I learnt something new today on working capital management strategies analysing this company. Here is the deal.
Supposing we looked at the business in its totality, Mirza as a company will manufacture goods in India, export and sell them in the UK and recognise revenue when a sale is made. All unsold commodity is recognised in its books as inventory. Plain simple vanilla accounting.
However, in this case Mirza international limited (a listed company) exports to Mirza UK limited (privately held company, the directors of which are the promoters of MIL). Mirza UK limited has distribution rights of Red Tape in the UK and US. So in essence there is a supplier-customer relationship between MIL and Mirza UK limited. So when MIL makes a “sale” to Mirza UK, the transfer of goods is recognised as inventory on Mirza UK and as turnover on cash/credit basis on MIL.(this by itself is a bit difficult to get my heads around because this is only simply transfer of goods from one entity to another, there should be no revenue recognition. However, this is normal accounting.)
Now, here is where it gets interesting. MIL sells to Mirza UK on credit, takes the invoice along to the bank and asks the bank to “bill discount/invoice discount” it. Essentially stating, I have made a sale to a buyer and the buyer will pay me in some time. Can you, bank, loan me an amount slightly lesser than the invoice value and wait till the buyer repays you directly? The bank happily says yes(making it fully clear to MIL that should the buyer, Mirza UK, not pay up then the bank will come knocking on MIL’s door). So in essence, Mirza as a business has manufactured and sold to itself and gotten the bank to pay for it against the invoice.Why do this when they can get a simple working capital loan? Simply because Ind AS allows companies to account these bill discounts as contingent liabilities (off balance sheet).
Exhibit 1 - MIL’s trade receivables position for FY16, 17 and 18
That is 132 crores in FY18, 67 crores FY17 and 63 crores in FY16.
Exhibit 2 - Mirza UK’s trade payable position (March 2017)
That is £12.8M or about 120 crores in payables to MIL (against the 67 crores recognised above).
Exhibit 3 - This explains the difference and more.
This is entirely legal. However, every analysis on working capital/capital turns/inventory turns will be skewed (will be too optimistic).
P.S : Mirza UK’s filing history can be found here https://beta.companieshouse.gov.uk/company/02802325/filing-history