The company is spreading its tentacles in all directions and becoming a disparate entity in the process
A long and chequered history
This is my second take on this company having first covered its working results for the 12 months ended March 2010. E.I.D-Parry (India) Limited as we know it has had a very long history of commercial activity in India. It was originally coined as East India Distilleries and Sugar Factories Ltd before its merger with Parry and Company. The E.I. in the name stands for East India -- an offshoot of the parent East India Company. Incorporated under the English Companies Act, it was for years after independence listed for trading in the London Stock Exchange also. Its equity capital was denominated in pounds sterling (Rs 13.33 per share face value) till the very 1970s, at which point I think it was converted into a company under the Indian Companies Act. Through very fortuitous means it came under the umbrella of the Murugappa group, care-of the good heartedness of Mr. R. Venkatraman during his tenure as the Union Finance Minister. The front cover of the annual report proudly announces its existence for 225 years, and boy oh boy is it real estate asset rich!
Its principal product line as one would expect is sugar and its offshoot the distillery unit that ferments the alcohol. The company along with its siblings operates nine sugar mills across the states of TamilNadu, Puducherry, Andhra Pradesh and Karnataka. The parent per-se appears to have eight sugar factory units along with three distilleries. Two of these sugar units were merged into the company during the year from a sibling. Hence, the sugar cane that was crushed and the resulting sugar that was produced during the year were appreciably higher than in the preceding year. It also earns tidbits from the sale of Bio and Nutra products-the latter is classified as dietary supplements or health foods.
The makeup of its revenues
In 2012-13 the company earned gross sales of Rs 20.13 bn from the 'sale or products and power'. Complimenting this revenue was 'other operating revenues' of Rs 280 m, and this consists of such odds and ends as sundry income, duty drawback, scrap sales, and liabilities no longer required written back. How the last mentioned fits into the definition of operating income beats me totally. But let that be. The sales of processed sugar, raw sugar, distillery, and cogenerated power alone accounted for over 93% of all sales of products and power. Adding more firepower to the top line-and this is crucial-- was other income of Rs 1.07 bn. This income is another hotch potch of receipts made up of interest income on bank deposits, on debentures issued by sibling, on loans and advances to siblings, and dividend income on its current and long term investments. (The company has Rs 8.7 bn stuck in non- current investments, and Rs 1.37 bn advanced to siblings against Rs 2.10 bn previously-such investments and advances play havoc with its cash flow).
The plain fact is that at the end of the day it is out of pocket. The company it would appear does not make more than a dime from its manufacturing operations -inspite of increasing the capacity of its sugar units, merging acquired units, and acquiring stakes in even more sugar units. No explanation is proferred for the mess. (As the investment schedule shows it has large stakes in Parrys Sugar Industries, Sadashiva Sugars, Silkroad Sugars and Alagawadi Birsehwar Sugars, and, some interest in Kulittalai Cane Farms). Consider the following figures. The company made a net pre-tax profit of Rs 953 m. This includes other income of Rs 1.07 bn. The figures for the preceding year were Rs 1.36 bn and Rs 1.70 bn respectively. In other words it was 'out of the money' in both the years. I have excluded from this 'other income' figure the 'other operating revenues' mentioned earlier.
So what gives? It is on the one hand unable to make ends meet in an industry which is a political hot potato. On the other it is expanding its reach in this sector. It may not be out of place to mention here that the company is but a pygmy in this industry. India produced an estimated 24.6 m tonnes of sugar in 2012-13. The company produced 0.6 m tonnes. That works out to a share of 2.4% in the overall production scenario. In the preceding year the share was 1.7%. The percentage figure in the latter year includes the results of two merged sugar units.
Unable to rein in costs
The company appears unable to rein in the increase in costs. For one, the input cost of materials amounted to 63% of revenues, net of excise, in 2012-13 against a larger 67% previously. The cost of finance (the interest cost) rose 112% to Rs 1.37bn while the depreciation charges rose 46% to Rs 1.07 bn. Juxtapose these increases with the 29% increase in revenues net of excise. The company's borrowings have ballooned to Rs 18.3 bn from Rs 8.85 bn previously -- and largely due to extraneous reasons - but also due to the fact that it generated a negative cash flow from operations. There are other issues too. A puny paid up capital of Rs176 m adds to its misery of being undercapitalised-relative to a total asset base of Rs 36.3 bn. It also boasts a gross block of Rs 13.1 bn which infers a gross block to net revenues ratio of 1:1.5. The Company added Rs 1.3 bn to gross block during the year. The relative inability to generate more bang for the buck from its productive assets could also be a sound reason for its below par cash flow.
As I stated earlier the borrowings rocketed during the year. The first reason for the increase in debt was the negative cash generation from operations of Rs 918 m. The negative cash flow in the preceding year was miniscule-but negative nevertheless. The rise in negative cash generation was also occasioned by a sharp spurt in the year end value of inventories by Rs 4 bn against an increase of Rs 650 m previously. Therefore the company had perforce to borrow a whopping amount of Rs 9.5 bn on capital account to partly fund the purchase of fixed assets, to invest in the equity of siblings, and to advance loans to siblings etc. (The parent is a milch cow you see). The net book value of its investments in the equity of its group companies at year end amounted to Rs 8.7 bn-upfrom Rs 6.7 bn previously. The single biggest investment is in the 9% non-convertible debentures issued by its sibling Coromandel International with an investment value of Rs 2.65 bn. The second biggest is in the equity of another sibling Silkroad Sugar Pvt Ltd. The Rs 10 face value shares were acquired at a price of Rs 21.50 per share for a total consideration of Rs 2.47 bn. Third in line is the Rs 1.20 bn invested in the equity of Coromandel International, and followed by the equity stake of Rs 1.18 bn plonked down on Sadashiva Sugars Ltd. The only other investment of value is the Rs 704 m invested in US Nutraceuticals LLC. Collectively these investments add up to Rs 8.20 bn, and they are here for keeps irrespective of whether they give any returns or not. This is a cross that the company has to bear.
The net effect of all these shenanigans is that the dividend of Rs 1 bn paid out during the year came from additional borrowings! It is no comfort that the dividend of Rs 695 m paid out in the preceding year came from the same source. Not exactly the right way to manage the affairs of a company of the size of E.I.D. Parry, but that is the reality of the matter. And, as I stated earlier, the tithes that the parent earned during the year from these investments and advances were as follows-debenture interest of Rs 165 m, interest of Rs 135 m on loans and advances, and dividends on long term investments of Rs 532 m.
The many siblings
What adds to the feeling of being let down is the financials of the 26 siblings and their underlings and such like. The list of worthies includes eight companies based out of foreign shores, and five others which became siblings during the year. The more the merrier is the apparent name of the game. Just three of the 26 entities -Coromandel International, CFL Mauritius, and Liberty Phosphates--declared any dividend during the year. What exactly is the dividend payment policy as regards the siblings please? Barring Coromandel International -formerly Coromandel Fertilisers - the rest of the entries are largely of the comical variety. Take two of the siblings, Sadashiva Sugars and Silkroad Sugars, as a case in point. The former has a paid up capital of Rs 1.1 bn and negative reserves of Rs 876 m. On a total income of Rs 1.2 bn it generated a pre-tax loss of Rs 300 m. Silkroad is fast getting there. On a paid up capital of Rs1.16 bn it has negative reserves of Rs 150 m. On a total income of a mere Rs 31 m -that is right Rs 31 m -it was out of pocket by Rs 658 m at the pre-tax level. How do such figures become possible? Does this company manufacture any sugar at all?
US Nutraceuticals LLC, a foreign entity denominated in US dollars is on a slightly better wicket. On a paid up capital of Rs 1.06 bn it had negative reserves of Rs 579 m. On a total income of Rs 807 m it managed to scrape a bottom-line in black ink of Rs 11 m. Another amusing entry is that of CFL Mauritius -obviously a holding company of sorts located in a tax haven. It has investments of the book value of Rs 1.95 bn. It has a generous paid up capital of Rs 777 m and magnanimous reserves of Rs 989 m. But it generated an income of only Rs 27 m along with a pre-tax of Rs 5 m. From the looks of it from where did this company generate such humungous reserves please? Amazingly enough it declared a dividend of Rs 491 m. What is the magic mantra here please?
Parrys Sugar Industries is another washout it appears. (There are six companies in the list sporting the Parrys name). On a paid up capital of Rs 375 m it has negative reserves of Rs 221 m. On revenues of Rs 1 bn it generated a negative profit of Rs 129 m. There are a few highfliers too-- relatively speaking that is. Like Liberty Phosphates which incidentally became a sibling during the year. On revenues of Rs 4.7 bn it ponied up a pre-tax profit of Rs 454 m. Or Parry Infrastructure -the real estate arm of the group. On revenues of Rs 647 m it generated a pre-tax of Rs 52 m.
By and large the list makes for a mishmash of siblings. In what manner if any they gel with the parent makes for a story in itself. The siblings have in any case very limited interactions with the parent in terms of goods purchased from the parent or goods sold to the parent. They are more of the standalone variety. It would appear prima facie that the parent is primarily interested in becoming a conglomerate - irrespective of what it takes to do so.
Disclosure: I hold 990 shares in the 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.
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