BackKhaitan family to cede control of McNally Bharat Engineering
An investor has been identified and a deal is expected to be concluded within a few weeks
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Kolkata: The Khaitan family of the Williamson Magor Group is ceding control of its engineering business, but for now will retain a minority stake in McNally Bharat Engineering Co. Ltd—a firm they acquired in 1980 from its foreign owners.
An investor has been identified and a deal is expected to be concluded within a few weeks, according to at least two people familiar with the development. The buyer is a leader in developing electricity transmission infrastructure, they said, without naming the buyer.
These officials did not want to be identified.
Deepak Khaitan, the firm’s chairman, could not be immediately reached for comment. His brother Aditya Khaitan, who is a director, said the Williamson Magor Group did not as a policy comment on speculation.
On 30 May, the company had said in a regulatory filing that its board had approved a plan to raise as much as ₹ 250 crore by selling shares or convertible securities.
McNally Bharat was founded in 1961 as a joint venture between the erstwhile McNally Pittsburgh Manufacturing Corp. of the US and the UK’s Bird and Co. to provide solutions to India’s mining industry. In time, it expanded to become a broad-spectrum engineering company serving the infrastructure and mining sectors.
McNally Bharat has a healthy order book of at least ₹ 6,000 crore, said the officials cited above, but it is laden with debt to banks and vendors. Instead of taking more loans and delaying payments to vendors, the management decided it was time to bring in fresh equity. So McNally Bharat will be selling shares, they said.
The Khaitan family will now focus on their two other companies: McLeod Russel India Ltd, the world’s biggest bulk tea producer, and Eveready Industries Ltd, which produces household batteries and lighting equipment.
Though the Khaitans are going to remain invested in their engineering firm with a small stake, they are likely to cash out when valuations improve. Their current stake of 32.31% in McNally Bharat is nearly entirely pledged to lenders. It isn’t immediately known to what extent their stake will be diluted by the proposed share sale.
The company’s shares have been trading firm for the past two weeks. On Monday, they gained 2% to close at ₹ 90.15 on BSE, while the Sensex fell 0.52% to 25,991.23 points. At its current market price, McNally Bharat is valued at ₹ 280 crore.
The Khaitan family is reorganizing its business interests and its decision to withdraw from active management of McNally Bharat comes amid its plan to prepare a roadmap for each of its other businesses for the next 10 years.
The beleaguered engineering company is looking to bring in ₹ 150-200 crore immediately to tide over its liquidity crisis, according to the officials cited above. In six-nine months, its management is of the view that it will be able to substantially realize the money stuck in completed and partly completed projects.
Unrealized revenue has been McNally Bharat’s biggest problem in the past few years, according to a person who has previously audited its accounts. He, too, declined to be identified.
Though McNally Bharat has reported profits in the past few years except in 2013-14, its cash flow from operations has lately been negative. What it reported as revenue wasn’t fully realized, the auditor said, but it is a legitimate practice under Indian accounting standards.
However, in 2013-14, the company set aside ₹ 75 crore towards “onerous contracts", resulting in a net loss of ₹ 72.5 crore. This was the first time in the wake of delayed payments that the management expressed doubt about the recoverability of the unrealized revenue.
Even as the company reported a net revenue of ₹ 2,155.5 crore for fiscal year 2014 (marginally lower than the previous year), it reported an increase in trade receivables of ₹ 527.67 crore. At the end of March, the company had ₹ 2,411 crore stuck in trade receivables and current assets, up from ₹ 1,928.28 crore a year ago.
The inability to recover money resulted in cash depletion (or negative cash flow) of ₹ 211.64 crore from operations alone despite withholding payments to vendors and without taking into account repayment of loans. This gap was funded by fresh short-term borrowings of ₹ 463.76 crore, shows McNally Bharat’s cash flow statement for fiscal 2014.
This has been going on for the past few years and has resulted in McNally Bharat’s trade payables swelling to ₹ 1,007.1 crore at the end of March (from ₹ 951.62 crore a year ago), short-term borrowings going up to ₹ 927.15 crore ( ₹ 610.66 crore) and other liabilities payable in less than a year rising to ₹ 725.91 crore ( ₹ 564.23 crore).
Getting investors to buy into the company might not have been easy had the outlook for the infrastructure sector not improved dramatically since the change of political guard at the Centre, the auditor added.
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