Optimistic of their future, many small-caps have embarked on expansion
Information about companies and the industry in which they are operating is criticalfor investors, particularly small and retail. Information gives investors an edge whileinvesting. Sourcing authenticate information about companies is a difficult task for smallinvestors.Finding out and tracking a reliable source of information is important for investors.The notes to accounts published along with the quarterly results is one of the reliablesources of information. Companies share important information about their past and presentthrough the notes to accounts. The notes are even futuristic and provide vital informationabout its future outlook,
Investors should refer to detailed results for better understanding and treat the notesas a reference point. The notes help a great deal to ensure apple-to-apple comparison. Asmatter of fact disclosures in the notes will help investors to get behind the numbers andanalyse the core operational performance of companies. Further information shared in thenotes to account should be used as pointers and investors need to find out additionalinformation from other sources such as annual reports to make meaningful interpretation.
In its pursuit to track valuable information, Capital Marketscanned the notesto accounts of over 2,000 companies for the quarter ended June 2010. An attempt has beenmade to simplify the technical or accounting language. For convenience, companies havebeen divided into three categories based on market capitalisation: small (less than Rs1000 crore), mid (between Rs 1000 to Rs 10000 crore), and large caps (over Rs 10000crore). This article, the last in the series of three articles, focuses on small caps.
One of the prominent trends among small-caps in the June 2010 quarter was theiroptimism about their business operations and industry outlook. Many of these companies areexpanding their capacities or in the process of doing so. In one case, a company’sboard has approved installation of manufacturing facilities. A few have commencedcommercial production and have completed modernisation-cum-optimisation projects.Companies have given an update about expansion plans in progress and also commented on theschedule of completion, whether it is as per plan, and have shared information aboutexpected date of plant going on stream.
A company has entered into collaboration agreement with a foreign company forcommercialisation of new technology. A company’s board has approved formation of ajoint venture company with a US-based company for marketing of products in the US.
Investors need to be careful while analysing the bottom line as a few small-capcompanies have accounted one-time or non-recurring items or cash inflows as part of otherincome, which should have been treated as exceptional or extraordinary items. Forinstance, fire insurance claim received is treated as other income. Profit on sale ofinvestments profit is also accounted as other income.
Companies have also commented about operational performance and the reasons. A companyhas seen erosion in profitability due to increase in input costs, discontinuation ofproduct line due to adverse market conditions, power cuts and failure, and annualmaintenance shutdown. In case of a few companies, future looks bright due to their orderbook position.
Following is the company-wise information shared by small-caps through the notes toaccounts of the June 2010 quarters.
Revathi Equipment: Extraordinary items represent inventory written off an accountof derivation in net realisable value by Rs1.7 crore.
* Factory at Gummidipoondi in Tamil Nadu commenced commercial production of concreteequipment from April 2010.
UB Engineering: Commenced construction of structural fabrication steel unit inChattisgarh.
* UB Infrastructure was incorporated as a wholly owned subsidiary in May 2010.
HOV Services: Certain number of equity shares was reclassified from the promoter tonon-promoter category from April 2010, resulting in drop in promoter holding from 55.83%to 48.59%.
DIC India: As per the share purchase agreement signed in March 2010, sold itsentire shareholding in DIC Coatings India to Valspar (Singapore) Corporation Pte Ltd forRs 40.06 crore in June 2010. The income from transaction has been treated as extraordinaryitem.
Zenith Computers: Out of the outstanding foreign currency convertible bonds (FCCB)of US$ 10 million, bought back US$ 1.81-million FCCBs in the June 2010 quarter.
Varun Industries: According to the amendment to accounting standard (AS)-11,exchange loss of Rs 98.48 lakh in long-term foreign currency monetary items added to thecost of fixed assets in the June 2010 quarter.
Riddhi Siddhi Gluco Biols: Other income included insurance claim of Rs 3.77 crorerelating to fire that took place in May 2007 at its Gokak unit in Karnataka.
Delta Magnets: Acquired 100% equity stake in MMG India Pvt, Ltd, and MMG Magdev,United Kingdom, in the June 2010 quarter. These companies are into the soft ferritebusiness.
Century Extrusions: On expiry of previous wage agreement, a new agreement has notbeen reached due to excessive demands of workmen. The matter was under conciliation withthe additional labour commissioner. However, workmen resorted to agitation inside factorypremises seriously disrupting normal production. The firm has declared work suspensionfrom 2 July 2010, which was withdrawn on 24 July 2010. Normal operations resumed only on28 July 2010.
Thangamayil Jewellery: Cost on advertisement not accounted in accordance with theAS, resulting in overstatement of profit by Rs 11.79 lakh. After taking into considerationthe extended life span of unexploited advertisement, expenses charged to this quarter isfair and proper, as per the company.
Swaraj Mazda: Engaged in legal battle over Modvat credit of Rs 4.66 crore, whichhas lapsed. The amount lapsed is not accounted or written off from the books of accounts,though adjusted in excise records.
Indian Hume Pipe Company: Value of the orders on hand stood at Rs 1254 crore endJune 2010 as against Rs 1519 crore end June 2009.
GHCL: With the approval of the Reserve Bank of India (RBI), it bought back andcancelled 725 FCCBs with face value of US$ 10,000 each at a discount. This resulted in asurplus of Rs 42 lakh, which has been transferred to the business development reserve, asper the scheme of arrangement approved by the Gujarat High Court.
* No provision made on outstanding guarantees of Rs 376.25 crore to Dan River, US, andRosebys, UK. As amount is not quantifiable this would be adjusted against businessdevelopment reserve in subsequent years upon reasonable certainty.
* Of the US$ 79-million FCCBs, bought back US$ 57.25-million FCCBs end June 2010 at asignificant discount. Any premium payable on the remaining US$ 21.75-million FCCBs to beadjusted against the securities premium account. Thus, does not expect any impact on theprofit & loss (P&L) account.
IFB Agro Industries: Production of rectified spirit from molasses distillery wassuspended from 11 June 2010 due to inordinate delay in disbursement of allowable molassestransportation cost by the excise department and also due to non-availability of molassesat economically feasible prices.
Schrader Duncan: Operations at the Mulund plant in Mumbai ceased completely.Entered into agreement with workmen and staff for payment of Rs 14 crore as voluntaryretirement compensation.
Kanoria Chemicals & Industries: Gain or loss arising from the effect of changein foreign exchange rates on revaluation of the outstanding FCCBs and premium on it shownas exceptional item.
EIH Associated Hotels: Travel advisories issued by several countries post-terroristattacks on Mumbai in November 2008 continued to adversely affect travel and tourism. Thedepressed global economic situation further impacted travel to India.
Infomedia 18: Prepared financial statements for the fiscal ending March 2010 (FY2010) on going-concern basis as the company is taking various effectors to revive itsbusiness. Auditors have commented on this. Incurred a loss of Rs 6.12 crore in the June2010 quarter and accumulated losses stood at Rs 99.49 crore end June 2010. Had raisedequity through rights issue of Rs 99.92 crore to augment equity in FY 2010. Unutilisedfunds from rights issue stood at Rs 19.76 crore. Its parent company has also extendedfinancial support. Is in the process of restructuring its business. Entered in to anagreement with Knowledgeworks Global Pvt Ltd in May 2010 to sell its entire equity stakein its four subsidiaries. This will result in significant cash flows in FY 2010.
Balasore Alloys: The auditors have expressed their inability to ascertain liabilityarising out of advances of Rs 5 crore as against which supply of materials is pendingbeyond the stipulated delivery schedule in the accounts for FY 2010. The company ispursuing the matter and is hopeful of refund or supply of materials in due course.
Zen Technologies: Value of orders on hand stood at Rs 3.55 crore end June 2010.
Hatsun Agro Product: In their limited review report for the June 2010 quarter andin their audit report for FY 2010, the auditors have qualified certain income tax relatedmatters under dispute. As per the management estimates, the financial impact will bearound Rs 1.5 crore based on legal advice. The management believes that no incrementalprovision are required.
* There was a fire at its Kancheepuram plant in Tamil Nadu in the June 2010 quarter. Itis hopeful of recovering the loss incurred from the insurance company and has accountedfor Rs 1.50 crore as insurance claim receivable.
Asahi Infrastructure & Projects: The board has approved the installation ofmanufacturing of the fly-ash gypsum brick plant at three sites: Partur district in Jalna,Maharashtra, and two more to be identified. Also approved to manufacture and market theprecast ferro-cement building components on large scale.
Shiva Cement: Kiln was closed for 20 days in the June 2010 quarter.
GMM Pfaudler: Changed its accounting policy for revenue recognition of largecontracts from recognition on completion basis to percentage of completion basis from 01April 2009. Sales of the previous quarter included Rs 4.2 crore based on percentage ofcompletion. There is no revenue booked under percentage of completion in the June 2010quarter.
Gontermann Peiper: Foreign exchange fluctuation loss of Rs 2.19 crore in the June2010 quarter.
Suryalata Spinning Mills: Manufacturing capacities at the Urukondapet unit AndhraPradesh was enhanced by 2016 spindles with two-for-one (TFO) twisting division 3,648spindles for value addition to yarn from 15 June 2010.
Fine Line Circuits: Depreciation was higher by Rs 14.86 lakh in the June 2010quarter as depreciation on plant and machinery for FY 2010 was subsequently reworked basedon the remaining useful life of the assets.
Hindoostan Spinning and Weaving Mills: Value of property and surplus or shortfallon property development by Kalpataru Heights located on the property at Mahalaxmi inMumbai would be accounted on resolution of dispute with the developer, which has beenreferred to arbitration.
Andhra Petrochemicals: Modernisation-cum-optimisation plant commenced commercialoperations from 1 May 2010. Post expansion, installed capacity increased to 73,000 tonnesper annum.
BSL: Expansion projects of the weaving and processing division and vortex spinningare going on as per schedule.
Beckons Industries: Collaborated with a US company for commercialisation of algaetechnology.
* Tied up with Hong Kong-based company for transfer of algae technology to South Asiancountries.
Kajaria Ceramics: Setting up a six-million square meter per annum polished andglazed vitrified tile manufacturing capacity at existing location at Gailpur in Rajasthan,which is expected to go on stream by December 2010
Prime Urban Development India: The realty division obtained approval forconstruction of villas on part of its lands admeasuring about five acres, owned at Tirupurin Tamil Nadu. Construction is scheduled to commence shortly.
* Exceptional items represent net loss on sale of buildings belonging to its TFOtwisting unit at Sathyamangalam in Tamil Nadu.
LKP Finance: Income from operation included Rs 3.56 crore from profit on sale ofshares held as investments.
Stone India: The auditors have commented on liability of Rs 2.28-crore rental tothe Kolkata Port Trust. The matter is pending with the high court. Provision made of Rs94.48 lakh, considered as adequate by the management. Paying rental since August 2005, asper the directive of the Supreme Court.
VBC Industries: Konaseema Gas Power, an associate company, commenced production ofpower for its third unit from 30 June 2010.
Steelcast: Profit margin under pressure due to increase in input costs that couldnot be passed on to customers. Increase in fixed costs arising from investments made tocreate additional capacities, benefits of which are yet to be realised and sharp increasein salaries and wages impacted profitability.
* The board approved formation of a joint venture company with Michigan Steel Group,USA, for marketing of steel castings in the US.
Aries Agro: The sulphur bentonite unit at Fujairah, UAE, commissioned in the lastweek of July 2010.
Transcorp International: Other income included Rs 2.18 crore from profit on sale ofinvestments.
Jay Shree Tea & Industries: Made further investment of US$ 6.6 million (Rs30.25 crore) in its wholly owned overseas subsidiary, Birla Holdings Dubai. The subsidiarymade multiple acquisitions in the June 2010 quarter. First, a 60% equity stake inOCIR-THE, the tea estates owned by the government of Rwanda, with made-tea producingcapacity of 41 lakh kg per annum, through consortium agreement with Rwanda Mountain TeaSARL. Second, 100% equity stake in Kijura Tea Company and Bondo Tea Estates, with made-teaproducing capacity of 13 lakh kg per annum.
* Difficult to estimate taxable profit for FY 2011 as the tea business is highlyseasonal in nature and, hence, current and deferred tax would be provided at the end ofthe year. This has been commented upon by the auditors in their review report for the June2010 quarter.
Mangalam Cement: Six wind mills, with capacity of 1.25 MW each, commissioned inJune 2010.
* Work on setting up of captive thermal power plant of 17.5 MW going on in full swingand to be commissioned by December 2010.
* As per the high court approval, deferred tax liability for FY 2011 and for the June2010 quarter would be adjusted against the securities premium account at the end of theyear.
Mangalore Chemicals & Fertilizers: Fertiliser subsidy accounted for based onthe nutrient-based subsidy policy announced by the government for FY 2011.
Williamson Financial Services: Other income included write-back of liabilities andprovision for diminution in value of investments made in the earlier years that is nolonger required.
Oriental Carbon & Chemicals: Started work on a 5,500-tonne per annum insolublesulphur plant in a special economic zone (SEZ) at Mundra, Kutch (Gujarat).
Lumax Industries: Has set up production facility at Haridwar in Uttarakhand, whichcommenced commercial production from March 2010.
Sulzer India: Other operating income includes a writeback of Rs 4.53 crore from adisputed legal matter which was pending since 1997.
Industrial Investment Trust: Formed a wholly owned subsidiary, IIT Media andEntertainment Pvt Ltd, with capital of Rs 15 lakh.
Abhishek Industries: Hedged its foreign currency fluctuation exposure in FY 2010 bytaking various derivative options from various banks with maturity up to January 2013. Asper the company, these options are proprietary products of banks and do not have a readymarket. Also, the marked-to-market (MTM) model is usually bank-specific instead of beingMTM. Due to the significant uncertainties associated with these derivatives, whoseultimate outcome depends on future events, loss on such derivatives cannot be determinedat this stage.
Lanco Industries: The mini-blast furnace plant was shut down for aboutone-and-a-half month for revamping and reinstallation of hot blast stoves.
Mukand Engineers: Turnover in the June 2010 quarter was less as clients’ siteswere not made available as per schedule. The order book position stood at Rs 198.59 croreend June 2010.
Golden Tobacco: Closed its Mumbai manufacturing facilities after taking permissionof labour commissioner in June 2010.
* Converted certain flats in Mumbai into stock in trade and surplus of Rs 2.67 croretreated as other income in the June 2010 quarter.
Amforge Industries: Due to lock-out declared at the plant, physical verification ofinventories was not undertaken and diminution or impairment in value as well as fixedassets could not be worked out.
* Provision for income tax and deferred tax, if any, for FY 2010 to be made at the endof the year.
Umang Dairies: Sales in the June 2010 quarter higher due to higher sale of brandedproducts.
* Carried forward losses and unabsorbed depreciation and may not have taxable profit innear future. Hence, considered appropriate not to create deferred tax asset as per AS-22.
* Auditors have commented on certain balances of debtors, loans & advances andcurrent liabilities, including advances from customers and secured loans in the process ofconfirmation and reconciliation, in FY 2010. The company is in the process of confirmationand reconciliation.
Cybermate Infotek: Received work orders from five hospitals from implementation ofhospital management software.
National Peroxide: Operating profit significantly higher on year on year comparisonas a result of increase in sales volumes of both hydrogen peroxide and hydrogen gas.
* There was a plant shutdown for 24 days in May 2009 for maintenance and replacement ofcatalyst.
* Other income included dividend of Rs 1.33 crore received from subsidiary NaperolInvestments, which is non-recurring. Therefore, results of the quarter strictly notcomparable.
Samtel (India): Deferred tax assets not recognised as per AS-22 on uncertainty offuture taxable income.
* The management finalized agreement for supply of labour in the previous quarter.Necessary amendments made in the memorandum of association, enabling the company toundertake this agreement. However, the company continues to carry on trading activitiesand is exploring other options. Accounts prepared on going-concern basis.
Saurashtra Cement: Exceptional items represent reversal of provision for diminutionin value of investment. Any diminution or reversal for losses in investment in subsidiarycompanies to be considered at the end of the financial year.
Bellary Steels & Alloys: All expenses including interest and depreciation onexisting operations capitalised as they are under implementation.
Pan Electronics (India): Worked out deferred tax assets. However, tax impact of netdeferred tax assets not recognised in books based on the application of principle ofprudency, as required by AS-22.
Sundaram Brake Linings: Provided detailed note on losses arising from derivativetransactions. Disputes arising out of certain derivative transactions entered into onbehalf of the company with some banks have been settled. Net amount paid shown asextraordinary expenditure. If there are defaults on its financial commitments under thesettlement claimed by the bank, the entire amount of Rs 84.12 crore would become payable.
Chokhani International: Decision pending on its claim on ICICI Bank for Rs 210crore on account of the bank’s negligence, resulting in total loss of thecompany’s most valuable assets, which had a value more than sufficient to meet claimsof secured and unsecured creditors, by failing to carry out timely maintenance despitereminders from the court receiver. Therefore, cost of fixed assets less depreciationprovided and value of inventories amounting to Rs 48.81 crore, as intimated by the debtrecovery tribunal receiver, deducted from secured loans. Considering this, the managementis of the opinion that no amount whatsoever is due and payable to financial institutions.
Ashirwad Capital: Deferred tax liability to be calculated and provided whilefinalising the accounts.
Ceat: increased its stake to 100% in Associated Ceat holdings Co Pvt Ltd, SriLanka.
ABM Knowledgeware: Revenue of approximately Rs 7 crore and corresponding cost ofapproximately Rs 5.6 crore out of one-time software supply contracts have been fullyexecuted in the June 2010 quarter.
* Provision for deferred tax liability, if any, to be made at the end of the year.
Kamat Hotels (India): Opted for amended AS -11. Resulted in a loss of Rs 2.09 crorein the June 2010 quarter as against gain of Rs 5.77 crore in the June 2009 quarter. Losshas been added to the cost of relevant fixed assets if related to capital asset and toforeign exchange fluctuation gain or loss difference account in other cases.
l After the shareholders’ approval received in June 2010, the Reserve Bank ofIndia (RBI) has issued no objection certificate to revise the conversion price of US$13-million FCCBs as per pricing norms notified.
Apt Packaging: Not recognised deferred tax assets in the accounts consideringuncertainties about future profits.
Swasti Vinayaka Gems Corporation: Deferred tax liability to be calculated andprovided at the year end.
Wadala Commodities: In view of uncertainty of profit to offset brought-forwardlosses, not recognised deferred tax assets.
Madras Fertilizers: Ammonia and urea plants shut down for four days and nine days,respectively, in the June 2010 quarter for annual maintenance and power failure.
ADF Foods: The unquoted investments in the subsidiaries are of long term and thereis no permanent diminution in the value. To do an impairment exercise at the year end, asper policy.
Total Exports: No interest provision made as final settlement of loan withfinancial institutions still in progress.
Nelco: Obtained approval of the shareholders to transfer undertakings comprisingtraction electronics, supervisory control and data acquisition and the industrial drivesbusinesses on a slump-sale basis to Crompton Greaves for Rs 92 crore.
* After implementation of the SAP ERP system from 01 October 2009, the accountingpolicy on valuation of raw materials has been changed from the weighted average method tothe moving weighted average method. This change does not have a significant impact on theresults for the June 2010 quarter and nine months ended June 2010.
* Other expenditure included charge of Rs 56.24 lakh for the June 2010 quarter andcredit of Rs 2.07 crore for the nine months ended June 2010 (June 2009 quarter credit ofRs 1.58 crore and charge of Rs 56.55 lakh for the nine months ended June 2009) on accountof foreign exchange fluctuations impacting monetary items, as per AS-11.
Sinclairs Hotels: Other income included Rs 66.31 lakh in the June 2010 quarter andRs 36.55 lakh in the previous quarter on account of income from investments of surplusfunds.
Century Enka: Shared information on preferential warrants allotted to promoters andstatus on conversion of warrants in equity shares.
JCT Electronics: Deferred tax assets not accounted due to uncertainty in realisingagainst future taxable income.
Blue Coast Hotels: Interest and finance charges of Rs 5.38 crore including Rs 2.75crore of interest on investment in new projects.
Binani Industries: Binani Zinc, subsidiary of Binani Industries, invested inMeridien Minerals, Australia, through its wholly owned subsidiary, PZ Minerals (Australia)Pty Ltd, to ensure long-term availability of zinc concentrate.
Amrit Corp: Sold or transferred its investment in ABC Paper to co-promoter EsteemFlnventures by way of interse transfer between the promoters at the close of the June 2010quarter as part of restructuring of shareholding among the promoters of the company.
Sri Ramakrishna Mills (Coimbatore): Power shutdowns and 20% power cut was in forcein Tamil Nadu.
Emmsons International: Foreign currency forward contract income or loss includedprovision made on MTM basis, as per revised AS-11.
Sumeru Industries: In the process of establishing salt-pan project in the Kutchdistrict of Gujarat.
Excel Crop Care: Excel Crop Care, Africa, was incorporated as a wholly ownedsubsidiary in Tanzania in June 2010. To commence business operations in the second half ofthe financial year.
Greenply Industries: The medium density fibreboard unit, situated at IIE,Pantnagar, Uttarakhand, was largely inoperative in the June 2010 quarter forsynchronisation of machineries in the continuous manufacturing process. During theprocess, there was an unfortunate incident that caused damage to the Thermax boilerfurnace on 22 June 2010. Discussions were initiated with the supplier. Furnace of boilerneeds to be replaced. Cost of replacement would be borne by the supplier. Normaloperations are expected to resume by 15 September, 2010
Firstobject Technologies: Total revenue included Rs 8.46 crore from IT / ITES andRs 60.7 lakh from e-learning.
Shri Keshav Cements & Infra: Capacity expansion is nearing completion as perschedule of planned growth. Benefit of the expanded capacity to accrue from the next threequarters.
Bhagiradha Chemicals & Industries: Manufacture of chlorpyriphos, along-standing product of the company, discontinued in July 2010 due to adverse marketconditions. Chlorpyriphos was contributing around 50% to sales. Developing alternativeproducts that are expected to be in the market in the next 12-18 months.
Vinyl Chemicals (I): Extra-ordinary items relates to gain on prepayment of deferredtax (sales tax) under the Maharashtra Value-Added Tax Act, 2002
Maral Overseas: Life of spinning plant and machinery was revised back to 18 yearsin FY 2009. Therefore, the depreciation for the June 2010 quarter not comparable.
Enkei Castalloy: Figures of the June 2010 quarter are not comparable due todemerger of the wheel division. The current results pertain to the foundry division only.Sales of the foundry division stood at Rs 44.71 crore and profit before tax Rs 3.15 crorein the June 2009 quarter.
Rubber Products: For valuing raw materials, followed inclusive method as in thepast instead of exclusive method. All taxes included, as per AS-2.
* Debtors subject to confirmation and included some debits that are overdue. Theseincluded dues from railways, government departments, and public sector undertakings. Legalaction for recovery of dues in progress. No provision made for doubtful debts.
ITD Cementation India: Recognised variation claims of Rs 50.42 crore till 30 June2010, which are also included in sundry debtors. These claims are disputed by thecustomer. Out of this, Rs 28.01 crore is under arbitration. For the balance variationclaims of Rs 22.41 crore, received arbitration awards in its favour. These have beenchallenged by the customer. Considering the legal advice, the management is reasonablyconfident of recovery of the amounts awarded.
* Debtors end June 2010 included Rs 33.84 crore, representing interim work bills forwork done which have not been certified by customers beyond normal periods ofcertification. The management is reasonably confident of the certification and recoverybased on past experience.
* Debtors end June 2010 included Rs 12.25 crore, which was recognised as income in theearlier years. Based on the payment schedule originally agreed with the customer, theclaim was expected to be received over a period of time commencing from FY 2009. Noamounts have been received till date and further rescheduling of payment not yetfinalised. The company is in advanced stage of discussion and confident of recovery.
* Recognised escalation claims on two road contracts, aggregating to Rs 20.28 crore,till 30 June 2010. Debtors included Rs 11.40 crore. The claims are disputed by thecustomer. The company has received favourable verdicts from the dispute redressal boardand in arbitration thereafter. The customer has appealed against the arbitration award.The management is reasonably confident of recovery. Not recognised any turnover orescalation claims on these road contracts in the June 2010 quarter.
* Debtors end June 2010 included variation claims of Rs 15.15 crore, for which thecompany has received an arbitration award, which was, subsequently, upheld by the districtcourt.
Bright Brothers: Reduction in equity capital was an account of buyback in the June2010 quarter.
Axis IT&T: Over the last two financial years, expanded operations and tookoptimisation measures resulting in improved profitability.
