Tuesday, November 29, 2011

Electrotherm Ltd...A case Study... Excellent Profit making Co converted in Loss making...!

Today I would like to write on Electrotherm Ltd.It was an excellent Co and suddenly since last 2 qrs the bottonline has gone very negative.I am stunned by the results. The loss are 136 cr for June qr and 156 cr for Sep qr 2011 respectively and that is a LOSS of almost 300 cr in first half.
Well, I was tracking Electrothern Ltd as it was a future bluechip in making and was posting excellent results qr by qr and yr by yr.
So suddenly what happened that Electrotherm started psoting huge losses?
In May/June 2010 management decided to takeover Hans Ispat Ltd and Shree Hans Paper Ltd, Electrotherm (India) Ltd  for  Rs 60 cr. When I read that annoucement at that time  I doubted it in my mind whether that was a right decision or not and looks like my suspicion has come out true unfortunately.
Why a Co which making excellent profit should buy Hans Ispat and Hans paper in which paper is not their core competence business?The sales were already over 2000 cr then why a Co has to acquire another Steel Co and a Paper Co?Is there something I am not able to see ?
The Interest outgo suddenly jumped from 41 cr to 82 cr from last June qr to this June qr.We all know that Steel is a capital Intensive business and if one do not play the cards properly you are bound to be in trouble.
Why a profit making Co take such decision to make it a LOSS making Co?
300 cr LOSS in 2 qrs and we don't know what is there in store for next 2 qrs! and how the Co will  makeup these losses is a big question coming to my mind. Rs 300 cr loss in one half is so big to cover up and then start making profit as well.
First Electrotherm will have to wipeoff this loss and then make profit , so from 300 cr loss to even small profit  of 30 cr , the table needs to be turned in such a way that Electrotherm should make a NP of Rs 330 cr ............and that is a Herculian task according to me for any Co .
Looks like Electrotherm has given us a glaring example how an excellent running Co can get converted in HUGE Loss making Co!A future bluechip Co is now a LOSS making Co.
Suddenly the expenditure has gone up then sales.In Sep 2011, the sales are 404 cr and expenditure is 442 cr.Means Co is already in loss from the starting point as raw material and other expenses has gone up over sales and then add Interest for debt which is 82  cr and add depreciation of 37 cr and Co ends up with a HUGE LOSS of 153 cr for just one quater , Sep 2011.....Wow.......Kya kehna hai......!
Achhi khasi nafe wali co thi, usko ghate wali bana diya................
I have no words to discribe such a bad decision taken by the management.As I said earlier , the entire aquisition was a bad decision.I maybe wrong in my view but as of now it looks it was a very bad decision.
Instead of trying to putting effort in research on Electric devision where they make BIKES which are battery operated  and making it more consumer oriented and spike up the sales of their YoBikes, they did the wrong thing, that is what I am feeling and let me write that when I read about the acquisition of Hans Ispat and Hans Paper, I was in doubt and if I remember , when someone asked me what I feel about Electrotherm Ltd I didn't give a BUY call to him/her.
If someone can remember in one of my recent post maybe a month or so back, I wrote that while looking at parametres one needs to keep track on stock and go to BSE site and see if there is any announcement there for the Stock you hold and if you find one open it and read it and if Co is diversifying in another business then analyse it whether the diversification will work or not.
And exactly same thing has happend with Electrotherm Ltd.

I would like to see what management has to say about the LOSSES and how they will manage it.I am awaiting Management interview on Electrotherm.If they have given any such interview after dismal LOSS in first 2 qrs I request readers to give the link ......

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