About eight to 10 months back, Fujitsu ICIM (provider of networking solutions, marketing of computer peripherals and office automation systems) was a potentially sick company with accumulated losses totalling Rs 25 crore, undermining the reputation of a strong overseas promoter.But two good things happened. One, the RPG group decided to pull out of the company, diluting its stake in favour of the overseas promoter which immediately improved market sentiment in the stock. And two, the company recently transferred its entire software business to its wholly owned subsidiary, (reportedly the 10th largest software company in the country), and subsequently sold a 25 per cent stake of that company to a leading mutual fund, thus, bringing in much needed funds into the company.
All this has happened with effect from October 1996, and the impact was expected to be felt over a slightly extended period of time, prompting the management to delay the announcement of the annual results till September 1997. Buteffectively, for the twelve-month period ended March 1997, the accumulated losses of Rs 25 crore were more or less wiped out. And the strategy seems to have paid off. According to the results declared for the 18 months ended September 1997, the turnaround seems to be imminent and the market certainly seems to think so. And there could be another bit of good news for the stock in terms of Fujitsu ICIM's partner, UK-based software giant ICL which holds 45 per cent in the company.
With the transfer of the software business to the subsidiary there does not seem to be much sense in ICL retaining its stake in the office automation and systems business. A possible shift of holdings at this point could see a consolidation by Fujitsu of its stake in the company which will see it directly holding over 72 per cent of the equity.
For the moment, however, the recently-announced results are in focus along with the likelihood that at least financially the worst could be over, especially as the company has been able toutilise its fresh cash flows to wipe out losses and reduce debt.
Debt service had become a major problem for this company over the last two years. Asset additions have been made over the years through debt, eventually leading to a debt-equity ratio of 5:1, almost all of which is short-term debt used to finance net working capital. The obvious emphasis from now on will be to reduce working capital needs, especially as the company intends to retain its focus as a marketing company, rather than a manufacturing one.The stock, too, has begun to respond positively to these developments. The only other time it was on an uptrend was when the RPG stake changed hands.
RPG Ricoh: good break
A similar phenomenon seems to have unfolded in the case of another RPG group company, RPG Ricoh Ltd (though the company has been making profits consistently and growing at a compound rate of 28 per cent for the last three years), in which the group has reportedly agreed to a sale of its stake to Ricoh of Japan, anotherleading company in the office automation systems business (photocopiers and fax machines).
RPG Ricoh has a capital structure similar to that of Fujitsu ICIM where assets are financed overwhelmingly by way of short-term debt (debt-equity ratio of 3.88:1), with a substantial portion of the assets locked in working capital. And in this case, despite a lopsided capital structure, 28 per cent of its net working capital is in loans and advances which are earning almost nothing. The stock of RPG Ricoh, too, has reacted positively to the news of the local promoter opting out.
