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Bimetal Bearings: Unable to get its bearings right - Outside View by Luke Verghese
 
 
Bimetal Bearings: Unable to get its bearings right

It is indeed a pity that a company with a high branding and as bright a product line as it can afford to have is simply not biting the bullet and making a go of it.

A small time player

One of the older warhorses that comprise the Amalgamations group, the report under the scanner is the 52nd annual report of the company. It makes bimetal bearings presently under technical collaboration from Daido Metal Company of Japan. (It also has a privately held joint venture going by the name of BBL Daido Pvt Ltd with the same collaborators). The production gets rolled out from its four factories based in Tamil Nadu. For the uninitiated, bimetal bearings are made by the bonding of two sheets of different metals with each metal possessing different properties. The target user is the same -the automotive and the tractor segments, and engine manufacturers. Companies manufacturing bearings come under the nomenclature of ancillary units -a prop- up of the mother unit. Capital Market magazine features the names of seven listed bearings units in its Corporate Scoreboard column - besides Bimetal there is ABC Bearings, Fag Bearings, NRB Bearings, NRB Industrial Bearings, SKF India and Timken India.

In terms of revenues the largest player of the seven companies by far is SKF India with revenues of Rs 22.3 bn in 2012-13, followed by FAG Bearings with revenues of Rs 14.5 bn. The revenues of NRB Industrial Bearings are not stated but of the six whose revenues are available, Bimetal Bearings is the second smallest with revenues of Rs 1.6 bn. The Amalgamations group moto is to 'hasten very slowly' and that precisely is the direction in which this company too is plodding on.

Loaded with warts and all

Like all ancillary units this company too comes loaded with its warts and all. High capital costs - gross fixed assets of Rs 1.1 bn at end 2012-13 generated nett cumulative revenues of only Rs 1.6 bn. The net manufactures sales of Rs 1.57 bn generated an asset to turnover ratio of 1:1.45. I am not clear if there is any industry yardstick on this measure. The industry has to make do with large working capital outlays due to the need to maintain high inventory levels on the one hand, and the need to give extra trade credit to extract revenues on the other. Mother units take their own time to pay up. This is a part and parcel of the working of this industry. The inventories at year end amounted to 33% of the nett revenues (net of excise) given the variety of bearings that companies have to produce and stock,  while the trade receivables anted up to another 20% of gross revenues (including excise). As a matter of fact the trade receivables at year end at Rs 349 m towers over that of the trade payable of Rs 110 m. This then is a cross that the industry has to bear. In this particular case the company also boasts of inter-se deals involving sales and purchases on revenue account with sundry group companies. It sold goods worth Rs 174 m to group companies. The largest individual group company sales were to its joint venture BBL Daido Pvt Ltd, followed by Simpson & Company, Speed-A-Way Pvt Ltd, and George Oakes Ltd. The company also affected purchase of goods worth Rs 3.6 m from group companies including Wallace Cartwright, IP Pins & Liners, and Addison & Company. There are other deals too-receiving and paying for services for example.

The resulting implication is that the current assets at year end - excluding cash and bank balances-amounted to Rs 1.03 bn which was far greater than the current liabilities of Rs 231 m. For the matter of record the cash and bank balances at year end amounted to Rs 56 m. The large difference between the two has to be financed. Fortunately, given the very sedate manner in which it conducts its operations, there was not much strain on its finances. The debt contracted at year end for both the accounting years was identical at Rs 15 m. The fact of the matter is also that the paid up capital of Rs 38 m is backed up by humungous reserves of Rs 1.33 bn.

Not investing adequately in manufacturing facilities

The bigger issue is that the company goes about its business in a 'convoluted' way in a manner of speaking. It boasts of non-current investments with a book value of Rs 105 m and current investments of the book value of Rs 47 m. Why it groups many of its equity and debenture bond investments under the former category is not known as they have no bearing whatsoever with the main operations of the company. Only an amount of Rs 26 m out of the total outlay of Rs 105 m pertains to investments in group companies (Arkay Energy Rs 2.8 m and Amalgamations Repco Rs 1.5 m in the main) or in joint ventures (BBL Daido Rs 20 m). The investments held under the latter category of current investments--debenture bonds--are identical to the bulk of the investments in the former category. Besides, the dividend yields that it realises from these investments are questionable.

The makeup of the revenues itself is a bit dicey. Besides the sales of manufactured products amounting to Rs 1.72 bn (Including excise) there is minor income from the sale of traded goods. The company also generated large 'other operating revenues' or scrap sales. The latter entry amounts to a very sizeable Rs 54 m and this in turn is further accompanied by 'discounts and rebates' paid out amounting to Rs 20 m. After deduction of Rs 159 m in the form of excise duties paid out, the company achieved nett sales of Rs 1.6 bn against Rs 1.73 bn previously. It is not known whether there is any set pattern for generating scrap sales as a percentage of manufactured sales, and the discounts etc offered on sale presumably depend on market conditions. But scrap sales and discounts etc are critical factors both in the top-line and in the bottom-line calculation. In the drab directors' report to the shareholders the company attributes the decline in revenues to the significant reduction in the off take by OEM manufacturers and in the fall in exports too.

The other income factor

The company also generated 'other income' of Rs 52 m during the year. The principal items that make up this figure include interest on deposit, credit balances no longer required, duty drawback on export sales of Rs 5.5 m, dividend income of Rs 4.4 m, and other non operating income. There is no visible sign on any deposit which would have yielded an interest of Rs 12.2 m. The write back of credit balances of Rs 10.5 m appears to have been resorted to, to beef up the bottom-line-an accounting trick that all companies in distress resort to. Exports on FOB basis at Rs 434 m which led to the availing of the duty drawback-contributed a sizeable 27% of net revenues. There is no knowing whether export sales are ringing in margins or not - even after allowing for duty drawback. The 'other non operating income' of Rs 6.2 m must be juxtaposed with the previous year's contribution of a piddling Rs 0.4 m. The point is that this other income of Rs 52 m accounted for a very sizeable 57% of the pre-tax profit for the year. In the preceding year the other income contribution of Rs 56 m made up only 30% of the pre-tax profit. The higher percentage contribution in the latter year is because the pre-tax profit declined sharply to Rs 91 m against Rs 188 m previously, thanks principally to the decline in revenues. With expenses such as material costs inching up on a percentage basis, and employee benefits, depreciation, and 'Other expenses' also rising - the decline in profits was inevitable.

Whatever be the manner in which the company cobbles together its working results, it released a surprise package during the year on the cash flow front. In a year of declining revenues and margins the company actually generated a surplus cash flow of Rs 83 m from operations against a negative cash flow of Rs 27 m previously. The principal contributors to the change in the cash generation fortunes were the marginal rise in inventories against a sharp rise in this department previously, and the decline in trade receivables as against a sharp rise in this respect previously. Corporate taxes paid too declined sharply as compared to the preceding year.

Consequently, the company 'splurged' on fixed assets creation in a manner of speaking by spending Rs 72 m against Rs 43 m previously. Considering a fixed assets gross block book value of Rs 1 bn, this spending amounts to pedestrian stuff. Besides, the accumulated depreciation on plant and machinery amounted to 70% of the plant and machinery gross block. It looks like that the manufacturing capacity is a bit dated or some such. Why the company is so ambivalent about this status quo is beyond me.

A depressing scenario

It is a rather depressing scenario from the looks of it and it is not for the lack of trying. The company appears to take two hesitant steps forward and then taking a pause if that is the apt phrase to describe the state of affairs. To add to the ridicule the company now states that its shares have been categorised as illiquid by SEBI based on trading volumes in the scrip. SEBI has therefore introduced trading through periodic call auctions in the scrip for illiquid scrips. For the matter of record, the promoters hold close to 75% of the paid up equity.

But to be fair, the company's share price did do a summersault of sorts in the last financial year. It vaulted from a high of Rs 305 to a low of Rs 198 at the NSE - but for what fathomable reason it did so is not known. For those who can spot such arbitrage opportunities the share still holds some promise. But for an investor it would appear to be a total no show.

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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