Audit Punctures Ceat
The plain paper copier division of the company was transferred to RPG Ricoh from May 31, 1994, for Rs 13.65 crore. Of this, Rs 4 crore was given to RPG Ricoh as loan repayable on June 30, 1995. Rs 2.55 crore is due from the company.
The notes to the accounts say that Ceat is finalising an agreement with RPG Ricoh for realisation of this sum with interest. The company's auditors say that they are unable to express an opinion on the realisability of the sums aggregating Rs 9.21 crore from RPG-Ricoh.
Provision has not been made against diminution aggregating Rs 19.92 crore in investments. In the company's opinion, this diminution in value is on account of the slump in the market.
Certain loans and advances aggregating Rs 4.43 crore, which have been considered to be good, are, in the opinion of the auditors, doubtful of recovery and require provision. Consequently, profit for the period is higher by Rs 2.53 crore, since such provisions have to be made on a net of tax basis.
Accounting changes: There have been several changes made in the method of accounting. For instance, against the earlier practice of interest capitalisation only in respect of loans specifically borrowed for acquiring fixed assets, the company has, with effect from October 1, 1994, capitalised interest related to other borrowings utilised for acquiring fixed assets. Consequently, the profit for the period is higher by Rs 1.77 crore.
The entire profit on the sale of Ceat's tyre cord plant to SRF, amounting to Rs 2.31 crore, has been recognised in the profit and loss account for the period. However, of the total consideration to be paid, the balance amount due on May 1, 1996, is being received in instalments as per revised terms of payment.
In spite of all these adjustments, Ceat's profit-after-tax amounted to Rs 17.72 crore for the 18-month period ended March 31, 1996, compared with Rs 26.45 crore for the earlier 15-month period ended September 30, 1994.
The company has revalued its fixed assets, which has added Rs 221 crore to reserves. Loan outstandings fell from Rs.643.74 crore as on September 30, 1994, to Rs.451.04 crore. Yet, current asset levels increased from Rs 564 crore to Rs 658 crore.
Investments & funding: How were these assets funded, especially when loans too were being repaid? Through the sale of fixed assets, especially the tyre cord division, which brought in the much-needed cash. Rs 297 crore came from the sale of the division. Stretching creditors also helped. Sundry creditors' outstanding increased from Rs 148 crore to Rs 200 crore. Funds were also available from the increase in share capital consequent to the conversion of warrants.
Much of this money was used to fund a Rs 94.47-crore jump in investments. The bulk of the new investments went towards subscription for zero coupon fully convertible debentures of subsidiary companies and towards investments in associate companies.
Against a profit of Rs 17.72 crore for the 18-month period, Rs 2.31 crore was profit contributed by the sale of a division, Rs.10.20 crore was contributed by profit on sale of fixed assets and Rs 9.46 crore were provisions no longer required written back.
For the earlier 15-month period ended September 30, 1994, the company's profits amounted to Rs 26.45 crore. Rs 13.84 crore was the profit on account of the sale of a division, Rs 5.10 crore was the profit on account of disposal of assets, Rs 27.25 crore was due to profits on account of sale of investments and Rs 11.53 crore was due to provisions no longer required written back.
For the year ended June 30, 1993, too, out of a total profit of Rs 19.68 crore, sale of a division raked in profits of Rs 10.55 crore, profit on sale of investments amounted to Rs 12.6 crore, and provisions written back amounted to Rs 12.50 crore. The effect of this strategy on the company's balance sheet has been that gross block has declined from Rs 521.93 crore as on June 30, 1993, to Rs 259.53 crore as on March 31 this year. And that includes the substantial revaluation made recently. On the other hand, during the same period, investments have increased from Rs 90 crore to Rs 254 crore.
Back to tyres: Till now, the company has boosted its bottomline by selling fixed assets, and it has used the proceeds to increase investments in associate companies. Ceat has subscribed to Rs 46.59-crore worth of zero-coupon debentures of wholly-owned subsidiaries, and another Rs 74.37 crore worth of convertible debentures in investment companies. Options for conversion before March 31, 1996, have not been availed of by Ceat, and, in the meantime, the companies which have received the investments enjoy the benefit of interest-free funds.
With the sale of its tyre cord business, Ceat has now completed its restructuring business. It is now entirely a tyre company. That will mean it can no longer fall back on sale of fixed assets to boost its bottomline. Elavia, however, says that the company's tyre business per se is profitable.