Thriving On Chaos

We all know that an increase in the price of coal hits dependent industries. But little are we aware that these hikes mean a lot for companies like Revathi CP Equipment whose fortunes are singularly linked to the coal sector. A part of the Swedish Atlas Copco group, Revathi CP is also a text book case of a company having prospered in circumstances that would have forced others to give up.

Revathi CP mainly makes blast hole drill rigs for the coal sector. Thus, its linkage to Coal India, a public sector monolith whose financial position is anybody's guess, is its biggest weakness. So when Coal India was in a bad shape, investments into new mining projects and expansion of existing mines were bound to suffer. And so the fact that Revathi CP's turnover stagnated around Rs 30 crore between 1992-93 to 1995-96 comes as no surprise. But the amazing fact was that despite little turnover growth, its profitability improved vastly. Most of the growth in turnover came from exports which have moved up from almost nothing in March 1992 to Rs 6.58 crore in March 1996.

 

Its profit at the net level grew from Rs 2.02 crore in 1992-93 to Rs 4.67 crore in 1995-96, a compounded growth of 23.3 per cent every year on a turnover that rose at a compounded rate of 4.2 per cent in the same period. March 1997 results show a 12 per cent increase in turnover to Rs 40 crore and 23 per cent rise in net profit to Rs 5.76 crore over the previous year.

Between March 1992 and March 1996, its capital employed rose from Rs 11.33 crore to Rs 15.40 crore. Return on capital grew from 48.70 per cent to 63.29 per cent. Return on net worth almost doubled from 18.62 per cent to 36.16 per cent. At the same time, the company slashed long term borrowings by one-third and consequently interest cover tripled. Interest cost in 1996-97 dropped to Rs 0.49 crore from Rs 0.77 crore in the previous year, in a business that is supposedly working capital intensive.

Says, PM Rajanarayanan, vice-president, Revathi CP, The company has been focusing its attention on working capital more particularly in the areas of inventory and receivables. For instance, last year the company's turnover grew 12 per cent while inventory level dropped marginally by Rs 0.40 crore while receivables just rose Rs 0.50 crore. And the company has practically no borrowings.

Similarly, the company undertakes cost reduction exercise on an on-going basis, adds Rajanarayanan. For example, in spite of small increases in sales between March 1992 and March 1996, raw material cost and other operational costs showed a declining trend.

Raw material cost as a percentage of the net turnover dropped from 46 to 37 per cent. Likewise, purchase of finished goods dropped from 21.81 per cent to 16.94 per cent. Total cost of production dropped from 76 per cent to 65 per cent. What rose in the same period was administrative expenditure, distribution expenses and employee cost (see table: Falling Costs). Some gains have also resulted from outsourcing, by changing the product mix in favour of C750 models of blast hole drill rigs and exports.

A large chunk of Revathi CP's turnover comes from blast hole rigs and sale of spare parts. Spare parts and components, which is a lucrative business constituted 42 per cent of its turnover in 1995-96. Though it manufactures water drilling rigs, the demand for them is sporadic and hence they comprise a very small percentage of turnover.

The market for blast hole rigs is estimated around Rs 65-70 crore, dominated by Ingersoll Rand with a wider product range followed by Revathi CP in the large-sized drill segment. There is a limited threat of competition in this business. Both the top two players are well entrenched in their business and enjoy access to technology.

However, unlike Ingersoll Rand, Revathi CP does not manufacture compressors but buys it from Elgi Equipments to be mounted on its drilling equipment. In many ways, Revathi CPs competence only lies in part-manufacture and assembly of drills. And it competes with the Rs 271-crore Ingersoll Rand only in that one segment. But Revathi CP's parent company is the Rs 110-crore Atlas Copco that competes with Ingersoll Rand elsewhere globally.

Thus, while Ingersoll Rand is a much bigger player with relatively diverse interests, Revathi CP is a niche player. But that has its own disadvantages, having its fortunes tied only to the coal sector.

Following hikes in prices of coal and improvement in utilisation of existing resources, Coal India's losses have climbed down substantially. Along with relief of waiver of overdue interest, the aggregate profits of Coal India and its subsidiaries improved to a record level of Rs 611.44 crore in 1995-96 as against Rs 29.73 crore in the previous year. The chairman's statement for 1995-96 the further says having earned profits for five years in succession, accumulated aggregate loss of Coal India and its subsidiaries which reached a peak of Rs 2,498.98 crore in 1990-91 has been reduced to Rs 1,312.29 crore. It is expected that the remaining accumulated loss would be wiped out within the next two years.

There also have been reports of Coal India likely to receive a line of credit from the World Bank for capital expenditure soon. Thus, Coal India should step up coal production in the coming years. Says, Rajanarayanan, This is likely to result for improved demand for the company. Though the government has opened coal mining to the private sector, nothing much has happened since then. If private sector participation in coal mining takes place, the demand for blast hole drilling will really jump. In fact, much of the current optimism that prevails around the Revathi CP stock is due to the developments that are expected to occur in the near future.

The stock has been trading in the range of Rs 350 to Rs 560 since early 1994. Recently it rose from Rs 470 to Rs 530 on the eve of results. Currently the stock is discounted 14.2 times and market capitalisation is 2.12 times net turnover. With an equity capital of Rs 1.6 crore, floating stock obviously is very low.

But the stock holds a terrific upside potential as demand will pick up sooner or later. Even otherwise, the company has been putting up an excellent show. Buy it on declines.