Corporate Front: Balance-Sheet Analysis, Could Ceat Have Retreaded Its Accounts?

CORPORATE FRONT: BALANCE-SHEET ANALYSIS
Could Ceat Have Retreaded Its Accounts?

The tyre-maker may be restructuring its investment portfolio, but that too is boosting its bottomline.

By Dilip Maitra

Harsh Goenka Can a rhino change its horns? Sure, the Rs 1,149-crore Ceat's 1997-98 Annual Report contains only 2 qualifications by its auditors, N.M. Raiji & Co., compared to 11 the previous year. Still, it is only by peeling off the layers of rubber that Ceat's 1,62,000 shareholders will discover that the flagship of the Rs 6,500-crore R.P. Goenka (RPG) Group actually registered operational losses for the third consecutive year.

In 1997-98, Ceat's profits of Rs 48.05 crore from the sale of investments and a Rs 1.70-crore write-back helped the Harsh Goenka-managed company report net profits of Rs 13.75 crore. No different from 1996-97, when the company booked profits of Rs 71.93 crore from the sale of investments, sale of assets, and the write-back of provisions. Ditto in 1994-96 (an 18-month period), when there was a bottomline-booster of Rs 27.57 crore.

In short, the objective of the incessant churning in the RPG Group's investment portfolio may have been to transfer money to Ceat from its sister companies. And it is these cash-infusions that have kept it in the black. For instance, the tyre major's profits in 1997-98 primarily came from the sale of 32 lakh Optionally Fully Convertible Debentures (OFCDs; face value: Rs 100) issued by Jubilee Investments, a privately-held investment subsidiary with substantial holdings in the RPG Group. Although Ceat refuses to disclose the name of the buyer, the OFCDs were, obviously, sold to a sister company.

While Jubilee Investments' portfolio is not known, there are enough indicators to prove its importance to the group. In 1995-96, CTI Investments (a 100 per cent subsidiary of Ceat), Venduritty Investments (a 100 per cent subsidiary of Harrisons Malayalam), and 8 other investment companies of the group were merged with Jubilee Investments. Which enabled the latter to acquire large stakes in various companies in the group. For instance, at that time, CTI Investments held a 5 per cent stake in CESC, and Venduritty Investments owned a 1.20 per cent stake in Ceat.

Naturally, Ceat would not have sold the OFCDs--which can be converted into equity shares--to an outsider. But Hari Mundra, 46, CFO, Ceat, insists that the transaction was genuine: "The sale and purchase of securities (in Jubilee Investments) was executed as a commercial transaction. Further, the auditors would not have accepted such a transaction if it was a mere deal to book paper-profits."

In fact, Mundra emphasises the fact that the sale was an attempt to clean up Ceat's balance-sheet. Says he: "There is a conscious move to improve the balance-sheet by reducing the portfolio of investment companies, increasing the portfolio of manufacturing companies, and injecting interest-free money into Ceat through divestments." True. In the same year, Ceat did increase its stakes in the RPG Group's manufacturing arms: CESC, Gramophone Co. of India, Phillips Carbon Black, RPG Transmission, and Spencer & Co.. The total investment: Rs 26.71 crore.

However, Ceat also spent an additional Rs 26.50 crore to purchase the unsecured debentures of 3 investment subsidiaries: Ceat Ventures, Ceat Holdings, and Meteoric Industrial Finance. Interestingly, Ceat had already invested Rs 127 crore in these 3 companies--either as equity or as debentures. In addition, the stakes in the manufacturing companies were really purchased from 2 of its fully-owned investment subsidiaries, Ceat Holdings and Ceat Ventures, at greater-than-market prices.

For instance, while Ceat Holdings sold 9.09 lakh shares of CESC to Ceat at a price of Rs 92 per share, the market-price fluctuated between Rs 24 and Rs 60 between April 1, 1997, and March 31, 1998. Similarly, the investment subsidiary also sold 11.50 lakh shares of Phillips Carbon Black to Ceat at a price of Rs 64 per share while the market-price moved between Rs 17 and Rs 51 during the same period. Clearly, Ceat's focus on trimming its investment-portfolio is puncturing the buoyancy of its balance-sheet.

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