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Kirloskar Elec: Strong foundations, indifferent mgmt - Outside View by Luke Verghese
 
 
Kirloskar Elec: Strong foundations, indifferent mgmt

The metamorphosis over the years

Kirloskar Electric, the Bangalore headquartered company, of 63 years vintage, is the maker of fine branded electrical equipment, including motors, alternators, generators, transformers, switchgears, diesel generating sets, circuit breakers, switchboards, and a few other mundane items. It claims to be the only private sector company to be working with the Nuclear Power Corporation to make special motors. It also makes electrical systems for the Reva Motors Car Company. The manufacturing is spread out over 11 factories across Bangalore, Mysore, Hubli, Pune, Tumkur, and Kolkata. However for almost a decade, starting in the mid 1990s, and spilling over into the 21st century, its operations were on low voltage mode, due to a variety of reasons, including a few very avoidable ones. In its second avatar it appears to be re-emerging phoenix like, and taking to the skies once again, or so one fondly hopes. The merger of Kaytee Switchgear and the demerger of Kirloskar Power Equipment led to a considerable increase in its wellbeing, the company states. And, in the fitness of things, the company’s long time great helmsman, Mr. Vijay Kirloskar, in his letter to the shareholders, states that he is pleased to announce ‘the impressive performance’ of the company for the FY10. Given the impressive performance, why then the company’s decision to provide only the abridged working results of the company? A corporate’s life should be an open book, alteast to the extent of meeting the full disclosure requirements as mandated by the Companies Act, especially when it has minority shareholders on hold, and is listed for trading on the Indian bourses. Sadly, that is not to be.

First off the mark

And taking a cue from its changing fortunes, Vijay Kirloskar himself is first off the mark to reap the whirlwind in the making. The board has approved a doubling of his salary from Rs 1 m a month to Rs 2 m a month, along with the attendant benefits, as also the doubling of his entertainment allowance to Rs 2 m per annum. (His total remunerationfor FY10 was an impressive Rs 21 m.) The ostensible reason proffered for the hike in salary ‘is keeping in view the responsibilities placed on Mr. Kirloskar and his contribution, experience and education’. Big deal! Conveniently forgotten is the fact that it was under his tutelage that the company almost went belly up in the first place. But with the Kirloskars having a 49% holding in the voting capital, anything goes. He also got plenty of help from his distaff side at just the right moment in time, in ‘anteing up’ his remuneration package. His wife Meena was appointed to the remuneration committee in March 2010, and his reappointment was approved by the board at its meeting held in early July 2010. His wife however made do with only a paltry remuneration of Rs 25,000 for her troubles, though their two daughters got a better deal, with a million bucks, and a half a million bucks, each, for their contribution to the value addition. Shareholders of all hues however have to wait a little longer to get their fair share of the apple pie. The directors have decided to forgo dividend in order to conserve resources for the company’s growth. (Vijay is actually the biggest loser here as he holds over 3.8 m shares in the company). Readers may also like to know that the company is in hock to the extent of Rs 95 m, being arrears in payment of dividend on cumulative preference shares, going way back to April 2004. These dues apparently rank lower in the list of priorities of the management.

Abridged statement of accounts

Abridged accounts or not, the notes to the accounts make for fascinating reading. It has a wholly owned subsidiary based out of Netherlands called Kirsons BV, which apparently does very little except rake up losses each year. The shares in this company were incidentally acquired at a price of Rs 800,000 per share. This subsidiary in turn controls two manufacturing subsidiaries based out of Germany. One of these subsidiaries appears to be on the performing list, while the other appears to be on the non-performing list. From the hazy details made available in the various annexures, it also has two associate and one joint venture company, with the associates being based out of Malaysia and Bahrain. The joint venture company which is based in India had its name struck off by the Registrar of Companies. It has an interest in a company called KEC North America which has gone fully belly up, with its outstanding liabilities not written off, but fully provided for. The shares in this company were acquired at a price of Rs 61,600/share. What exactly did the management see in this company please? Then there is another item called Kirloskar Kenya, but its interest in this venture is not readily ascertainable. One of the notes to the accounts says that barring its investment in KEC North America, all other investments have fetched returns. This is questionable. The gross book value of the company’s investment portfolio is a cool Rs 870 m (net book value of Rs 857 m, after provisions) and it earned a dividend of only Rs 140,000 on this last year! This cannot be called a return on investment even by any hallucinogenic stretch of imagination.

The many companies that make up the system

There are also another 11 enterprises over which key management personnel and their relatives are able to exercise significant influence. Almost all these companies are recipients of the parent’s good heartedness. Some of the bigger recipients of its kindness are Kirlsokar Computer Services, Kirloskar Power Equipments, and Vijay Farms. Kirloskar Computers may well be the in-house consultant on all software matters and not necessarily doing a very good job of it. The SAP integration is facing bottlenecks and a new version of the software is under installation. And such was its foresight that it even furnished a guarantee for the redemption of preference shares of Rs 20 m issued by its now defunct group brand, Kirloskar Investments and Finance. With accumulated dividends, the claim has now escalated to Rs 41 m. The company’s liability to honor its commitment is now being contested in the courts of law.

The many qualifications

Some of the notes to the accounts are so unbecoming of a company its size and vintage that it makes one sit up and think what management practices it has imbibed and inculcated all these years when earning its daily bread. The qualifications of the auditors are onerous, if that is the right term. The procedure for physical verification of inventories needs to be improved says one observation. The company’s internal audit system needs to be strengthened says another. The moneys given to group firms are advances and not loans according to the management say a third observation. Some of the advances have been administered to companies which are on steroids. One of the notes is rather intriguing. The note says - the terms and conditions on which a fixed deposit was accepted from a director is prima facie not prejudicial to the interest of the company. What in heaven’s name is this? Another lucid observation states that the company has raised Rs 304 m on short term basis, which has used for long term investment. How can any company function effectively with such mannerisms?

There are several other qualifications and notes, both from the auditors and from the management, which may have the effect of raising the hairs on your spine. The management on its part states that the confirmation of balances from certain debtors, deposit accounts, loans and advances, creditors etc is awaited. Yet other such balances are under review and reconciliation. The difference if any is not expected to be material is its perceived wisdom. Confirmation is an ongoing process in the management’s esteemed view. The capital work in progress includes Rs 34 m relating to assets which have not been installed for several years is yet another note. These assets are now being disposed of for scrap value. As if all this were not enough, it has a number of central and state government related indirect tax cases worth Rs 134 m under dispute and stuck at various stages of hearing.

Somehow, in the midst of this ongoing chaos, the company is also able to grow and hopefully prosper.

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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Equitymaster requests your view! Post a comment on "Kirloskar Elec: Strong foundations, indifferent mgmt". Click here!

3 Responses to "Kirloskar Elec: Strong foundations, indifferent mgmt"

BNRAO

Apr 14, 2013

I desire to deposit my retirement benefits with max security and yeild. Can I choose KEC?

Like 

Nat

Dec 30, 2010

Was looking for some information on whether to place money with this company as fixed deposit. Glad I came here. Am obviously going elsewhere now for where to park my hard earned money! I thank you for this incisive analysis.

Like 

Amit

Dec 11, 2010

Nice article Mr. Luke

haven' seen many of these kind in the market in comparison to buy report or recommendations on the companies.

Needless to say , excellent analysis of the financial statements & Management's seriousness to the company / shareholders.

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Equitymaster requests your view! Post a comment on "Kirloskar Elec: Strong foundations, indifferent mgmt". Click here!
 

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