With a chunk (almost 40 per cent) of its revenues coming from purchases by government departments, the growth rate for Gestetner India (manufacturer of digital copiers) slackened a bit in the second half of the previous financial year. Orders were not forthcoming due to budgetary constraints. For the first half (ended June 30, 1997), revenues grew by 33 per cent over the previous corresponding period, while for the second half (ended December 31, 1997), growth over the corresponding period in the previous year slowed to 22 per cent.Over the last two consecutive financial years, the company's return on capital has improved quite dramatically, from 18 per cent in 1996 to 21 per cent in 1997, and that too on lower capital employed. Gestetner has managed to reduce its capital employed by reducing inventories thus, cutting back its working capital requirement. In fact, for 1997 the net working capital employed was down to Rs 9 crore from Rs 13 crore in the previous year, despite a 30 per cent growth in businessand a launch of various new products.
Despite this consistently improving financial performance by Gestetner India, and especially so for the year ended December 1997, the stock has not kept pace with the latest results. The most probable reason for this could be earnings expectations from the company which have been on the higher side of late. In fact, just prior to the announcement of the results, there was a jump in the stock in anticipation of good results, a run which more or less has been exhausted now. Hence, the dip in the share price. In tandem with the financial performance the market has also discounted the consolidation of the overseas parent company's stake in Gestetner, which has resulted in a number of new products being launched in the domestic market leading to an improvement in the financial performance and a change in the stock market's perception (which once viewed the company as being lethargic and discounted it accordingly). Gestetner of the UK hiked its stake to 51 per cent just lastyear which did wonders for the stock at the time. Also, Ricoh of Japan acquired a substantial stake in Gestetner, UK. This is being taken as a positive signal by the shareholders as Ricoh is seen to be consolidating its presence in the Indian market (the company has recently taken over the stake of the RPG group in RPG Ricoh, a manufacturer of photocopiers). There have also been reports recently that Ricoh will be introducing some of its products through Gestetner.
Though the Japanese company now controls both companies the fate of these two subsidiaries in India is unknown. There is some apprehension over a possible merger of the two companies which may not bode too well for Gestetner's shareholders in the short run as RPG Ricoh has not yet shown a strong financial performance and its balance sheet is over-leveraged.
In the recent past, Gestetner has relied on internal accruals and debt for funding growth (with the exception of two issues made to Gestetner UK). Irrespective of that and despite the strongshowing by Gestetner, the stock appears to be fully priced with regard to its underlying value. For Gestetner, the last eight years produced a compound rate of growth on revenues of just 14 per cent, but ever since Gestetner, UK began hiking its stake (it did so in two stages between 1994 and 1997) and showing some interest in the company, the compound rate of growth has increased to 24 per cent from 1994 (including a 30 per cent growth shown for the whole of 1997 and a similar growth rate expected for 1998).
But while Gestetner has been growing at a vastly improved pace in recent years, it is from a very small base. Now, given the competition coming into the market from other multinational companies (in some of its product ranges) and the fact that the bigger players are already established, future growth may not be such an easy factor despite the recent proactiveness shown by the management.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
