The company appears unable to generate adequate returns on its maha investments in group companies
Needs more level headed reporting practices
The Chairman of the board of directors of Tulip Telecom, Mr. H S Bedi in his exuberant message to the shareholders signs off as Lt. H. S. Bedi. The masthead of the board of directors states that he is a (Retd) Lt. Col. But this is only a minor error and calls for more ‘proof reading’ in future. The company has also extended its year end for the latest year by six months to close as on September 30, 2012. The reasons given for extending the year end is classy to say the least. (In hindsight it was not a very good decision to extend the year end by six months. The share price touched its nadir in the month of September in the 18 month accounting period). The company says the shift was done in order to align the reporting structure of the company with then regulatory reporting structure and to make it more transparent and compliant. It is more than difficult to digest all this at one go. Which regulatory reporting structure is the company referring to please? For direct and indirect tax accounting purposes the various state and central government recognise only one year end and that is March 31. Similarly in what way do the accounts of the company become more transparent by merely extending the accounting period please? And, likewise, in what way does it become more compliant in the process-compliant with what please? And to round out the picture the directors also add that the company has decided not to recommend any dividend for the extended accounting year. Does this decision have anything to do with any regulatory or transparency requirements please?
Separately, elsewhere, the company states that it has a global presence with over 5,000 employees and more than 2,500 customers. The company implements and manages communication networks of large enterprises on long term contracts to include communications connectivity, network integration, managed services and data centres. But the schedule of forex earnings and forex expenditure shows forex earning for the year as NIL while the expenditure in forex amounts to Rs 157 m. These tables look a bit incongruous given its global presence.
Largest data connectivity service provider
For the matter of record Tulip has been ranked by Frost and Sullivan as the largest data connectivity service provider in India with a market share of 30.6%. Data service connectivity for example helps stock markets to stream data live on ticker tapes, and helps make real time derivatives trading possible. The industrial sectors that are driving growth for the company include -- banking and financial services, retail and FMCG, Government, IT/ITeS, manufacturing, and, telecom. That is a vast canvas to paint on. The company is also 20 years young as a corporate entity. The promoters either individually or through the modicum of bodies corporate control some 68% of the outstanding equity capital of the company. Just to be doubly on safe ground it has got the Singapore government to subscribe to an additional 5.3% of the capital. On a paid up capital of Rs 290m that does not leave for very much of floating stock. The shares have a face value of Rs 2 each. The share capital is backed up by reserves and surplus of Rs 13.7 bn -consisting mostly of the free reserves variety. Securities premium reserves account for Rs 822 m. The total asset base, net of depreciation on fixed assets, has grown to Rs 45.6 bn against Rs 32.6 bn previously.
What the financials reveal is that the revenue from operations scaled up to Rs 40.5 bn for the extended period against Rs 23.5 bn for the preceding 12 months. Other income tossed in Rs 46 m against a minor contribution of a few pennies previously. But this other income is after accounting for a negative entry for ‘other non-operating income’ which in the preceding year is quite substantial. How can non-operating income be a negative figure and what does it pertain to please? Anyways, the pre-tax profit grew to Rs 4.9 bn from Rs 4 bn previously-which is fairly pedestrian relative to the growth in revenues. Profit margins were squeezed primarily due to the sharp growth in both employee costs, and in ‘other expenses’. The depreciation provision and interest costs too added their mite.
In the context of the rise in profits, it is difficult to understand why the share price descended so steeply-but let that be. (It would appear that the fall in the stock price could be due to the default by the company during the year in the repayment of the Foreign Currency Convertible Bond (FCCB)loan of Rs 7.58 bn that it had taken on earlier. And, it is the possible raison d'tre why the company skipped dividend payment for the year-when you default on capital repayments how dare you effect a dividend payout, right?). There is also the possibility that the accountants may have found it a tad difficult to paint the bottom-line in adequate black ink if the accounts had been prepared for 12 months- as originally intended. There is also a onetime extraordinary income of Rs 684 m against NIL previously, being the profit on the sale of its portfolio holding in Qualcomm.
Directors’ too take part in the goodwill
The directors are also participating actively in the increase in employee costs. Their remuneration (there are three whole time directors) rose to Rs 139 m from Rs 49 m previously with overall employee costs rising to Rs 2.12 bn. The finance costs in the meantime jumped to Rs 2.77bn from Rs 853 m previously. One is however not able to understand where the hitch lay in its ability to repay the FCCB loan. Granted it was simultaneously saddled with a massive capital asset purchase of Rs 12.6 bn during the year which itself had to be funded. A major part of this spending may have been related to the purchase of a Data Centre facility at Bangalore - the third largest data centre in the world with 9 lakhsqft of built up space -- through its wholly owned subsidiary Tulip Data Centre Services Pvt. Ltd. I am however not very clear whether this capital spending and the purchase of the data centre are inter-related. There is however a capital expenditure of Rs 8.1bn during the year under the head of Equipments -Tulip Connect in the fixed assets schedule.
Defaulting on repayments
Whether the default was forced on the company, or whether it sought to default for whatever reason is not very clear. The cash flow statement shows that the company actually generated positive cash from operations during the year. The total cash generated was Rs 4.5 bn against Rs 3.3 bn previously. As stated earlier the company expended Rs 12.6 bn on capex. (In the preceding year the capex spend was Rs 5.1 bn). The company was however able to squeeze out badly needed cash of Rs 2.2 bn from the encashment of its portfolio holding. (In the preceding year it appears to have made the elementary error of also plonking down Rs 3.8 bn in investments). It had to juggle all the debt at its disposal including having to handle repayment of dues to the lenders. Overall, the debt component at year end stood at Rs 27.2bn against Rs 18 bn previously -an increase of Rs 9.2 bn. It would appear to be a very bad case of timing by its accountants that it was suddenly saddled with additional debt on the one hand, and faced with a large debt repayment on the other. And thanks to the spiralling debt the interest outflow on the debt also rocketed to Rs 2.76 bn from Rs 853m previously.
It is not known how the revenues and profits will get a leg up as a result of this humungous spending on capital assets. But the key to the well being of the company lies precisely in the ability of this additional gross block to deliver and to deliver fast at that. Of the total gross block of Rs 33.30 bn (inclusive of capital work in progress Rs 7.4 bn) as at end September 2012, the addition in the last two financial years could have been as much as Rs 18.8 bn.
Compounding the problem of getting an adequate return on its fixed assets is the fact that its non current investments of Rs 2.26 bn are not yielding a dime in revenues to the parent. In the preceding year the book value of the investment was higher at Rs 3.78 bn, with a zilch return too. Such wayward investments ultimately tell on the cash generation.
This brings us to the four siblings that it boasts of today. All the siblings are 100% owned and there is a fellow subsidiary too - which again is 100% owned. One is based out of Singapore, another out of the USA and the balance three are India based. (According to the footnote all the companies are supposed to be of strategic importance). The vast bulk of its investment outlay is in just one company --Tulip Data Centre Services Pvt. Ltd. The book value of the investment is Rs 2.14 bn. This amount accounts for 95% of its entire investment portfolio.
The siblings appear to be some sort of a poor joke -- if that is the apt term. Three of the five offspring have generated measly revenues, all of them have recorded losses or it is a no show for the year, and needless to add none of them have paid out any dividend. The largest sibling in terms of a share capital base, and total assets, is Tulip Data Centre Services. Tulip Data has a share capital base of Rs 200 m. This implies that the shares in this company were acquired a fab premium to the face value. Correspondingly, the reserves stand at Rs 1.87 bn. It is not known on what basis the premium on the face value was arrived at given the financial mindset of this company. It had total assets of the value of Rs 5.46 bn. It has no revenues but still managed to pony up a pre-tax loss of Rs 90 m. And after ‘negative’ provision for tax of Rs 78m, the post tax loss amounted to Rs 12.8 m. How is it that this company does not generate any revenues on its rather sumptuous assets?
Almost as colourful is the fellow subsidiary, SADA IT Parks Pvt. Ltd. which boasts a capital base of Rs 0.1 m, but has bountiful reserves of Rs 882 m. How is this possible please? Were the shares in this company also issued at a fantabulous premium or what? It also has total assets of Rs 1 bn, a marginal turnover of Rs 17 m, and a pre-tax loss of Rs 7.3 m. After tax provision of Rs 3.4 m it turned out a post tax loss of Rs 10.7 m. Quite apparently, the company had revenue expenses which were not tax deductible or some such. It is not known which group company if any is the holding company of SADA IT Parks.
The figures that adorn the financials of the other three siblings are almost as amusing. The very purport of their incorporation beats me totally. But the same can be said about the siblings of the vast number of companies that dot the corposphere. This company is more than a mouthful to digest.
I may also add here that the parent has some minor revenue transactions with associate companies according to details that are available. Whether these associate companies refer to its siblings or not is not known - but the details are nevertheless tantalising. The company bought goods/ services valued at Rs 550 m and the creditors at year end amount to Rs 0.5m. The company sold goods to them valued at Rs 305 m, and the trade debtors at year end was valued at Rs 185 m. As one can see the parent takes much longer to pay its dues that it takes to collect its dues.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.