Now, with the launch of Safari, the sports utility vehicle (SUV) by Telco, along with that company's fortunes to some extent the fortunes of Bright Brothers Ltd also rides with it. In its recent set of results declared for the first-half of the current year (ending in June 1998) Bright Brothers continued to grow its revenues though at a slightly slower rate than what is usual for it (at 12 per cent against a long-term compound average of 18 per cent), while profits have not grown at all.The operating margins however have grown very smartly as compared to the previous first- half. More importantly the company has consistently improved technology at its disposal or acquired new ones that has enabled it to add more products to its portfolio while essentially sticking to the moulded plastics business. So the company supplies thermoware for household applications, plastic crates, auto components and office furniture and all the while increasing its capacities.
In addition to supplying components to Telco forits SUV, Bright Brothers has also begun the manufacture of components for Fiat's model Uno in India. As a result of this product expansion it tied up with an Italian firm for plastic welding technology, something that will come in handy for its other product segments as well. Only recently the company announced a further extension of its manufacturing capacities, in the office furniture segment, one in which it has been a major player for sometime now.
Rapid growth in the recent past also came to BBL due to the capacities that it set up to cater exclusively to Maruti Udyog's requirement for moulded auto components. But in the last one year growth was a little sluggish despite the new capacities constantly coming up in the automobile sector.
One factor that slowed its growth rates a little is probably the fact that the company sells moulded products to the white goods sector. But going by the growth seen in the last quarter from the white goods sector, especially amongst television manufacturers eventhis business should begin contributing to BBLs growth in the second-half.
But while under the circumstances (sluggish growth in the user industries, longer working capital cycles) the company has performed reasonably well on growth parameters except that profits after tax remained flat for the first half, there are factors not quite satisfactory as far as shareholders are concerned.
For one, probably due to the capital intensive nature of the business and due to the need to extend long periods of credit to its buyers (net working capital requirements increased by 50 per cent during the last full year a further increase has occurred this year as well) who are mainly large blue chip companies and who are in a position to dictate terms, the company has been unable to beat its cost of capital.
For last year (during which growth in revenues came at 30 per cent, while growth in profits were at 56 per cent) BBL barely managed to earn a 8.6 per cent return on its capital and it is quite unlikely that thecurrent year will produce anything better. Secondly, entry and exit from the stock can be a very painful affair as the stock is almost entirely illiquid, owing to the fact that it has a paltry equity capital of just Rs 3.75 crore (its book value is a decent Rs 50 per share).
Even though we have consistently maintained that issuing bonus shares are of little use to shareholders and in a majority of cases it does not enhance the stock's market capitalisation (the argument that it increases the dividend flow to shareholders is not true as companies can increase dividends without resorting to issuing bonus shares); in this case and others like the shareholders can benefit tremendously if the management splits the stock at reasonable intervals thus encouraging participation increasing liquidity in the stock and aiding in the price discovery process.
A parallel can be drawn in the case of Revathi CP as well. Being an MNC the stock trades at a multiple of just 12-14 times as compared to other companies withsimilar risk return characteristics like Ingersoll Rand for example which trade at 29 times historical earnings. The difference being that Ingersoll Rand has frequently resorted to stock splits to increase liquidity (hence activating the price discovery process) while Revathi CP is equally attractive but being illiquid it does not attract buyers.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
