Unproductive investments make their presence felt the most when a company's core business slows down. Bharat Forge is one such company. Its operating income grew by only about three per cent to Rs 573.62 crore in 1997-98.
Its profit before tax and extraordinary items fell to Rs 52.39 crore from Rs 62.72 crore. Sales in the first quarter are down by 31.86 per cent and net profit by 58.71 per cent.
Having raised funds in excess of what it needed to deploy in its core business of forgings, Bharat Forge deployed them in other areas like leasing and hire purchase of assets, loans and investments.
Out of its funds base of Rs 851.36 crore, as on March 31 1998, Rs 170.74 crore is parked in investments and Rs 279.1 crore in loans and advances (of which Rs 157 crore are largely interest free loans to its subsidiaries).
Financial services activities contributed Rs 23.41 crore to its income in 1997-98 but the credit risks associated with the business has forced the company to reduce its exposure in areas like bill discounting, inter-corporate loans and hire purchase. As revenues from this business reduces, it also tends to impact the overall income and profitability and will be a painful, though essential, transition.
Its investment portfolio has Rs 87.3 crore parked in quoted investments which possess a market value of only Rs 31.44 crore. Of unquoted investments of Rs 83.38 crore, nearly Rs 79.44 crore is invested in its five subsidiary companies apart from the loans given to them.
These subsidiaries are the investment vehicles of the company. In turn, they have invested bulk of these funds in group companies or given loans to companies (including under the same management). The quoted investments made by these companies, too, are quoting at way below their cost prices.
Here, Bharat Forge's decision to sell 60 per cent of its stake in Kalyani Lemmerz could come useful as this stake is held by the five subsidiaries.
Thus, the sale, which is expected to e=arial size=2>
However, there will still be a substantial portion of its funds parked in loans which are yielding little or no return and investments that are quoting below their acquisition cost. Until these are taken care of, they will continue to weigh down the company's performance.
Mico
Mico's share price, which fell from about Rs 5,900 to Rs 5,500 in April, 1998 after its first quarter results, has fallen to about Rs 3600 now after its first half results. The company's sales have fallen by 7.22 per cent in the first half ended June, 1998, to Rs 605.34 crore. In calendar 1997, its overall sales increased by 18 per cent, aided by a 34.5 per cent increase in exports to Rs 190.6 crore. The slowdown in auto sales finally caught up with Mico as producers, especially commercial vehicle manufacturers, began slashing output. The company's product range comprises fuel injection equipment, spark plugs, electric power tools and other auto components.
Though the decline in sales was to be expected (sales in January and February, 1998 were down 8.5 per cent), the company was not able to reduce its expenditure to the same extent. Its total expenses have fallen only by 1.44 per cent to Rs 534.61 crore as a result of which its margins have got depressed, falling to 11.68 per cent in the half year ended June, 1998 as against 16.87 per cent in the corresponding period last year.
Part of this could be attributable to labour costs, price negotiations by OEMs and additions to capacity which are not yielding commensurate returns. Capital work-in-progress, as of December, 1997, amounted to Rs 75.9 crore against the net block of Rs 285.16 crore.
The company is implementing a Rs 250 crore project for fuel injection systems, auto electricals, hydraulics and power tools. The first phase is expected to be ready by the end of the current year. It also has a Rs 300 crore expansion-cum-diversification plan lined up at its Nanganathapura unit in Karnataka.
The capacity additions are coming at a time when the automobile sector is in a bad shape and an industrial revival this year seems remote. Capital investments in such a scenario is a risky proposition which will affect its overall margins as revenue growth does not match expectations. On the other hand, these capacity additions are also imperative for Mico as it was operating in 1997 at full capacity. Thus, while the company could face short term blips in performance, it will be one of the few to survive and also gain the maximum when a revival materialises in its areas of operation.
