Is Reliance Chemotex Shortchanging the Minority Shareholder?

reliance chemotex analysis

A couple of weeks back we got in touch with Strategic Growth Advisors, the Brand managers of Reliance Chemotex, asking them to arrange an interview with the management.

We were researching into the stock and wanted to know the reasons for the poor performance in 2016-17 (even after discounting for demonetization and GST).

The company promised us time last week, but did not schedule the interview because someone fell sick in the family.

We were promised time this week, but there’s been no response so far.

Therefore, we are publishing the questions here, and forwarding the article to the company and the Brand Managers in the hope they will take the time to answer these questions:

Reliance Chemotex

1. In 2017-18, your company’s profits were badly hit by an increase in power costs of about 67 crores.

This is a 21% increase in power cost without an increase in sales/production. Why did the power cost increase despite a fall in sales?

What is the situation today?

2. You have mentioned the need to modernize your facilities thereby saving power and increasing capacity. What is the capital required and by how much will this modernization hit profits in 2018-19?

3. You have stated that expansion is on the cards and have even announced a rights issue. Can you give us more information?

4. Last year you repaid about 13 crores loans to bankers. What’s your debt reduction program. To what extent do you plan to repay this year?

5. How much of your foreign currency earnings are hedged at given point?

What is the situation today?

How much hedging MTM losses have you booked in 2018-19 so far?

6. What is the value add that the 3rd generation of the promoters is bringing in to the company.

They are MIT graduates and have joined the company since 2010.

So far no value add is visible to the shareholders.

Please provide some insights.

7. 164 crores out of about 288 crores turnover, or 57%, is being exported. Last year the average $ rate was about 65. This year is about 70 so far. Can we expect that based on on $ terms, the export revenue will rise minimum 5%?

Also, how much will sales rise in the natural course of business?

8. You are paying Rs 9,75,000 rent per month to interested parties despite owning your own land and facilities.

This hits profits by 1.20 crores per year.

Please let us know the use of each premise, and what are your future plans.

9. You are paying 2.15 crore annual salaries to promoters which is way above your net profits.

Plus, you have made profits by writing back taxes.

This is extremely unfair to minority shareholders. Please elaborate on this.

11. You have about 2.25 crores contingent liabilities in disputed tax cases.

What is the current status?

Have you received any opinion from your lawyers, and if so, can you share it?

12. Please list your best performing product (auto seat covers, school uniform, yarn for special uses such as conveyor belts, etc.). We need a list of your best selling products, and a list of products with potential.

13. Real net profit for the year is 81.50 lakhs

After writing back deferred taxes, it works out to 2.81 crores.

Now compare these numbers with

  1. Rent paid to interested parties – 1.2 crores
  2. Salaries paid to promoters – 2.15 crores

The promoters rewarding themselves and showing profits by writing back taxes looks extremely unreasonable to minority shareholders.

14. In 2017-18, you have borrowed 10.23 crores (and have generated 10 crores as operating cash flow) to repay long term debt 8.5 crores, dividend on equity and preference shares of 3.1 crore and interest of 9.6 crores, and have ended the year with a net cash outflow of 55 lakhs. This seems unnerving. How is the cash flow situation as on date?

15. In 2017-18 you have added 1.05 crores to building and 3.27 crores to plant and machinery. What’s cooking?

We are still awaiting answers to these questions.

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