The Black Sheep

Price : Rs 10, at par

Opens on : October 22, 1996

Listing at : Mumbai, Ahmedabad and Hyderabad

Lead managers : Prudential Capital Markets and Ruoday &Co.

The company does not earn enough from its operations even to serve its current equity of Rs 3.52 crore.

With Stotz-Blacksmiths(SBL) entering the capital market, the choice for the worst primary issue of the year has become more difficult. The company proposes to raise funds from the public to set up a unit to make sugar mill machinery and cement plant machinery. The cost of the project is estimated to be Rs 20.11 crore. It will be financed mainly through equity (Rs 17.11 crore) and rest through lease finance (Rs 3 crore). Lease finance will be provided by one of the lead managers. The commercial production is expected to start in May 1997. So far, the company has deployed only 18 per cent of the project cost. The project could be delayed by at least 6 months.

 

The track record of SBL, incorporated in 1984, is awe-inspiring. In 1995-96, on sales of Rs 1.29 crore, the debtors amount to Rs 2.61 crore and in 1996-97 (four months), on sales of Rs 0.4 crore, it has debtors worth Rs 2.81 crore. Of these, debt outstanding for more than six months is Rs 1.73 crore. The gross block of SBL has fallen in 1996-97, indicating sale of assets by the company. In any case, it is meagre Rs 0.24 crore.

In 1994-95, the company has changed the method of accountingfor depreciation from WDV to SLM. Though the effect has been given below the line, the practice will lower depreciation charge in future. In 1994-95 and 1995-96, against sales of Rs 1.24 crore and Rs 1.29 crore, the expenditure (not accounting for interest, depreciation and tax) is Rs 1.25 crore and Rs 1.54 crore and yet, in both the years SBL has shown profit. This was made possible by inventory pile up.

There is an interesting side to inventory valuation. The auditors report states that the inventory has been valued and certified by the management. It is surprisingly silent on the mode of valuation of the inventory. It does not state that it has been valued at cost. Even if valued at cost, does it include administration and interest charges?

Probably it is the case. This argument is based on the estimate of working capital made by the company. For the purpose of working capital, the WIP is valued at cost of raw material plus 75 per cent of other manufacturing costs. Finished goods has been valued at manufacturing cost plus administrative and sales expenses. The company is yet to approach its bankers for its working capital.

Another point worth noting is the poor profitability of the company. In 12 years of existence, it has been able to build the reserves of only Rs 0.08 crore and this, without declaring dividend since incorporation and without capitalising reserves.

SBL is engaged in the job work for making precision close dies and forgings for sugar and cement plants. It also supplies technical drawings, engineering design, production know-how and manufactures heavy components for cement and sugar plants.

SBL's financial prudence is also reflected in its advances. It has given an advance of Rs 0.23 crore to Stotz Agro, a company under the same management, for a period of one year without any interest. It may be noted that cumulative PBIDT of the company for last five years is Rs 0.16 crore. The group company is yet to start commercial operation even 20 months after incorporation.

SBL's project has already been delayed by three months. The company will be able to supply the cement machinery only to mini cement plants as it does not have the capacity to cater to the requirements of large players. The survival of mini cement plants itself is at stake and hence healthy order book position can't be envisaged.

The sugar industry is passing through crisis. Sugarcane crushing should touch a new low next season and hence little revenue can be expected from sugar machinery division as well. Considering the fact, that it does not earn enough from its current operations to serve its equity of Rs 3.52 crore, one fails to understand how an equity of Rs 18 crore will be served.

The working capital needs of SBL is not based on either industry or RBI norms but on experience. It is difficult to understand the logic because the company proposes to undertake new activity and as a result, how will the past experience be useful?

There is absolutely no scope for any appreciation and investors must avoid the issue. We believe that better assets which earn higher rates of interest are available to deploy funds.