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Greaves Cotton: Time to take stock and move on - Outside View by Luke Verghese

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Greaves Cotton: Time to take stock and move on
Jan 17, 2011

A lustrous brand

The Greaves brand has been around for some 150 years, though the corporate entity is a mere 91 years young. Today it is accredited as a part of the B M Thapar Group, and which control over 51% of the voting capital of this geriatric. (Mercifully this group, inter alia, comprises of only 17 companies). As a mark of respect for the brand having survived its sesquicentennial (150th) year, the directors have very thoughtfully paid a record percentage dividend of 150% against 40% in the preceding year. Though the management has laid down its mission statement very concisely (technology, value, reach), the company appears to lack the traction, and not quite able to match up to the ideals, judging from the snapshot of its financial performance in the last decade.

A sad legacy

It recorded a pretax loss in the first two years of the decade, made an apology of a pretax profit in the third year of the decade, had a minus EPS in the first three years of the decade, and skipped dividend in the first four years of the decade .Its subsequent bottom-line performance hardly instills much confidence either, and besides, pretax profits took a dive in FY09. The odd factor here is that net sales have almost consistently risen in each year of the decade. (The plus point in its functioning is that it has brought down debt t over this period from Rs 3.2 bn to a mere Rs 5 m. Equally impressive is the fact that the company has spent Rs 148 m during the year on R&D expenses, but the spin off benefits of this largesse is not known). And for a brand which has been haring around for the length of time that it has been, the gross turnover of Rs 14.6 bn that it clocked in, in FY10, and the equity capital base of Rs 488 m, is not exactly the stuff of dreams. Shareholders too seem to losing faith. Their numbers have declined from 57,400 at the start of the decade to 42,600 at the latest year end, after dipping to a low of 41,781 in the interim.

Its product line The company per se has 5 divisions - its largest being the Automotive division, the Agricultural Equipment division, the Auxiliary Power division, the Construction Equipment division, and the newly formed Industrial Engines division. Then there is the fledgling international operations comprising South and South East Asia, The Middle East, Southern African and, Eastern African markets. For the present, the forex earnings tote up to a mere Rs 300 m - small beer compared to the overall turnover that it ratchets up. Separately the company also appears to have a branch in Manchester (England) which does not appear to fit into the above scheme of things. Moreover, this branch rang up an impressionable loss of Rs 34 m during the year (Rs 15 m loss in the preceding year) for doing what, god only knows. The products that the company puts in the market are cranked out from its 8 factories - 4 in Maharashtra, and 4 in Tamil Nadu. Principally, each of these divisions, barring the construction equipment division that is, (and here too motors are a part of the deal), make and market engines - petrol, diesel, kerosene, and they come in all shapes and sizes. But the catch here is that its principal customers are the original equipment manufacturers, and in a sense, units such as Greaves Cotton, qualify as ancillary units of sorts. And ancillary units by their very nomenclature are in no position to dictate terms to the mother unit.

The breakup of sales

From the breakdown of how the sales income is derived, the category defined as 'internal combustion engine and generating sets' accounted for 68% of gross revenues in either year with 'engine spares and accessories' bringing in another 18% (15%). Together they constituted a neat 86% (84%) of all revenues. Vibratory compactors, Power tillers, Rollers, and spare parts effectively brought in the balance moolah. Also in this agglomeration is the revenue realized from the sale of bought out Power Tillers. Assuming that the company did not add any value to the product post purchase, then it would have realized a most impressive profit of Rs 165 m (Rs 167 m) on the purchase/ sale transaction in the two years. However, value addition on such a scale, looks unlikely by a mile!

Quantitatively speaking, there was a big jump in the production of 'internal combustion engines' during the year. Production rose by 35% to 448,000 units from 332,000 units in the preceding year. Production levels are close to its installed capacity of 496,000 units. The installed capacity in this instance is way below its licensed capacity of over 1 m engines. Hasten slowly appears to be its mantra. Presumably then, the company will now have to hike the installed capacity of this unit, though there is no mention of this possibility. The only other significant items of produce are 'generating sets' and 'concrete mixer' plants. Production of the former at 2,440 units is a mere 11% of what it can produce at full tilt, which are 22,600 units. Why does this company nurse such an excessive unutilized capacity in the first place? A similar production trend is visible in the latter unit too. Production is a mere 32% of capacity. In other words there appears to be a severe mismatch with what the company foresees, and the ground realities. On paper it also has capacity to make 14 items in total, but 9 of the product lines are non functional, either because the company has yet to put up the infrastructural facilities, or because the capacities already installed are kept idling. This says a lot about the 'grey cells' of the management.

Segment Reporting

The information contained in the segment reporting schedule gives a much clearer picture of what the insides of the company is all about. It classifies its sales income under three heads - Engines, Infrastructure Equipments, and Others. The engines division brings home the bacon both on the top-line and bottom-line front. The curiously named Infrastructure Equipment division which brought in 11% of the revenue in FY10 is a loss maker of no mean proportion in either year. Why this should be so has not been adequately explained. It is of course good to note that unlike other large family owned business houses, Greaves Cotton is not the repository of myriad subsidiaries and affiliates, especially the ones located in the exotic tax havens of the Caribbean, or what are labeled as of the 'Gora' variety. Of late though, it is making a half hearted attempt to make up for the lost time and get there. The main difficulty that the company faces in doing so is that it does not generate enough spare cash to do much damage, and besides it has adopted the philosophy of being debt free - and thank God for that.

The subsidiaries

To date it has a mere 5 subsidiaries, the largest of which, capital investment wise, is Greaves Leasing Finance. The parent has plonked down Rs 372 m into this venture in the form of equity, and mostly as preference capital. The equity shares of this 100% subsidiary were even acquired at a large premium of Rs 38.3 per share relative to the face value of Rs 10, for no plausible reason. There appears to be very few interse transactions between the parent and its sibling. Where this sibling fits in, in the overall scheme of things that Greaves Cotton has chalked out for itself, is a bit difficult to comprehend. For the present however, inspite of its name plate, its focus is on intercorporate investments, with a book value of Rs 358 m. Almost the vast bulk of the money is plonked into an entity sporting the name Premium Energy Transmissions. This company is presumably into laying of high tension lines or some such. (Why did the management have to float a company with a leasing tag, when the primary objective was in an ulta direction?) Besides, the business eked out pitiful revenues of Rs 34 m, but given the excellent margins, was able to repay the parent Rs 12.5 m as dividend.

The Dutch Fetish

Like brother Gautam Thapar of Ballarpur Industries, Karan, who has been anointed the crown prince of Greaves Cotton, also has a fetish for matters Dutch. So he has promoted a gora holding company titled Greave Cotton Netherlands BV into which it has pumped in Rs 292 m. In all probability this 'Highlander' will oversee all future 'Out Of India' operations, among the myriad other possibilities. It has already been landed with a pipsqueak German subsidiary, Greaves Farymann Diesel, which appears to be on the mend for the time being. The two other subsidiaries Dee Greaves and Greaves Auto Ltd are in a state of nirvana, with the management presumably having no clue of what to do with them.

All in all, a very depressing scenario for a company with a lustrous brand image, and the high powered motors that it turns out.

Disclosure: Please note that i am not a shareholder of this company

This column Cool Hand Luke is written by . 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.

Disclaimer:

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