profit of Rs 793 m. With no revenues or income to show it beats me how it generated a pre-tax profit - but let that be. The company with the highest revenues at Rs 5.7 bn is SAE Brazil followed by SAE Mexico with Rs 4.5 bn and third in line is SAE USA. All the companies with the SAE label are operationally profitable.

KEC Investments Holdings Mauritius appears to be the holding company of all the KEC group companies incorporated abroad. It has a paid up capital of only Rs 32.5 m. The KEC companies operate in three of the countries where SAE also operates. Only one KEC company -operating out of the UAE-- generated any revenues. Two of the KEC companies operating in the USA generated pre-tax profits while yet another generated a pre-tax loss. How such tricks are possible is beyond me. Interestingly, KEC Transmission LLC USA has only a whisper of a capital base -too small to be even mentioned here --and yet generated a pre-tax of Rs 152 m. The same is true of KEC US LLC USA. Anything goes it appears.It is better to keep away from such companies where the composition of the revenues and expenses and the makings of the myriad siblings are difficult to fathom in the first place.

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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