I got annual report of Dai-Ichi Karkaria yesterday. The report is mixed bag with some positive points, but many negative issues. Find enlcosed my notes from annual report:
Positive:
Benefit of new swiss technology:
The gas dispersion in a liquid, without any moving parts inside the reactor along with pressure tight set-up, makes this the safest technology for an ethoxylation process. The Buss reactor with its double loop has allowed the company to expand its capacity two-fold and manufacture specialty ethoxylates of superior quality and with utmost safety and efficiency. The cutting-edge technology used and innovative products that can be produced will allow, the company to enter not only the personal-care space, but also move forward with higher
molecular weight products that are used in the pharmaceutical industry. This will allow us to move into niche markets where our presence so far, has remained limited.
Labour lost case in Mumbai High Court
HKS had filed a Writ Petition in the Mumbai High Court for representing the workers for negotiating Charter of Demands with the Company. However, the Mumbai High Court has dismissed the Writ Petition. As advised by the High Court and in order to settle all the legal matters, the Company had made an offer to pay the differential wages to all the workers who had not accepted the earlier Individual Settlements. However, the workers have refused to accept the offer.
Negative issues:
Longer period to stabilise of production at Dahej
This transformation required several systems & processes being put in place (some of them adopted from our Pune site), a recruitment drive to attract local talent, transition of manpower from Pune to Dahej, outsourcing of service functions like boiler, utility, ETP and ousekeeping, set-up of local supply chain, start-up of RM/FG stores (material movement), canteen, along with a full-fledged Quality Control and R&D Centre.
The new Plant at Dahej is based on new Buss Technology which required the setting up of each of the Company’s products on a much larger reactor and into a fully automated DCS system. The SOP of each of the 100 products the Company manufactures had to be reviewed and reset on the new conditions in the Plant. This process itself took over 6 months.
Besides issues with labour and our inability to move several key reactors from Kasarwadi to Dahej, we had issues with our key manpower from Pune adjusting to the facilities at Dahej. Due to shortage of reactors we were only able to achieve partially our overall capacities. In fact with the delays we faced in production we could not even despatch substantial of the orders received.
Meanwhile because of Labour issues in Pune (created by the ex-workers of the Company together with an unrecognised union) resulted in non – removal of several balancing reactors from Kasarwadi to Dahej. The result has been that we have had to carry out production on a partially completed Plant with atleast 30% of the equipment still lying in Pune. This has been seriously challenging for the Company.
Issue in shifting machines from Pune to Dahej
Some ex - workers have entered into an illegal agitation at the factory gate of the Kasarwadi Plant and have restrained the Company from moving its machinery and equipment to the Dahej Plant.We have not been able to fully commission the Dahej facility resulting in serious disturbances to our Sales plans & despatches.
Stressed cashflows:
CSR Amount not spent
Delay in deposit of undisputed statutory due (amout is < 1 Lakh hence not material, but does indicate issue on cashflow position of the company)
The company need to pay term loan of Rs 16 Cr. While it has some liquid investment which can be sold and also surplus land assets at Pune (once Karaswadi labour issue is resolved), there could be temperory cashflow mismatch in case company is not able to scale up at Dahej plant signficantly during the first half. While currently, it does not have solvency risk, in case financial continue remain as they have been since last 6 months, the company may face issue of liquidity in near term in my opinion.
Deteriorating operations:
Despite decline in sales, Lower production (based annual report mentioned plant opeating at 30% at Dahej), we see major jump in Power cost and also unit consumed. May be due to stabilsing face, but the efficiency appears to deterorated during the year with almost 25% increase in power consumed. Per Kg production, power consumption increased from 213 kwh in FY18 to 249 kwh in FY19.
Change in Depreciation policy:
While not affecting cashflow and cash profit, still the company changed depreciation policy which lower depreciation charge during FY19 by Rs 7 Cr. Same was also disclosed in interim results so not new in my opinion.
Lackluster performance of Nalco Champion
Given the loss making operation (even after lower rate of Depreciation during FY19), deteriorated performance of Nalco Champion JV, unability to stabilise operation at Dahej and closure of Kasarwadi unit, sign of strained cashflow (indicated by not spending CSR and delay in depositing undisputed income tax), I have moved Dai Ichi position from Core holding to trakcing portoflio. There is high porability that managment would try to address issue ot Dahej unit stabilisation and business may show good prospect during the time to come. However, at this stage, in my limited understanding, business has many moving parts which increases risk given my risk profile.
Disclosure: While being initiator of thread, I continue to respect management of the company for transperency, I consider it to my duty to intimate investment decision to the fellow investors. After reading annual report, I find it difficult for me to hold company in my core portfolio. Hence, I have liquidated substantial (more than 99% of my current holding) holding of mine in the company . My view may be biased due to minor holding and/or recent sell of material quantity. I am not SEBI registred advisor. Hence, investor shall consult his/her own due diligence/consult investment advisor before making any investment decision.