Bombay Burmah: A sprawling conglomerate

Sep 13, 2011

Bombay Burmah's turf extends way beyond its shores and the warts are beginning to flower through the woodwork.

A company of many parts

This is a company of many displaced parts. Incorporated as far back as in 1863 in the then city of Bombay by a family of Scottish traders sporting the surname Wallace, their creation is today 146 annual reports old. It is also the 2nd oldest listed Indian company, and still chugging along the well beaten track. (The wonder is that it is still alive and meandering somewhat, which makes it a fit subject for a case study on meaningful longevity. It has also had a glorious past. Bonus shares account for 85% of its paid up equity capital of Rs 140 m - but that was many moons ago). Its original charter was to engage in the tea trade, by shipping tea to Mumbai from Burma. It subsequently diversified into trading in teak from Burma and Thailand. Its foray into the plantation sector happened much later. As a consolidated entity it is humungous, thanks mostly to the convoluted provisions of the Companies Act, which allows it to even tag in the results of group company Britannia Industries. As a single entity though, it really does not have much to show for its years of perseverance.

The consolidated entity boasted gross revenues including other income, of Rs 51 bn. It incorporates the financials of 46 subsidiaries, and 12 associates. These siblings come in all hues - including subsidiaries, fellow subsidiaries, sub subsidiaries, step down subsidiaries, and yet other step downs subsidiaries of step down subsidiaries and so on. The mantra it appears is to confuse and to obfuscate. One may not be overstating the case by saying that it is easier to traverse through an Amazonian jungle. The siblings include such exotica as holding companies based out of The British Virgin Islands and Mauritius (two of India Incs' favorite watering holes), and yet other businesses based out of the UAE, Oman, Sri Lanka, Malaysia, Singapore, Indonesia, the UK, USA, and of course yours truly Bharat. The standalone company on its part managed to crank up a gross income of Rs 4.1 bn for the latest year end, with liberal help from a one of a kind 'other income'.

The divergent businesses

The parent's chief claim to fame is the numbers of bewilderingly divergent businesses that it makes do with under one roof. Then there are its six subsidiary companies which are into this and that, twenty eight subsidiaries created out of its six subsidiaries, or out of its step down subsidiaries, three associates, and its 14.6% stake in fellow Nowrosjee Wadia group company, Bombay Dyeing. This latter investment alone makes Bombay Burmah even more invaluable to the group. (The book value of its holding in the rapidly greying Bombay Dyeing is Rs 166 per share, with a total outlay of Rs 987 m. The Wadias acquired the controlling stake in this company some three decades ago from the Vissanji family, if my memory serves me right. The promoter group holds 66% of the voting stock). The advantage of having such a complex holding pattern of subsidiaries and such like is simple - the parent does not have to reveal the innards of the step down subsidiaries and other non appetizing details. It is all a game you see. But most importantly, its considerable tea and coffee plantation lands are valued at a mere Rs 191 m, if my reading of the fixed asset schedule is on track. The value of these lands today will be worth more than an emperor's ransom, and then some more.

The standalone company

So what exactly is this company up to? Bombay Burmah grows and sells tea, coffee, pepper, cardamom etc, makes phenolic laminates under the brand name of Sunmica, automotive components, weighing machines and consumable dental products. It also dabbles in trading activities in what it makes, and this brought in sales of Rs 99 m. (It bought and sold almost as much coffee as it produced in 2010-11). It also notched up export sales of Rs 408 m during the year - the bulk of which was exports of tea and coffee. Interestingly enough, all the manufacturing divisions are on a roll and contribute to the bottom-line.

The segment revenues net of excise that is, show top-line generation from six sources. At the top of the heap is Auto ancillary Products generating revenues of Rs 1.08 bn, followed by Plantation Products with Rs 1.06 bn, Building Products with Rs 788 m, Dental Products with Rs 131 m, and Others with Rs 21 m. That adds up to Rs 3.1 bn against Rs 2.9 bn previously. Based on pure play working it is the Auto Ancillary division that brought in the maximum top-line of 35.1% and segmental profits of 41.8%. Next in line is Plantation Products with 34.4% and 38.8%. Third in line is Building Products with 25.5% and 11.4%, and bringing up the rear end is the Dental Products division. Separately there is the one time Investment income of Rs 732 m and also the customary 'other income' which contributed with Rs 67 m. That makes for a further addition of Rs 799 m to the top-line - and wrongly shown as Rs 1.1 bn in the schedule. Together it adds up to a cumulative total of Rs 3.9 bn. To this one must adds excise taxes of Rs 111 m.

Strange observations

Barring the auto ancillary unit there appears to be little traction in the other business segments. (The directors' report however has a different take on this calculation. The report states that the Plantations division continues to be the core business and other divisions although profitable are relatively small in size. A very strange observation indeed, if one may so). In the not too hazy future, hopefully, another revenue accruer will be the real estate division which is just picking up steam. Apparently the company has extensive real estate in Mumbai, (though the value of its land in historical cost terms is minisule) where the action was first initiated by its original promoters. For the present the expenditure on this count is shown under inventories as 'Real Estate under development' and valued at Rs 186 m. Coming to think of it the Wadias seem to have developed more expertise in the real estate business than in the bundle of activities that they have for long been associated with.

From the accounting year 2011-12, the results of its wholly owned subsidiary Electromags Automotive Products should also feature in the division wise results of the parent, as this company is being merged into the parent. Though it is large sized turnover wise at Rs 943 m, it is scraping the bottom of the barrel at the profitability end, and hence the merger. In what manner does a merger help the cause of this struggling business except to hide the warts? Besides the equity stake of Rs 54 m that the parent has in Electromags, there are also outstanding loans of Rs 278 m due from this sibling.

Siblings come and go

During the year it also made short work of its holding in P.T. Indo Java Rubber Planting Company. This cash cow from which the parent earned a dividend income of Rs 48 m in 2010-11 was apparently acquired eons ago, and for not more than a lullaby tune it appears. (The same appears to be true of its present holding in its Malaysian subsidiary, Leila Lands Sdn Bhd). The book value of its 50.3% capital stake in P T Indo Java was a mere Re 0.02 m. This holding was flogged for Rs 670 m which led to a long term gain of a like amount. This sale apparently also led to a tax payment of Rs 132 m, leaving the company with a net sum of Rs 537 m. These funds are now being invested in the equity of a wholly owned subsidiary, Leila Lands Sendirian Berhad, based out of Malaysia. What is amazing about this material development is that there is nary a mention of the sale of its Indonesian plantation, or for that matter, the reasons for the proposed additional capital infusion of Rs 525 m in the Malaysian subsidiary (from the proceeds of this sale) in either the directors' report or in the Management discussion and analysis statement. In the learned opinion of the management this was only a minor infraction or some such.

Extraordinary receipts

This 'other income' of Rs 669 m is one of the two extraordinary receipts that it earned during the year. (As a matter of fact, its other income schedule is like that of very few other companies and includes a potpourri of receipts under 15 heads of account). The second such receipt is for Rs 60 m and pertains to 'Compensation for transfer of lease' - and probably has to do with the sale of the Indonesian property. Together they tote up to Rs 729 m. This had the salutary effect of ramping up pretax profit to Rs 1 bn from Rs 207 m previously. That is before accounting for 'Derivative losses' of Rs 62 m against Rs 85 m previously. Separately the company has booked an exchange gain of Rs 11 m against a loss of Rs 19 m previously. Why the necessity for such separate categorizations please? The company also received its dividend tithes from Bombay Dyeing, but the Malaysian subsidiary has not paid its dues.

The many offspring

It is the financials of the many subsidiaries and associate companies which makes this company remarkably extraordinary. Take for example PT Indo Java Rubbers which has only recently been hived off. (The parent has been kind enough to provide the 'summarized statement of financials' of 46 subsidiary companies, as is statutorily required. The true standout disclosure here is that only two companies in this meandering list have declared a dividend - Britannia Industries and PT Indo Java Rubber). As per the brief information furnished, PT Indo Java was hawked for Rs 670 m. This company recorded a turnover of Rs 488 m, and earned a pretax profit of Rs 278 m, and recorded a post tax profit of Rs 205 m, in the latest accounting year. It also paid a record dividend (it appears) of Rs 10.6 bn! Or is there a gross printing error here? If this indeed is the quantum of dividend, and as the sibling is a 50.3% subsidiary, then the parent will be richer by an astronomical sum. (As stated earlier the parent has shown an income of Rs 48 m on this count, in the latest annual report). It also boasted total assets of Rs 350 m, and had a paid up capital of Rs 0.8 m, and reserves and surplus of Rs 245 m. Given these mellifluous book figure statistics, on what basis was the sale price arrived at please?

Just as befuddling is the Malaysian subsidiary, Leila Lands Sdn Berhad. It has a paid up capital base of Rs 157 m, Reserves of Rs 708 m, and total assets of Rs 1.4 bn - but has no investments. It is not known what business this company is into, but it recorded a turnover of Rs 2.4 m, and posted a loss before tax of Rs 32 m. This makes for an Amar Chitra Katha comic story or something. What sort of whacko business is this company into please? On top of this the parent is now pumping hard earned cash running into over half a billion bucks into this sibling, chasing a mirage perhaps?

Even more comic is the Mauritius based subsidiary of Leila Lands Sendirian Berhad, sporting the name Leila Lands Ltd. It has a paid up capital base of Rs 0.009 m, reserves and surplus of Rs 2.04 bn, and mega total assets of Rs 9.7 bn - and like its parent has no investments. And guess what, it could not even rustle up any revenues. On the contrary it recorded a loss before tax of Rs 50 m! This will beat any magic that Chris Angel can conjure up.

The financials of Naira Holdings, a fellow subsidiary of Leila Lands is as flummoxing. It has extra large reserves and surplus, and total assets, no investments, a zilch turnover, and a pretax loss which has no bearing with the revenues. What is more, the parent has at year end also advanced Rs 23 m of low coupon bearing debt to this company. What could be the purpose please? And, what is one to make of this muddle?

There are several other equally eyebrow raising companies in the subsidiary fold, but not worth expanding on, as the conclusions are the same. The management has also affected a change of guard in the top echelons during the year. The tenure of Mr Jeh Wadia, the deputy managing director was abruptly foreclosed during the year. And his place on the board has now been usurped by his brother Ness Wadia. (It appears that the various companies in the group are being clearly demarcated between the two siblings). But more importantly Ness joins as the managing director, and will be one of the two managing directors of the company. He will of course be availing a handsome remuneration for the services that he will be rendering to the company.

We have to wait and see what benefits accrue to the company following the change of guard. But it is more likely that continuity is the only change that one will get to see. This is not a company for the faint hearted investor, or even for the foolhardy for that matter.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme