ABB LtdThe slowdown in the capital goods sector has hit ABB Ltd. ABB had grown at 37 per cent CAGR from 1994-1996. In 1997, sales had dropped by 8.5 per cent compared to 1996. Considering that there has been a decline in production of all major goods in the electrical industry by around 10-20 per cent, the performance of the company is in line with industry. However, ABB managed to keep the net margins of the company, at 6 per cent, which is same as in 1996.
The deferment of the 1070 mw Daweoo plant, where ABB-India is an EPC-supplier, has led to sales worth Rs 1,000 crore being postponed. The company's newly commissioned plant in Baroda for manufacturing transformers has not booked any significant orders, according to company sources. The decline in orders severely hit the power division, which contributed only 20 per cent of sales in 1997, compared to last year's 33 per cent of net sales. The sales in transmission segment remained the same at about Rs 375 crore. What really helped the companywas the increase in sales from Industry and Building systems segment, where the sales increased by approximately Rs 75 crore.
The reduction in the interest cost by Rs 7 crore( replacing high cost debt by low cost debt), was negated by the rise in the cost of production. The cost of production rose to 92 per cent of net sales from 88 per cent last year, which in value terms is Rs 42 crore. Possibly this rise in cost along with a higher depreciation of Rs 31 crore is on account of the new transformer plant commissioned.
IEEMA statistics claim that the order booking has slumped by 59 per cent and it is unlikely to pick up as additional power generating capacity has been dropped in the last two years of eighth plan. For all the other products, the last two months has seen rise in production in electrical industry. Whether this would increase the order position and subsequent sales of ABB remains to be seen.
The market already has discounted the current slowdown in the industry. The current price of Rs 379is close to the 52-week low of Rs 340.
Denso India
The decision by the Denso India management to price its rights issue at Rs 50 per share, when the scrip is available at Rs 32 in the market, is clearly a way of increasing the stake of Denso and associates in the company. The parent and its associate companies have already received the necessary FIPB and other government clearances to pick-up the unsubscribed portion of the rights issue. Denso - Japan, Asmo Corporation and Sumitomo, collectively hold 50.92 per cent of the Indian company.
Taking its cue from the slump in automotive demand, sales at Denso have also slowed down. A fact which is clearly accentuated by the 17 per cent growth in revenues for the twelve months ended March 1997, compared to a 36 per cent growth in 1995-96. The bottomline growth at 9.07 per cent was also pedestrian when compared to previous years, thanks largely to a high depreciation charge, tax burden and increased input costs. The first half results at Denso India alsooffer little in terms of an assurance for investors.
The company has not tried to paint a rosy picture in its letter of offer. In fact net profits have been projected at Rs 5.92 crore, a drop of 48 per cent. a reason for the dip in profitability is due to Denso's high import content, and the additional 3 per cent duty announced on imports recently.
But the parent's commitment is in ample evidence from the hike in equity and the plans for making Denso's Indian operations a global sourcing base. The products manufactured by Denso are primarily sold to leading OEM's such as MUL, Hero Honda and Bajaj Auto - which account for almost 80 per cent of sales. Other customers include Subros, Eicher Motors, Shriram Honda Power Equipments amd Escorts Yamaha, with the Honda Siel venture being the latest addition. Its Japanese connections could also land supply contracts for the Mitsubishi and Toyota ventures in India. Also the company's capacity expansions are in line with MUL's plans to expand theircapacities.
Accounting for securitisation
Several NBFCs have been busy securitising their asset portfolios, in an effort to make do with the lower level of liquidity now available to them after the imposition of the new RBI norms. At the same time, other finance companies which have the wherewithal are purchasing these assets. In most such asset sales, the purcasers have recourse to the selling NBFC for ultimate recovery of the loans. Such a securitisation deal would be beneficial to both the buyer and the seller -- the former would get much needed liquidity, besides meeting capital adequacy norms, once the securities assets are removed from the balance sheet, while the latter would get access to good assets.
The problem may lie with the accounting. If an asset sale is with recourse to the original seller, for instance, should it be removed from the balance sheet of the seller? If it is, and is treated as a contingent liability, the full disclosures of the risks involved need to be made. Willsuch assets not be included while calculating capital adequacy? Ratio analysis of finance companies would depend a lot on whether such assets are included or not. Both regulators as well as the auditing profession need to be proactive to ensure clear guidelines, particularly because it is well established that the market moves much faster than the regulators.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
