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McDowell Holdings: Without much of a future - Outside View by Luke Verghese
 
 
McDowell Holdings: Without much of a future

Another nugget from the UB stable

This company is yet another nugget from the United Breweries (UB) Group. Its primary function, as the nameplate suggests, is being a repository of the shares held by the proprietors of the Group, in its group companies. It is a small time player, though the directors' report claims that it has a substantial stake in group companies. (The proprietors themselves have a stake of only around 37% in the voting capital of McDowell Holdings.)

The company is seven years young as a corporate entity, and it has had the misfortune of having its name plate rolled over, and in short order at that, several times, in tune with the whims and fancies of a management which appears to be bamboozled on a matter of such minor import.

An aftermath creation

McDowell Holdings was the aftermath creation following the rechristening of McDowell and Company as United Spirits Ltd. The investment business of McDowell and Company was demerged into this company. It originally took on the name of United Golden Beverages Ltd in March 2004. It subsequently affected a name change to McDowell India Spirits Ltd, before subsuming its present avatar. What's in a name, especially when the job is mainly of the housekeeping variety? In any event this is the brief resume of this company.

It presently holds shares in four UB group companies - Mangalore Chemicals & Fertilizers, UB Engineering Ltd, United Breweries (Holdings) Ltd, and United Breweries Ltd. The total book value of its holdings as on March 2010 was Rs 632 m. Each of these company shares was transferred to McDowell Holdings at different prices relative to the face value.

Name Rs (m) % of voting capital held
United Breweries Ltd 293 4.5
United Breweries Holdings 284 7.9
Mangalore Chemicals 35 6.0
UB Engineering 19 2.6

(In the preceding year it also held shares in non group companies.) Its percentage holdings can hardly be referred to as 'substantial holdings' by any stretch of imagination. But in any event let us give the devil its due.

In the doghouse

So how is the company faring? That depends on how the four companies in which its holdings stand, are doling out as dividend on the one hand, and the debt capital that it has to service on the other, to remain afloat. It is not a very pretty picture though. In the preceding year end it has a total debt of Rs 209 m which included an intercorporate deposit (ICD) of Rs 190 m that it took on during the year. This ICD was used to acquire shares to the tune of Rs 189 m. Total debt in FY10 was lower at Rs 179 m. The debt is really an inconsequential sum, relative to the total book value of its holdings. But the debt would appear humungous when compared to the ability of the companies in which it holds shares to declare dividends. The reduction in debt this year was the fallout of its sales of shares that it held in non group cos. It sold these holdings having a book value of Rs 10.7 m, for Rs 62.5 m, realizing a profit of Rs 52 m. From this onetime cash flow bounty, it reduced debt by Rs 36 m.

It has little leverage over the companies in which its present holdings are held. These shares will never be parted with by the proprietors either, given the very sensitive nature of the shareholding. (McDowell Holdings has however pledged almost its entire holding in these companies for loans availed of by the Group Company. The name of the group company remains cleverly hidden, but in all probability it could be United Spirits.) These pledged shares are unlikely to be retrieved in a hurry either. It therefore has to make do with the dividends, if any, that are declared by them, and McDowell Holdings does not feature in the list of priorities of these four companies.

Piddling incomes

In FY10 it had a dividend inflow of Rs 7.5 m which is a piddling figure by any reckoning. On the basis of the book value of its holdings at year end, the dividend yield on its investment is a paltry 1.2%. Currently it has intercorporate deposits to the tune of Rs 173 m, and it appears to be paying a coupon rate of 16% on this debt. The interest burden in FY10 was in excess of Rs 31 m, and consequently, the income and expenditure schedules simply do not add up. The intercorporate deposit appears to have been sourced from a non group company. It also appears to earn a standard 'commission fee' of Rs 7 m from some financial service that it renders. But this additional income, even when added to its dividend income, is still small beer.

It will be interesting to see how the company will balance its books in the current year, as it will be bereft of any extraordinary incomes. The management itself acknowledges the problem of making ends meet by adding that various alternatives are being explored to mitigate the burden of interest payable. In the same breath it also says that the company will continue to focus on making long term strategic investments in various new ventures promoted by the UB Group. It appears that the management had to fill in a few columns in the directors' report and added whatever came to their mind.

The scene is bad

The scene is so bad that even the Managing director of the company, Mr. Harish Bhat, has been reappointed for a further period of three years, but on a NIL salary basis. As if this was not enough he also holds a few shares in the company, which needless to add earns no dividend. Wonder how the poor soul manages to making a living in this manner. But Mr. Vijay Mallya is also known to be a very benevolent man.

Why the lay public would want to hold shares in this company is among the bigger mysteries.

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.

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