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Aaron Chaze & Shishir Asthana
Weakening tea prices hampered the second-quarter profit growth of most companies engaged in that business, and Eveready Industries was no exception. In the second quarter, profit growth was negligible, against the first-quarter growth of 50 per cent. Operating margins were also lower by almost two percentage points. second-quarter revenue growth was negative, versus the corresponding period.
It is understandable if the stock reacts negatively to the weakening of selling prices, since tea contributes to 25 per cent of revenues. But the Eveready stock lost favour with the stock market a long time ago. The much-improved growth figures for 1997-98 did nothing to improve valuations. Even the sale of Nestle shares that brought in an extraordinary cash flow of Rs 14.75 crore did not enthuse the market.
During 1997-98, the company reported a 19.5 per cent increase in revenues. That performance was buoyed by both sharply rising tea prices as well as weakening zinc prices, which is a major raw material for its drycells batteries business, which earns 60 per cent of its revenues. Capacity utilisation also improved last year for almost all its lines of business.
The first half is usually the better one for the company, and it earns most of its profits at this time. So, if profit growth is muffled now, it is unlikely to improve during the rest of the year. But more than that, the reason the stock of a company that is performing well loses value is because of a declining ability to service its capital.
Though the dividend payout is high at 30 per cent, the return on capital employed is too low for comfort. For the last financial year, the ROCE had dipped to 11 per cent, but even by a conservative estimate, the cost of capital works out to 18.4 per cent, reflecting the extent to which the company has been giving poor returns on its capital employed. The return on net worth also is a poor 8 per cent.
Hindustan Organic Chemicals:
Hindustan Organic Chemicals (HOC) has performed better than most other companiesin the chemical industry by improving its operating margins as well as recording the highest-ever level of production and sales in 1997-98. However, owing to higher depreciation and interest charges, the company has posted a loss of Rs 5.09 crore, against a profit of Rs 9.59 crore in the previous year. Despite the loss, the company paid a dividend of 5 per cent, further eroding its reserves.
The main problem is the high cost of debt. Interest cost has increased from Rs 9.39 crore to Rs 28.82 crore. The reason for this staggering increase is a 17.5 per cent Rs 99.95-crore loan in its books. During 1997-98, the company has increased its other debt by Rs 50 crore and fixed deposits by Rs 11 crore. These have further resulted in worsening of its financial situation. In spite of the large debt, the company has not provided for a bond-redemption reserve, owing to want of a book profit during the year.
In spite of its own tight financials, HOC continues to feed its subsidiary, which is a BIFR case. As per theauditors' report, HOC has not charged any interest to its subsidiary Hindustan Fluorocarbons for the years 1992-93 to 1994-95 and 1996-97, and has also waived interest thereon in the past. The auditors' report further says that HOC has not provided for accumulated losses for its subsidiary, which stood at Rs 40.17 crore for the year ending 1997-98, in which the company has contributed Rs 11.06 crore as capital and Rs 26.10 crore as unsecured loans. The company has also not charged interest on the loan of two PSUs for the year 1996-97.
Apart from these benevolent acts, the company has made a mess of its balance sheet, as pointed out by the auditors. HOC has violated AS10 by recording the value of the plant that has been retired from active use and held for disposal at a depreciated value, as against the standards of recording it at lower of net book value and net realisable value. Further, the amounts realised on partial disposal of the said plants are shown under the head `Loans and Advances', as againstgiving the treatment in the revenue account.
An even more serious violation is that of AS5. The company has treated salary, wages, bonus and allowances (Rs 1.19 crore), trade discount, including DPC reversal (Rs 2.23 crore), and interest as prior period items (Rs 0.54 crore) in the `Reserve/Provision no longer required/prior period and extraordinary item', instead of treating it as an ordinary expenditure of the year. The report further mentions that the accounting policy in respect of rate conversion of foreign currency on export/import is also not in accordance with AS11.
With such kind of accounting policies and financial health, the company is getting the discounting it rightly deserves. Unless the balance sheet is cleaned up, even a good performance will be ignored by the stock market.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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