Ballarpur Industries, a part of the Lala Karamchand Thapar Group, is a classic example of the saying that no investment is a permanent investment. This 65 year darling of yesteryears is now under the stewardship of Gautam Thapar, a scion of the third generation of the family, and, merely coasting along. Gautam is indeed a lucky man having inherited the undivided share of the group assets of the crown prince of the group, the late L M Thapar, who died issueless. This is in addition to the share that befell him as a part of the B M Thapar agglomeration, when the group spoils were carved up. This branch of the extended family is now rechristened as the Avantha Group. According to the latest annual report, BILT and Gautam Thapar, along with the 'following' entities constitute a Group as defined by the MRTP Act, 1969. Guess how many companies are involved in this listing? A humungous 111 companies or so, and the list appears to include a liberal sprinkling of companies incorporated across the seven seas. What pray is the crying need to incorporate so many entities?
Not quite getting it right
In his annual brief to the shareholders, Gautam extols at length on the many virtues of Ballarpur Industries - 'BILTs production facilities are in the low cost economies of India and Malaysia, the company continues to strive to squeeze out every element of cost in its day to day operations, its focus on technology, distribution and innovation'- the works if you wish. The ground realities are not exactly on the same wavelength as the conclusions he has drawn, based on his learned observations. The point is that, besides focusing on the main objectives of the company, the management has more colorful designs too in mind.
Ballarpur continues to be a one product wonder and has not really strayed from its initial moorings of manufacturing paper and paper boards. Specifically, the company makes writing and printing paper, and tissue paper, in five locations in India. It has three factories in Maharashtra, including the mother unit at Ballarpur, one in Orissa, with the fifth unit in Haryana. Its consolidated operations include its captive unit in Malaysia; through a 97.8% owned subsidiary called Sabah Forest Industries Sdn. Bhd. (Separately it also makes wood pulp, the very raw material that goes into the manufacture of the end product). It also appears to have another strangely structured manufacturing unit going by the name of BILT Graphic Paper Products Ltd, which is a 99.9% subsidiary of Ballarpur International Paper Holdings B.V. with the balance stake held by the parent! (The initials B.V. for the uninitiated denote a type of Dutch private limited liability company.) By the way is Netherlands also a tax haven of sorts? Gautam also appears to have a fetish for matters Dutch, but more on this later.
The figures do not add up
As stated earlier, Ballarpur appears to be merely meandering on, judging by the very statistics that the company has put out. It has an installed capacity to manufacture 232,000 metric tons of paper, including wrapper and coated paper. The installed capacity remains unchanged over that of the preceding year. This is bit difficult to believe, as the company incidentally has spent Rs 3.6 bn over the last two years in fixed asset mollycoddling. (The increase in installed capacity in FY09 over that of the preceding year is not known.) In this giant jigsaw puzzle the management adds to the confusion by stating that it has been on an expansion drive over the last few years. Consequently an additional capacity of 355, 000 tons has come on stream (190,000 tons at Bhigwan and 165,000 tons at Ballarpur). Unless I am hallucinating here, this is an impossibility, as the total installed capacity of all the five units is only 232,000 tons. What is even more amusing here is that different pages give different figures of the additional capacity that has come on stream! The fact of the matter also is that in reality BILT per se manufactured 650,000 metric tons of paper in FY10, and its Malaysian subsidiary another 150,000 tons. Together it adds up to a total production of 796,000 tons for the year. (It also purchased Rs 566 m worth of paper. Whether these purchases were affected from its Malaysian subsidiary is not known. But in any case it does not alter the picture). Unless I am getting something drastically wrong here, the figures simply do not add up. The people dreaming up the contents of the annual report should pay a little more attention to the accuracy of the statements.
The total installed capacity of all the paper units operating in the Indian geography is stated as 10.8 m metric tons per annum (MTPA). In other words the company's share of the cake is a mere 2.2%. Even going by the production it achieved during the year, its share of the cake in the domestic market is only 6%. Another 1.2 m MTPA capacity addition is expected over the next two years. There is no mention of what the company's contribution to this expanded kitty will be. And what is more, in either year, going by the appended schedules, the company's production was less than 90% of its installed capacity levels.
A tectonic shift in focus
As I stated earlier, the focus of the management is undergoing a tectonic shift. Whether this shift in focus is a harbinger of better times to come or not for the non management shareholders is difficult to tell at this point of time. But in any case I leave it to the better judgment of the readers of this copy. But suffice to say that this Avantha group company had at last count 11 subsidiary companies, of which 7 are based out of ‘Dutchland’. It had related party transactions with 6 of them, and there are 19 enterprises in which key management personnel have significant influence.
So what appears to be cooking in the melting pot? The company generated Rs 8 bn, as net cash inflow from operating activities during the year, against Rs 1.4 bn that it generated in the preceding year. Significantly however, the bulk of the application of funds during the year and amounting to Rs 8.7 bn was for the purchase of equity shares, all of which was funneled into one company. A billion bucks was also ploughed into capital assets. Since it was out of pocket after this dual splurge, the company resorted to a two pronged issue of additional capital comprising of pure equity and of the zero coupon variety. It issued additional equity to the tune of Rs 1.4 bn and zero coupon bonds for the value of Rs 1.7 bn or for a total of Rs 3 bn. The cash flow statement has however come to the brilliant conclusion that the company raised equity capital to the tune of Rs 13.5 bn! So much for number crunching! (Following this issue of capital the management has a firm hold on matters of import, with a stake of close to 50% in the voting stock of the company).
The subsidiary imbroglio
BILT has a direct equity stake in only 6 subsidiaries. The other 5 unfortunates are step down subsidiaries or some such. Its diciest investment is in the majestically named wholly owned subsidiary, Ballarpur International Holdings BV, in which the book value of its investment at year end was Rs 11.4 bn against Rs 2.6 bn in the preceding year. These shares were collectively acquired at an average price of Rs 67.8 per share, against an average price of Rs 58.5 per share in the preceding year. Its total investment in its subsidiaries adds up to Rs 11.5 bn. In other words, the company’s investments in the other subsidiaries are mere pinpricks.
The company has provided the working results of 10 of the 11 subsidiaries. It has not provided any details of Ballarpur Packaging Holdings Private Ltd, which was previously known as Labuan Offshore Financial Services Authority. (A complete makeover in the name plate from one curious name to another equally curious name, or so it would appear). Four of the 11 subsidiaries, including 2 based out of the Netherlands and the one based out of Malaysia are subsidiaries of Ballarpur International Holdings B.V. But the most curious aspect here is that Ballarpur International Holdings does not appear to have any investments in any company, or so its abridged balance sheet shows. How is this possible? And, what is one to make of this muddle? More importantly, what of the combined financial performance of the 10 worthies? Collectively they generated a turnover of Rs 28.8 bn and recorded a pretax profit of Rs 2.8 bn. But just 2 of the 10 recorded any revenue of any sorts. Namely BILT Graphic Paper with a turnover of Rs 22.6 bn with a pretax profit of Rs 1.2 bn and Sabah Forest industries with a turnover of Rs 6.2 bn and a pretax profit of Rs 1.1 bn.
Where the money is going?
(BILT Graphic Paper with a total asset base of Rs 41 bn also controls more than 33% of the gross total assets of Rs 124 bn of the 10 subsidiaries combined. Compare this for size with the total asset base of BILT which is a mere Rs 26 bn and one gets the big picture. Besides, there is no specific mention of BILT Graphic Paper in the annual report!) All the other siblings recorded piddling profits or mostly recorded losses on zilch revenues. Combined, the 10 companies have an equity capital base of Rs 38 bn. Just one of the 10 declared a dividend of Rs 100 m. This cash return must rank as a neat return on total investment any which way that one looks at it. (Now you know in which direction the moneys are flowing).
And what of the king pin Ballarpur International Holdings which has just been infused an additional capital stake of Rs 8.7 bn, and which boasts the second highest paid up capital among the subsidiaries after Sabah Forest Industries? Well if it is of any consolation to anybody it has negative reserves of Rs 1 bn for starters. It also recorded a loss of Rs 179 m, and has no income streams. This implies that it is merely a rubber stamp, and exercises no control over the companies that it has founded. But who is complaining anyway? There is still more, but I have prattled enough.
If one must know this is simply a fantastic muddle.
Disclosure: Please note that i am not a shareholder of this company
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.