Mukand Engineering

Mukand Engineering operates in the contracting/construction industry.

The company is involved in supplying and erecting equipment and executing other structural, mechanical, piping, and electrical work.  It serves customers in basic industries such as power, steel, aluminium, etc.  It operates with minimal fixed assets and practically all work is reflected within the working capital in its balance sheet.

The company also has a small ‘Infotech’ segment providing ERP implementation services.

The company reported volatile growth in revenues and operating profits over the last five years – reporting about 20cr of operating profits on revenues of 80cr in the last financial year.  It operated with an uncomfortably high debt load relative to operating cash flows, which may require liquidation of current assets at a discount if operating performance doesn’t improve or credit conditions remain tight.

The business is subject to the capital investment cycle, which is linked to the interest rate cycle. 

Although cost increases are baked into the company’s contracts, it still has to bear abnormal cost increases.  Further, cost overruns as a result of client delays would still require their acceptance, which is a source of uncertainty.

There are specific accounting issues for companies operating in this industry such as the extensive use of estimates in recording revenues, the profit potential of work-in-progress, and the recoverability of debtor balances.  These issues should encourage scepticism and careful analysis when viewing the balance sheet.

Moreover, the company owns loans and advances of questionable value including a 12cr loan to a company whose net worth has eroded, and 15cr in restructured debt of Mukand Ltd that appears to have trouble paying its dues.