October 6: Dr Reddy's Laboratories has surprised everyone, not by its performance but by suddenly becoming transparent. The sudden fit of disclosures forces one to ponder over the possibility of some underlying motive to the move such as an equity dilution. Or could this merely be a step towards becoming a better corporate citizen?

The company in the second quarter has recorded a growth of 35 per cent as compared to the same period in the previous year. This does look impressive when looked at in isolation. However, when the second quarter sales are compared to that of the first quarter there is a growth of only 2.28 per cent.

In fact a comparision of domestic formulation sales between the first and the second quarter of the current fiscal show that there was a drop in the second quarter. First quarter sales for the current fiscal stood at Rs 38.42 crore, while the second quarter sales are Rs 37.47 crore.

Further, a drop in sales is also noticable in the cardio-vascular segment, which has dropped from Rs 8.16 crore to Rs 5.49 crore between the two quarters. Also, sales of its brand "Omez" has dropped from Rs 8.93 crore to Rs 6.32 crore.

However the drop in these segments has been cushioned by a growth in anti-infectives from Rs 7.82 crore to Rs 9.83 crore. Growth was also possible from launch of the acquired brands namely Riflux, Clamp and Becelac which contributed Rs 6.89 crore to the turnover.

But for a growth in exports of formulations and diagnostic segment the second quarter would have recorded a negative growth rate than the first.

ITC Bhadrachalam

ITC Classic is not the only NBFC in the ITC group which is in trouble. A subsidiary of ITC Bhadrachalam namely - ITC Bhadrachalam Finance and Investments (IBF) is also in deep trouble. The restructuring of IBF with ITC Classic could not materialise and this compounded problems for IBF. The parent is also in no position to help either. The proposed expansion project of ITC Bhadra - to manufacture coated packaging board along with a co-generation project has been delayed by ten months. The project has also suffered a cost overrun of Rs 108 crore. The company did not perform as per projections made at the time of its rights issue in February 1996. In fact against the projected PAT of Rs 66.93 crore, it managed a PAT of only Rs 16.72 crore. Naturally, unlike some "better managed companies" ITC Bhadra was not able to extend financial support to the subsidiary.

IBF which had managed a meagre profit of Rs 0.91 crore in 1995-96, posted a loss of Rs 17.56 crore in 1996-97. The recovery of dues has also been a major problem. The lease and hire-purchase debtors outstanding for more than six months and considered good amounted to Rs 9.43 crore (Rs 1.56 crore) and trade debtors amounted to Rs 17.04 crore (Rs 2.05 crore). Despite the liquidity problems, the company has acquired 99.98 per cent equity of a private company at Rs 5025 per share to acquire the office space in Mumbai by way of tenancy rights. Now is it not difficult to understand the logic of a cash outgo Rs 5 crore to acquire mere tenancy rights in Mumbai, when property could easily be bought outright at this price.

A subsidiary of IBF - ITC Bhadrachalam Securities is also yet to start operations and is considering giving up its NSE membership. This should result in much needed cash flows for the parent.

More importantly ITC Bhadrachalam is now trying to source funds to finance its cost over-runs. Besides, with expansions going on stream, it will be difficult for the parent to finance the subsidiary. Thus with the overall scenario for NBFC's also bleak, the subsidiary could well be in for a very tough year ahead.

Wimco

Wimco is an accepted master in camouflaging its accounts and the last financial year 1996-97 was no different. According to the management, the RoE (PAT/Average networth) for 1996-97 is just 8.9 per cent (without adjusting for auditor's qualifications). This is a clear attempt by the management to mislead investors. Of the reserves of Rs 138.03 crore, revaluation reserve accounts for 89 percent. Now financial norms clearly prescribe that revaluation reserve cannot be included in the calculation of net worth. The reason for the management overlooking such an obvious point seems to be the loans that the company has to reapy within a year. The amount of Rs 27.17 crore accounts for 60 per cent of the net worth and capital of the company is Rs 29.87 crore. Thus Wimco will undoubtedly find it hard to repay the loans as it simply does not generate sufficient cash.

Furthermore a large chunk (almost 80 per cent) of the unquoted investments which account for 99.4 per cent of total investments, have been put into subsidiaries alone.

The auditors have also qualified the accounts for a non-provision of diminutions in value of investments which the company has shown at cost (amt:Rs 20.94 crore) and loans and advances due from subsidiaries/group companies and AoPs amounting to Rs 19.53 crore. The stock view of the management is that decline in value of investments is temporary and the dues are recoverable. It is pointless going into other qualifications made by the auditors as the company is not considered investment worthy by the institutional investors. It is a pity that a company like Wimco should get away scot free with a few auditors qualification despite following such deplorable financial practises.

(With contributions from Shishir Asthana and Urmik Chhaya)

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.