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Gulf Oil : A wishy washy collection of businesses - Outside View by Luke Verghese
 
 
Gulf Oil : A wishy washy collection of businesses

The name plate is a misnomer

The name plate does not quite tell the whole story. (The brand incidentally is Hinduja.) The company operates in a jumble of disjointed businesses ranging from lubricating oils, industrial explosives, contract mining and mining infrastructure projects, a contemplated big thrust into property development in concert with its subsidiary, Hinduja Realty Ventures Ltd, a very puny side business from the pharma end, and a wee bit of electricity generation from wind power. The power generated is supplied to its Hyderabad office. (The explosives division is care of the merger of group company IDL Industries with Gulf Oil Not bad going for a company which just about crossed the Rs 10 bn turnover mark in FY10. As the bottom-line results show, there is simply no synergy between the various revenue generators. The effect of this bio-diversity is there for all to see.

The what and how of the bottom-line

The company has reported a profit before exceptional items and taxation of Rs 384 m for the latest year against Rs 388 m in the preceding year. The other income for the year is shown as Rs 265 m, against other income (including income from property development) of Rs 360 m in the preceding year. This other income includes a more than liberal dose of profit on sale of fixed assets. (The company sold fixed assets worth Rs 241 m and realized a profit of Rs 225 m. In the preceding year the figures were Rs 239 m and Rs 229 m respectively.) Add to this figure yet some more other income comprising of 'rent' and 'others' (as shown in the breakup of sales income generated) amounting to Rs 43 m and Rs 50 m respectively. The net result is that the combined other income totes up to Rs 308 m against Rs 409 m in the preceding year. Juxtapose this windfall income with that of the pretax pre exceptional profit, and the clear as crystal picture becomes very evident. Other income constitutes 80% of pretax profit against 105% in the preceding year. For FY10 there is also an exceptional item consisting mostly of a capital account receipts amounting to Rs 158 m which is shown as a deduction from the pretax profit, but in effect it is added on to the pretax profit to arrive at a pretax profit of Rs 543 m! Just about anything goes in the accounting business it appears.

The revenue breakup

The biggest contributor to revenues is the lubricating oil segment, bringing in 53% of overall turnover against 51% in the preceding year. Industrial explosives brought in a further 29% (28%), with the mining segment chipping in with 18% (21%).The balance dribbling is contributed by other sundry elements. The breakup of sales in the segment information schedule shows that the margins generated by the three divisions are highly variable. In FY10, the explosives division generated a segment profit of Rs 268 m (Rs 50 m profit) on a turnover of Rs 2.9 bn (Rs 2.5 bn). The mining set up lost money to the tune of Rs 104 m (profit of Rs 118 m) on sales of Rs 1.9 bn (Rs 2.1 bn), while the lubricating division posted a profit of Rs 361 m (Rs 233 m) on sales of Rs 5 bn (Rs. 4.5 bn.) Sales from the item labeled 'Others' recorded piddling revenues followed by an inconsequential profit for the year against an equally inconsequential loss in the preceding year. Roughly the type of performance that one can expect when a company merges, demerges, expands, and diversifies into totally unrelated businesses. One can only imagine, based on its current performance, what the diversification into real estate development may well bring about! The instant worry is that the company is planning real big here in developing both the Hyderabad and Bangalore properties. And sure enough, counting the chickens before they have hatched, the management had even gone to the extent of revaluing the value of this real estate, with the surplus on such revaluation amounting to Rs 18.4 bn being credited to revaluation reserve. Fortunately, better sense prevailed subsequently, and the value of these lands was reassessed downwards by Rs 14 bn. We have to now wait and see what happens in the next episode of the unfolding drama.

The extra-ordinary accounting

The revenues and profits have been arrived at after some extraordinary accounting. To generate the turnover it had to pay both commission and discount on sales aggregating to Rs 644 m against Rs 528 m previously - what nutty businesses are these? The company seems to be in a very tricky business for sure. Then there is an expense entry for provision for doubtful debts and advances of Rs 47 m, and not including a write off of bad debts of Rs 74 m (which fortunately was written off against the lump sum bad debts provision) against NIL previously. That is a total write-off of capital account dues of Rs 122 m. It appears not to want to exercise any control over the moneys that it advances. And don't forget the provision for bad debts of Rs 360 m (Rs 395 m) from trade debtor dues at year end. The provision accounts for 23% (19%) of all trade debtor dues at year end. What kind of due diligence does this company do in its day to day business? Not to forget a royalty payment of Rs 50 m (Rs 47 m) - royalty paid to whom please? In the preceding year it had also incurred a whopping forex loss of Rs 258 m against a gain of Rs 17 m in the current year. If one were to deduct this extraordinary loss accruing on account of the forex episode, the contribution of other income in FY09 would become a lot less imposing, though still germane! But on the flip side, in this very year it had charged expenses under the voluntary retirement scheme (VRS) amounting to Rs 70 m to its revaluation account. The creation of the revaluation reserve was very properly timed it appears, and it is now being put to full use.

Even on the capital account front there were high octane action sequences - vigorous inflows and outflows of moneys for starters. It borrowed large dollops on money, repaid large loans, advanced considerable sums to companies - probably subsidiaries, and who were kind enough to repay them also. The loans and advances schedule is a treat for tired eyes. In either year the company appears to have provided for (or is it written off?) large dollops of interest free advances given to its subsidiary IDL Speciality Chemicals (formerly IDL Agro Chemicals). In the preceding year the total write off of amounts due from IDL Specialty under assorted counts was a humungous Rs 2.5 bn, which sum the accountants very thoughtfully adjusted against revaluation reserves. As a matter of fact L'Affaire IDL Speciality Chemicals is a fit case for study on how to go about dismembering an enterprise with aplomb.

The subsidiaries

Then there are its 6 subsidiary companies (down from 8 in the preceding year.)Fortunately the total capital investment in this diversion is limited to a manageable Rs 292 m. Out of this, two subsidiaries, Gulf Carosserie India, and IDL Buildware Ltd (formerly IDL Finance) are apparently gone cases, and Gulf Oil's meager capital stake of Rs 4 m and Rs 20 m respectively in these ventures are fully provided for. The parent has provided the briefest of brief peaks at the financials of the 6 siblings. Merely a single line on each company (and not quite in keeping with the disclosure requirements), informing the very discerning that three out of the five, Gulf Oil Bangladesh, PT Gulf Oil Indonesia, and Gulf Oil Yantai made profits of Rs 10m, Rs 5.5 m, and Rs 8.5 m each. A mere dip in the ocean, but nevertheless. IDL Buildware is still apparently operating on oxygen supply as it notched up a loss of Rs 18 m, following the closure of its factory at Vizag, as is Gulf Carosserie chipping in with an insignificant loss. Hinduja Realty is yet to attain any momentum. The interest free advances if any due from its subsidiaries is not readily known. Needless to add no dividend accrues to the parent on its cumulative investment. The subsidiaries are keeping in perfect step with the lackadaisical performance of the parent.

The wonder of its all is that the company is still able to function as a going concern given the manner in which it is run. Inspite of the mishmash that characterizes its functioning, the directors' report is not coming up short about its plans for the future.

I DO NOT HOLD ANY SHARES IN THIS COMPANY, EITHER DIRECTLY, OR UNDER NON DISCRETIONARY PORTFOLIO

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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