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Lakshmi Mills: 100 years old and showing its age - Outside View by Luke Verghese
 
 
Lakshmi Mills: 100 years old and showing its age



The centenarian at play

The most remarkable factor of Lakshmi Mills is that it is still extant. Having made its corporate beginnings in April 1910, it is today a mere 100 years old. It must also rank as among the oldest textile companies in the organized sector, and listed for trading too, which is still trying to make a go of it. Sadly, it appears to be losing the battle against geriatry. It has recently shuttered its weaving unit, and the company is now reduced to operating just two manufacturing units, after closing down its Coimbatore operations.

The company is a part of the (late) G Kuppuswamy Naidu group of institutions. Its better known siblings are Lakshmi Machine Works and Lakshmi Automatic Loom Works. One hundred years is a long time in the history of any corporate institution, and companies like to make a song and dance of the anniversary of this occasion. But wisely the management has chosen not to do so, and has merely rewarded its long suffering shareholders with a 9% dividend, after resorting to some deft accounting moves to make it all possible. The company proudly adds that it has a track record of paying a dividend to its shareholders for the last 75 years without a break. This in itself is a feat which very few other pure play cotton and synthetic yarn textile mills can duplicate.

Exploiting its land bank

What it is left with today is a spindlage capacity of 129,000 nos of ring spindles—which is a fall from the 140,000 nos capacity in the preceding year. Concurrently, it also boasts of a land bank valued at Rs 1 bn (based on a revaluation that the company effected in March 2005, plus additional expenses on VRS paid to erstwhile employees that it added on) at its shuttered Coimbatore operations. To this one must add its investments in group listed companies with a book value of Rs 11 m. The market value of its combined stake in Lakshmi Machine Works, Lakshmi Automatic Loom Works, and Rajshree Sugars was valued at Rs 1.3 bn at end March 2010. (This is an infinite jump over the market value of Rs 387 m in the preceding year end.) That is a lot of book assets for a company which is a sputtering operation in all other respects. But the land bank will be developed, and the revenue streams can be measured only in terms of future cash flows which are indeterminate. It is also unlikely that the shareholding by the company in its group companies, which also represent the group's voting strength, will be bartered in any manner, which will prove detrimental to the group's control in its fellow companies. So in effect the value of its equity holding in its group companies is mere deadwood for all practical purposes. (The bank loans that it has contracted for example, is against a charge on the other moveable and immovable assets of the company.)

Set to reap the whirlwind

But the management is getting all set to reap the whirlwind. The chairman, Mr. S. Pathy, in his wisdom, has decided that the burden of managing both the textile operations and the developing of the land bank is a bit too much to handle all by himself. Therefore the company has wised up to the idea of appointing Aditya Krishna Pathy, who has suddenly appeared out of nowhere, as the right candidate for the latter job on hand. He will take in the new role in the capacity of executive director. The senior Pathy is himself well remunerated for his troubles, with a pay packet of close to Rs 3.7 m.

The company manufactures and sells cotton and synthetic yarn, and buys and sells cloth. The activities include exports of textiles. The other sales related income is from the hocking of waste cloth. Together, it garnered revenues of Rs 1.3 bn during the year, against revenues of Rs 1 bn in the preceding year. This includes purchase of garments worth Rs 60 m for resale, which realized a 'profit' of Rs 21 m on resale. It also earned 'other income' of Rs 33 m against Rs 65 m in the preceding year. The other income basically constitutes dividend income, and profit from the sale of machinery. The cash inflow from this manna in either year is fairly substantial, and is not a recurring item in its entirety. It partly accrues from the sale of capital equipment from its dysfunctional weaving operations.

Deft accounting

After some deft accounting, the company still reported a pre-tax loss of Rs 8.5 m against an even more impressive loss of Rs 74 m in the preceding year. What is quite clear from the profit generation pattern is that, the company's manufacturing operations are a dead loss proposition, minus the other income factor on the one hand, and the profit generated from the resale of bought out cloth, on the other. The high level of borrowings (Rs 951 m) and the interest outflow of Rs 100 m arising from it, add to the grind. Seeing the writing on the wall, the management has very thoughtfully decided to double exports to Rs 120 m in the current year and is pinning hopes for an encore on the profitability front. Besides, the spinning operations appear to be as antiquated as the company. This inspite of the company having spent a fairly impressive Rs 100 m altogether in gross block upkeep in the FY09 and FY10. The directors' report states that the company made do with some 2,142 employees at year end. Employee remuneration took away another Rs 181 m.

The future imperfect

It does not look like it will go very far in the manner in which it is traversing at this point of time. It simply lacks the resources to do a complete makeover of its bread and butter activity. What the real estate division will contribute to the cash kitty is at present a matter of conjecture. And what the management plans to do with this cash generation, if any, has not been even vaguely spelt out as yet. But the management appears to be upbeat about the company's performance, for lack of anything else to say. The report proudly adds that its Rs 100 face value shares are quoted at Rs 2,500 in the secondary markets. That price quotation is due to several favorable factors, including the management's stake of 50% in the paid up equity, and the lack of floating stock. But this secondary market quotation definitely does NOT add much credence to the theory on the 'efficient market hypothesis' of the stock markets.

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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