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Aaron Chaze
Kirloskar Oil Engine (KOEL) is being talked of as a strong buyback candidate. But it is odd that unlike other potential buyback candidates, there has not been any movement in the stock. The company also did not bother to pass an enabling resolution at its recent annual general meeting indicating its disinclination towards the same.
But the possibility of a buyback in this stock is very much there. The company has large free reserves, a reasonable debt-equity ratio of 0.9:1, and a desperate need to shore up its stock price, which is trading at a 82 per cent discount to its book value. Against the present market capitalisation of just Rs 57 crore, KOEL has net current assets of Rs 361 crore, and investments in companies outside the Kirloskar group with a market value of Rs 190 crore, of which the largest chunk of Rs 147 crore is the value of the five million Cummins India shares that it still owns. Its cash holdings alone are at Rs 27 crore. In addition, it has huge investments and advances made to groupcompanies totalling over Rs 150 crore.
Even though restructuring its equity capital will help its shareholders, there are other pressing concerns before the management. One, high interest costs are cutting deeply into operating profits (96 per cent of the 1997-98 operating profits is absorbed by interest costs), so there is a need to cut down on debt. The company was able to report net profits in the last two years only owing to profits earned from the sale of investments.
Second, it has problems with some of its subsidiary companies like Shivaji Works (SWL), which alone owes Kirloskar Oil Engine Rs 75 crore, and is bankrupt. Kirloskar Ferrous, another group company, is also making losses, but still received fresh funds worth 45 crore from Kirloskar Oil Engine. Third, there is also a constant need for funds for KOEL's own diversifications, the most recent being the joint venture with Denso Corporation of Japan for manufacturing radiators and car air-conditioners. And lastly, there has also been aballooning of working-capital requirements in the last one year, owing to an increase in book debts to Rs 196 crore and a reduction in payables.
Despite the alternative uses for its cash, the company will be well advised to contemplate a buyback. The Kirloskar group companies' constant diversion of funds has long been frowned upon by the equity markets, and now is the time to make amends. The shareholders of KOEL have not seen a penny of the Rs 245 crore that the company has received as extraordinary profits from the sale of some of its investments in the last two years, except for a marginal 10 per cent additional dividend over the 25 per cent paid. The company has kept the 25 per cent rate unchanged for the previous five years.
ESAB India
For once, the tables were turned on Esab India. Ever since the slowdown in the steel, auto and bearings industries began, the difference in performance between the Indian and multinational companies catering to this sector only widened in favour of themultinationals. The same was also true for the two competitors in the welding electrodes and consumables industry, Esab India and Advani Oerlikon (Ador). Till last year, the performance from Esab India has been superior in terms of both revenues and profits. But in the first half of the current year, buoyed by a surge in exports, Advani Oerlikon has reported a better performance. Ever since the domestic market for welding equipment and consumables began to contract, the company started successfully focusing on exports. For the first half, revenues from exports have increased by 48 per cent.
Just the opposite happened with Esab. This company also exported to Esab AB's (its Swedish parent company) subsidiaries overseas, but offtake here has now begun to slow, which has affected its growth rates. In addition, the company has been facing labour problems, which has reduced output (even Ador has reported some labour trouble at the start of the second half). For the first half, Esab India has recorded a fall inrevenues by 11 per cent, and a fall in net profit by 36 per cent. While Ador has recorded an increase in revenues by 9.4 per cent, its net profit recorded only a marginal fall by 3 per cent. The Ador stock has stabilised around Rs 23, while that of Esab India has stabilised around Rs 75.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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