Another Hardware Goliath?

Unicorp is squeezed for working capital. Though a bail-out plan is in place, it might be prudent to stay clear of the stock in the short term

Is Unicorp Industries the next hardware company to bite the dust? Just last year the company was one of the fastest growing IT companies and one of the top five personal computer vendors in the country. But now, if industry grapevine is to be believed, it is following PCL's footsteps. "They have not paid their suppliers for a long time," says one industry source.

The indications that the company was in for troubled times is reflected even in its balance sheet for the year ended September 1997. The turnover for the year 1996-97 grew 53 per cent to Rs 225.90 crore but this was accompanied by 128 per cent increase in debtors. Another industry insider comments, "They have landed into trouble because they can never refuse business." The debtor days in the balance sheet went upto 90 days in 1996-97 against 60 days in 1995-96.

 

This is not all. Inventory levels were about 76 days sales against 63 days in 1995-96. All this increase is partly being funded by an increase in trade payables which has gone up 2.52 times from Rs 15.13 crore to 53.40 crore. This translates into a credit period of 87 days of sales against 38 days in September 1996.

The cash flow statement looks even more bleak. The net cash from operations in 1995-96 stood at a negative figure of Rs 0.78 crore. In 1996-97 it worsened further to a cash outflow of Rs 3.66 crore. In both years the shortfall, the working capital requirements for increased business and additional capital expenditure, has been met by borrowings.

The company increased its borrowings by Rs 9.49 crore in 1995-96 and by Rs 16.09 crore in 1996-97. In the year ended September 1997, the company had fresh short term borrowings of about Rs 21.11 crore. This had led to a position where the debt-equity ratio of the company was a little over two. This resulted in some banks refusing to increase their working capital limits.

The company's managing director, Arun Sogani is completely forthright about the company's dire straits. He candidly says, "We were facing problems and the banks would not extend our limits. But in the annual general meeting (AGM) last Thursday, we have passed a resolution to bring Rs 12.5 crore through a private placement of equity and a further Rs 5 lakh through issue of preferential equity. This should ease our debt to equity ratio and also give us flexibility to borrow additional working capital from banks."

In the AGM, the resolution has been passed to place equity at a premium of Rs 20 to five Ahmedabad based financial services companies. This will expand the company's capital base by Rs 4.16 crore to Rs 9.80 crore. Can the company service this equity?

The results for the first half 1997-98 ended March 1998 indicates that the company has booked a net profit of Rs 4.04 crore. If this were to be annualised, it would result in an EPS of Rs 8.24. The return on net worth would be about 18.77 per cent. The company could still recover from this.

But the crucial question is: What are they doing about increased debtors and inventories? According to Sogani, that has been the main focus of the company for many months now and it has taken several measures to increase the turnover rate in all their businesses.

Unicorp has two sales channels. One is the high value direct sales and the second is the distribution channel which according to the company is widespread.

The company's sales system is what makes it attractive to the global products companies which want to reduce their overheads and minimise their risks.

High bad debt can be attributed to the distribution channel business. Sogani claims that he has introduced a cash and carry system since October 1997. Select distribution partners may be given credit but with a fixed limit over and above which they will have to pay cash.

The company has decentralised billing to about nine centres across the country. The second tier-

distributor will now pay cash and carry shipment from these centres.

The business mix is also being changed. Says Sogani, "Distribution business will gradually contribute less to our turnover and will reduce to just ten per cent." Ten per cent seems to be wishful thinking but the company certainly seems to be giving this a serious thought.

Sogani also has another idea to use his well spread distribution channel. He says, "Talks are in an advanced stage. But we will perhaps get into a joint venture with an overseas company for this business. We will provide our expertise and manpower and the overseas

company will provide the working capital."

In the direct sales business, in some cases, debtors have defaulted because Unicorp itself has made part shipments. It did not have the working capital to complete a large order. The influx of funds is expected to ease this situation.

Unicorp manufactures its computers under its own brand name and is also a first tier distributor for other manufacturers like IBM and Compaq. A year ago, the company moved into a new manufacturing facility in the electronic hardware technology park area of Gurgaon which has the capacity to manufacture many more machines. It is now in talks with an international brand, to manufacture its computers for the Indian market at Unicorp's facility. This is expected to further add to the turnover and profitability of the company without straining its working capital.

Another of Sogani's trump cards, is an increase in value addition by implementing enterprise software solutions apart from networking solutions. The company has orders from several banks and is also empanelled with insurance companies. This value addition is expected to show in the balance sheet for the year ending September 1998.

Unicorp also has two 100 per cent subsidiaries. One being Unicorp Overseas Limited which is the service and maintenance subsidiary of Unicorp. Sogani claims that the service company is not easily replicable because international companies' main requirement is, that their products should be maintained by certified engineers who need to get re-certified every two years.

This company has clocked a turnover of about Rs 13 crore in 1996-97. The company's financial year ends in March. And this company also has two months of debtors and two months of inventory. The operating profit margin in this business, at about 11 per cent is much higher than Unicorp's. As such, the subsidiary does not affect Unicorp's bottomline.

The other arm is the Singapore based company which has a turnover of about Rs 150 crore. This subsidiary has a major presence in Vietnam where it has systems integration and distribution partnerships with Compaq, Seagate, Epson and Creative Technologies. Of late the company has also got into manpower exports to boost its bottomline and will subsequently get into software exports.

According to Sogani, this company has not built up any losses because of the south east Asian currency crisis. But it is also likely that the high debtors position could have arose due to this. Its sub-distributors may have had businesses in the affected countries. The demand has however, definitely slowed down and the turnover is expected to remain at the same level.

All in all, Sogani might be able to pull off what he is talking about. Even now, Compaq, one of Unicorp's largest creditors, claims that all dues have been paid. They clearly want to maintain the good relationship.

To its credit, the company's turnover is showing a 50 per cent growth rate in spite of falling prices. But it might be prudent to get out of this stock and stay clear. Even if all goes according to plans, it would take two or three years for the company to get its act together.