Corporate Front: Balance-Sheet Analysis [Are DCM Shriram's Profits Sweet Nothings?]

CORPORATE FRONT: BALANCE-SHEET ANALYSIS
Are DCM Shriram's Profits
Sweet Nothings?

CEO Bansi Dhar's claims of a turnaround last year are based on non-recurring incomes that are notional.

By Dilip Maitra

Bansi Dhar, CEO, DCM Shriram It's sweet. It's heady. It's a turnaround. Or is it?

Judged by the covers of this annual report, the 18 accounting months that ended on March 31, 1998, were rather kind to the Bansi Dhar-managed dcm Shriram Industries (DCM Shriram). Not only did the turnover of this producer of sugar, alcohol, and rayon rise by 7 per cent to Rs 508.38 crore from Rs 474.17 crore in the previous year, as against a net loss of Rs 47.46 crore in 1996-97, the company reported net profits of Rs 2.27 crore in 1997-98.

Read the footnotes of this well-qualified (sic!) annual report-and it becomes obvious that DCM Shriram's profits are the figment of an accountant's imagination. Were its non-recurring Other Income of Rs 13.62 crore-earned by the creation of a subsidiary, Hindon River Mills-to be adjusted for, the company's net profits of Rs 2.28 crore in 1997-98 would immediately turn into a loss of Rs 11.34 crore.

When, in July, 1997, Chairman Bansi Dhar hived off the two textile units-Hindon River Mills and DCM Clusone-into a subsidiary, he sold it those assets for Rs 1.50 crore. But dcm Shriram booked Rs 13.62 crore as Other Income because that was the difference between its Revaluation Reserves of Rs 15.90 crore and the excess of the net assets it had transferred over the amount paid, which was Rs 2.28 crore. Actually, since that sum came from the Revaluation Reserves, even this Other Income was purely notional.

Moreover, as per the balance-sheet, DCM Shriram chose to capitalise all the charges-a total of Rs 2.62 crore-that it incurred on account of delays in the clearance of machinery it had imported. However, the company's auditors have argued that, since those expenses were not directly attributable to the acquisition of the fixed assets, they should have been written off in DCM Shriram's Profit & Loss Account instead. ''Had these expenses been so written off, the profit for the year would have been lower by Rs 2.62 crore,'' reads the qualification made by the company's auditors, A.F. Ferguson & Co..

There go the profits! If DCM Shriram's accounts are adjusted for both these controversial entries, its bouncy profitline morphs into a sinking lossline. Of Rs 13.95 crore, to be precise. In that case, its accumulated losses would have shot up to Rs 30.46 crore (Rs 16.51 crore carried forward from last year), which is 41 per cent of the company's net worth of Rs 73.51 crore (net of the Revaluation Reserves). That's perhaps why the dcm Shriram scrip-which was trading at Rs 10.20 on September 10, 1998-still hovers around only its par value of Rs 10.

Worrisome for tomorrow is the revealing fact in the dcm Shriram balance-sheet that the company also has exposures to two sick companies. In an 81 per cent-owned subsidiary, Indital Tintoria-a Board For Industrial & Financial Reconstruction (BIFR) case, which had accumulated losses of Rs 18.03 crore against its net worth of Rs 4.25 crore as of March 31, 1998-the company has an investment of Rs 3.47 crore by way of investments in equity shares, an overdue loan of Rs 8.35 crore, and loan-guarantee obligations of Rs 7.97 crore.

Likewise, in another sick company, DCM Hyundai-which, having accumulated losses of Rs 45.14 crore as against its net worth of Rs 33.81 crore on March 31, 1998, was officially declared sick by the BIFR last month-dcm Shriram's exposure is Rs 49.17 crore (consisting of its subscription to equity capital, loans, and loan-guarantees). Although the official view is that these investments are ''good and recoverable,'' the auditors have said that they are ''... unable to express an opinion on the recoverability, or otherwise, of the investments and receivables, and any possible loss that may arise...'' The total possible loss: Rs 69 crore.

''The turnaround has been possible due to the steps taken to restructure the company's businesses, and focus on its core businesses,'' explains the 68-year-old Bansi Dhar in the Director's Report. Perhaps. However, a balance-sheet reading suggests that the only turnaround at DCM Shriram, so far, has been in the topsy-turvy numbers.

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