Igarashi Motors: Not quite motoring on - Outside View by Luke Verghese

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Igarashi Motors: Not quite motoring on
Dec 22, 2010

Crying wolf of sorts

The President of Igarashi Group , Mr. Keiichi Igarashi, in his annual pontification addressed to the dear shareholders of the Indian company moans that 'in my lifetime I have not seen a devastating period like FY09 and at the same time, I have a not also seen such a rapid turnaround in FY10.' The Chairman of the Board, Mr. K.K. Nohria (the former top gun at Crompton Greaves) pens a similar note of sorrow and disbelief in his own message to the shareholders. The gross liabilities at end FY10 exceeded the gross assets (before adjusting against reserves) to the tune of Rs 269 m against Rs 296 m in the preceding year. Igarashi has been present in India for the last 18 years, as a 100% Export Oriented Unit, with its manufacturing facilities located in Tambaram, Chennai. The foreign promoters hold 60% of the company's voting stock, through two holding companies, Igarashi Electric Works, and Igarashi Electric Works H.K. Considering that the Indian subsidiary has been around as a legal entity for only around 18 years or so, it is not really much of a lifetime to fall back on, to compare on performance yardsticks.

The how and the what

The company is programmed to manufacture Electric Micro Motors, Rotor Assemblies and an item called 'Others' for the automotive industry (its principal focus being the Asian geography and the small car/midsized car market). The capacity to manufacture Rotor assemblies appears to have been discontinued in FY10. Granted Its contribution to overall sales is miniscule, but there is no mention in the directors' report as to why this product line which contributed Rs 83 m to overall sales in the preceding year, has suddenly been switched off. It is obviously not a matter of any significance. It also bought finished products of a fairly large value, for resale, in the preceding year. From the looks of it, this company is very clearly a remote controlled and closed ended operation. In the sense that the bulk of its raw materials and components consumed, is imported and in all probability on a captive basis at that. The manufactured output is also sold to a consortium, made up of the holding company, a fellow subsidiary, and associates, all of whom report to the same patriarch. In other words, the Indian operations are probably nothing more than a rubber stamp undertaking, merely following the dictates of its principal shareholders. The upshot is that, both the raw materials, and the end products, do not have to be 'sourced in' or 'sourced out' in a manner of speaking.

An interesting take on its state of affairs

In FY09 the company clocked in a gross turnover including 'other income' of Rs 2.8 bn, and reported a pre-tax loss of Rs 587 m. The gross revenues included a sizeable other income of Rs 159 m. In FY10 it recorded a sharply lower gross revenue including other income of Rs 1.6 bn, (following an almost total breakdown of its trading operations), and clocked a profit before tax of Rs 37 m. The other income for this year toted up to a mere Rs 5 m. In both the years, the export sales accounted for over 95% of gross sales, based on the details furnished of the breakup of sales.

This is where the story gets interesting. In FY09 the company's revenues emanated from manufactured items, and sales of bought out products. Manufactured sales brought in revenues of Rs 1.4 bn, or 56% of overall revenues of Rs 2.6 bn, while sales of traded bought out items wrung in Rs 1.1 bn of 44% of all revenues. The total value of raw materials and components consumed amounted to Rs 1.1 bn, and 83% of this was imported. Of the total purchase cost of traded bought out items (mostly components and parts) of Rs 1.1 bn, close to 70% or Rs 794 m by value was imported. As one can see, both the purchase price and the sale price of traded items were almost identical. What was the meaning of this seemingly off-color deal please? And, besides, what was the contribution of exports in overall revenues? That depends on which schedule one looks at. If the schedule recording the earnings in foreign currency is the right indicator, then exports accounted for 86% of total revenues. But if one goes by the schedule showing sales by geographies, then exports brought in 96% of all sales. Either way, exports rank as prima donna in the revenue basket. In this two way revenue transaction jigsaw puzzle of purchases and sales, it also buys finished goods from group companies, and sells finished goods to group companies.

The forex muddle

Given the two way forex transactions of over Rs 4 bn in FY09, the company hedged its forex payables and receivables, and as luck would have it, became a cropper in the process. It booked forex losses of Rs 415 m. How did the company manage this unintended feat of gross negligence? (Wiser from this bitter experience, the company avoided taking forex positions in FY10.) The forex loss hemorrhaged the company badly. But, a big part of this forex loss may also have arisen on the position taken on its trading sales portfolio, which netted the company not a dime as value addition, in any case. Besides, as stated earlier it has assorted dealings with group companies on revenue account. It also purchased finished goods worth Rs 359 m from group companies (this purchase is shown in a separate schedule as compared to the purchase of traded items) and sold goods worth Rs 1.3 bn to them. These sales accounted for 50% of all sales during the year. The group companies that it deals with consists of the Japanese holding company, three fellow subsidiaries based out of Hong Kong, USA, and Germany, and three affiliate companies based in India. (Of the three affiliates that it has disclosed under 'related party disclosures' it has an capital stake in only one, and this one goes by the name of IJT Plastics and Tools. Presumably then, the other two affiliates are subsidiaries or affiliates of IJT Tools, or some such. Strangely enough, inspite of having an equity stake in a JV called Bosch Electrical Drive s- this company is not shown as an affiliate. Probably Bosch Electricals ranks under some other unknown nomenclature.)

Knew what was coming

The point here is that the company knew what was brewing in FY09, and was very well entrenched to take care of any unwarranted eventuality, given that the group is remote controlled at every stage of the operation. Yet it chose to step on the accelerator and resorted to traded sales in a big way. The traded goods that it purchased were largely imported, and they were then re-exported back at the same price. It also appears to have other finished goods separately and perhaps resold these too. It would appear quite evident that someone or the other was the clear winner here in this senseless merry-go-round, even if the Indian subsidiary was the loser. The wounds were therefore largely self inflicted. Boxed into a corner, the company then partially made good the loss and restored cash flow by a tad, through the sale of investments .This led to an inflow of Rs 197 m into the cash starved box.

The situation was only slightly different in FY10. Different to the extent that it resorted to only limited traded purchase/sales. In this year it purchased finished goods worth Rs 146 m, and then sold these goods at a marginally higher price of Rs 148 m. The hold of the group is as pernicious as ever. Imported raw materials and components constituted 89% of all raw material consumption. It also purchased Rs 359 m worth of goods from group companies (though there does not appear to be any separate evidencing of this purchase elsewhere in the balance sheet.) But, what made this year special was that it earned 100% of its revenues from sales to group companies. It also extracted a longer credit line for what it purchased, but concurrently had to part with a longer credit line for what it sold. But the bottom-line here is that it still ended up the loser, because what it sold was far more humungous in value than what it purchased. What it did do in FY10 was to slash borrowings by Rs 308 m and pare overall debt in the process. Given the very minimum that the management did to bring about some semblance of order in FY10, it does not appear to carry the merit that the management is crowing about.

The other asides

The management also does not give much importance to the fact that the company's liquid investments of Rs 143 m, is on idle mode, from the dividend point of view. And, what exactly is the role of its affiliate, IJT Plastics, and the two others going by the name of Agile Electric? One also cannot quite get a more holistic fix on the agenda, as the company has not furnished even the brief financial working results of the four fellow subsidiaries, which are scattered around the globe.

In the context of the company's functioning, it is a trifle difficult to swallow the revelation that one of the Oracles of Dalal Street, Mr. Ramesh Damani, is one of the top ten shareholders of the company holding 45,450 shares, accounting for 0.33% of the outstanding stock. Or does Mr. Damani have a different take to the goings on?

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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