Cleaning-Up Act

The much awaited `restructured' annual report of Ceat is out and does not disappoint _a change in no small measure aided by a steep erosion in investor confidence. Its share price, which was Rs 120 in July, 1996, has lost considerable ground and now trades at about Rs 19.

Not that cleansing its annual report, by itself, will bring the share price back to its previous levels but a concrete beginning has been made to restore confidence.

The change is easily visible from the fact that auditor's qualifications, which numbered close to a dozen in 1996-97, have come down to only two in the latest report.

 

Frequent changes in accounting policies, non-adherence to prudent accounting practices, inadequate internal systems and lack of provisions were some of the ills plaguing its accounts. It was therefore routine to view its annual report with suspicion.

For example, 1996-97 saw it give effect to a profit on sale of certain investments done on the last day of the year despite the said amount not having been received. Change in accounting policies, themselves, lent a cushion of Rs 9.96 crore to the bottomline.

The last fiscal saw no change in its accounting policy which has affected the profit for the year. However, there was no act which was considered as an imprudent accounting practice by the auditors. Thus, the 1997-98 net profit of Rs 13.75 crore, while being nearly twice that of the previous year, is actually much more than the disclosed figure.

Other income contribution has come down to Rs 101.69 crore from Rs 113.72 crore in the previous year.

However, Ceat's performance should be viewed in the backdrop of lower raw material prices (raw material cost was down by 23.6 per cent) which ensured that a 4.3 drop in sales did not affect its bottomline.

Just one blotch remains - its investment portfolio. The auditors have qualified its Rs 45.37 crore investment in certain companies whose net worth has diminished significantly.

Ceat's aggregate investments have gone up to Rs 245.81 crore in 1997-98 from Rs 230.17 crore in the previous year. The aggregate cost of quoted investments has gone up to Rs 70.67 crore from Rs 34.29 crore. The market value of the same is only Rs 28.17 crore.

The company has taken a view that this diminution in value of both quoted and unquoted investments is not permanent and these assets are long term in nature.

Hence, no provisions have been made for the same. Thus, one more step remains to be taken before Ceat can lay claim to having a clean balance sheet.

Shipping

Reports indicating a 15 to 20 per cent increase in the wage bills of shipping companies in the current year will further affect investor sentiment. Shipping stocks are being avoided by the market as easy trends in freight have put their margins under pressure. A further addition to costs at this stage will only serve to depress earnings growth.

While wages as a percentage of total cost for Great Eastern Shipping amount to 8.4 per cent, for Shipping Corporation of India, it accounted for nearly 17 per cent in 1996-97. For Varun Shipping, a relatively smaller player, it accounted for 22 per cent of its total cost. Thus, a 15 to 20 per cent increase will mean a significant drop in their operating margins in a year in which sales growth, too, is likely to be under pressure.

Parry Agro

Substantially higher tea prices in 1997-98 saw Parry Agro reap a rich harvest with its sales increasing by 36.23 per cent over the previous year to Rs 75.95 crore. Its net profit shot up by 2.4 times to Rs 8.14 crore. The steep rise in prices has now tapered off and the company expects prices to stabilise at or marginally lower levels compared to the 1997 levels. Thus, one can expect relatively flat sales and profit growth in the current year.

Average tea prices at auction centres which was Rs 53.6 per kg in April, 1997 increased to a high of Rs 91.8 per kg in January, 1998. It has declined to about Rs 74.6 per kg in May.

This year, the company will focus on cost reduction and productivity improvements to maintain its margins. Its operating profit margin increased by a whopping ten percentage points to 25.33 per cent in 1997-98 but it is unlikely to see similar growth in the current year.

The algae project was slated to start commercial production in June, 1998, and will add to top line growth in the current year. To boost income, it is planning to double production of coffee through a partnership venture. It is also on the lookout for tea estate acquisitions in the north eastern region.