Sol PharmaThe newsreports on SICOM planning to file a winding up petition against Sol Pharma, reflect the sorry state of controls implemented by banks, as well as by the managements of some Indian corporates.
Sol's directors report for 1996 highlights the fact that it is the largest producer of Pentaoxyfiline (a bulk drug) in the country. Most of the formulations produced by the company are as per FDA guidelines and hence are eligible for exports to US. In the past SOL-Pharma had acquired Sol Drugs, Dexopharma (a small-scale formulation units) and Dakshin pharma and AGIPI chemicals to avail of the various incentives on offer. Interestingly export revenues account for almost 40 per cent of Sol's turnover, which means that the corporate income tax is less by that amount.
While prima facie this augurs well, the company in its zeal to expand forgot to incorporate measures to control its working capital. Sol over the past four years has been maintaining inventory levels of over 100 days. Out of thisthe raw material inventory has been consistently maintained at around two months.
These policies resulted in the company buying excessive stocks of Pencillin G, at a time when the price were extremely high at Rs 876 per tonne in 1996. In 1997, when the price of Pen G fell by 16 per cent, Sol was still saddled with inventories of the previous year.
Interestingly Sol chose to finance its liberal policies through increased loans. Except for preventing the 30 per cent dividend payments, announced by the company in 1996, the banks have hardly helped the company through stricter supervision of its working capital requirements.
The rise in debt: equity to 15:1 bears testimony to the fact that the banks also failed to exercise due diligence. The management of the company has also gone in for investments, worth Rs 16 crore in new technology in 1997, when the need of the hour was to reduce cost and interest charges. The interest charges have shot up to Rs 55 crore in 1997 from Rs 23.3 crore in 1996.
Inspite theinterest coverage ratio being at best only 2.96 way back in 1992, the nationalised banks SBI, Allahabad Bank, and others have lent Rs 90 crore in the last four years. Also the working credit was enhanced to Rs 123 crore from Rs 47 crore in 1994, all of which highlights, what bad management and loose financial controls can do to a company.
Aptech Industries
Aptech Industries has posted impressive results for the twelve-month period ended Dec 31 1997. The total revenues have increased by 23.83 per cent to Rs 202.20 crore. More importantly operating margins have also remained healthy, improving from 17.47 per cent to 19.57 per cent. With a substantial market share in the computer education business, the company still garners 83 per cent (Rs 168.24 crore) of its revenues from this area. The other divisions namely - Asset International, Arena multi-media and Business consulting account for only 11 per cent (Rs 22.22 crore), 4 per cent (Rs 7.90 crore) and 2 per cent (Rs 3.82 crore) respectively.
The21.25 per cent jump in net profits to 20.62 crore from 17.01 crore, is especially more commendable in the wake of increased depreciation and a higher provision for taxation.
Due to the writing off of assets (computers) in a shorter period, the depreciation has gone up from Rs 1.80 crore to Rs 5.06 crore. The non-deferment of tax has led to a higher tax provision of Rs 6.13 crore, an increase of 239.73 per cent. However the replacement of high cost debt with lower coupon debentures, has helped reduce the interest burden to Rs 8.04 crore.
Using the formula (PAT + post tax interest / average of total capital employed), the ROCE (return on capital employed) for the financial years 1995-96 and 1996-97 works out to a healthy 35.07 per cent and 32.30 per cent respectively. This amply proves the fact that the company has been consistently providing high value to its shareholders. The high earnings per share of Rs 30.46 and Rs 36.93 in the financial years 1995-96 and 1996-97, also reiterate this point.
Aptechcurrently enjoys a debt equity ratio of 0.91:1. Therefore using the formula ([interest/average debt] x actual tax rate), the post tax cost of debt for the financial year 1996-97 works out to 8.77 per cent. Now assuming a cost of equity of 22 per cent, the WACC (Weighted average cost of capital) for the company works out to be 15.76 per cent, which compares favourably with the ROCE figures cited above.
Aptech has envisaged a capital expenditure of Rs 20 crore to fund its various expansions in the next three years. It is also slated to increase its authorised capital to Rs 11.16 crore in the next AGM in line with its announcement of a 1:1 bonus issue. Given the current shareholding pattern where promoters hold - 43 per cent and FII's - 18 per cent, the bonus issue is an obvious attempt at increasing the liquidity of the scrip on the bourses. Not surprisingly the announcement led to high volumes and the scrip lost ground by around Rs 35 to close at Rs 600 (P/E 17.4). Considering an EPS of Rs 36.93, thedividend per share of Rs 3 (Rs 1 last year) seems to be moderate. This actually works out to a very high dividend cover (EPS/ Dividend per share) of 12.3, which proves that the company could have gone in for a higher pay-out.
Emcee (With contributions from Manish Saxena and AG Krishnan)
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
