In a nutshell Tata Chemicals (TCL) operates in 3 broad sectors -Living Essentials, Industry Essentials and Farm Essentials. Living essentials are of the household variety - Tata Salt, I-Shakti (both salt brands) and Tata Swach (low cost water purifier). Industry essentials deals with soda ash, which caters to the needs of the glass and detergents industry and, a wide range of bicarb offerings (a white soluble compound used in effervescent drinks, baking powders and as an antacid.) Farm essentials are its offerings in urea and phosphatic fertilizer segments, a strategic stake in a producer in Morocco, and a JV in Ireland. Looked at it another way, the company's operations are organized under two segments - inorganic and, fertilizers. Industrial Chemicals and Consumer Products are a part of the former, and crop nutrition and agri-business are a part of the latter. The company also makes cement from the solid wastes generated as by-products from soda ash manufacture.
The management however also has another take on what the company is all about and this they have to say. 'Established in 1939, TCL is currently the second largest producer of soda ash in the world, with manufacturing facilities in India, UK, Kenya, and the USA'. It is India's leading Crop Nutrients Player with its own manufacturing of urea, and phosphatic fertilizers, and a leading player in the crop protection business through its subsidiary Rallis India. Tata Salt has been recognized as India's No 1 brand for more than five years. The company is now deep into nanotechnology and biotechnology research including bio-fuels (jatropa), while the JV in Ireland sources and distributes fresh fruits and vegetables. A much diversified operation, if that is the right term, given the different marketing skills that it has to imbibe.
What the financials say
So what do the financials have to say? All the good work and ideals are not necessarily being converted into positive energy. The year FY10 does not hold very pleasant memories either for the standalone company, or for the consolidated entity. Apparently both the 'desi' and 'videsi' economies simultaneously proved to be a severe letdown on the top-line front. The standalone revenues were down sharply to Rs 56.7 bn from Rs 85.2 bn previously. The fall in sales is intriguing, as the company sells a portfolio of bread and butter commodities. Likewise, the consolidated income too was down to Rs 97 bn from Rs 128 bn in the preceding year. In this masala mix, the subsidiaries together pooled in revenues of Rs 40.3 bn, against revenues of Rs 42.8 bn in the preceding year. But the welcome development here is that the profit before depreciation and exceptional items of the standalone unit was maintained at Rs 8.8 bn, and that of the consolidated unit actually rose to Rs 16 bn from Rs 15.5 bn. This is holding true to the adage that when the conditions get tough; the tough gets going. And if the message from this is that less is more, why doesn't the company downsize please?
So how did the company manage to pull a rabbit out of the hat on the bottom-line front, in a year when the company says that the Western economies were hemorrhaging? It has a ready answer for that. Net sales were down because of a reduction in price realization of fertilizer products and a substantial decrease in trading volumes of imported DAP/MOP. On the expenditure side, there was a substantial drop in the input costs of phosphoric acid and sulphur, the quantity and cost of bought out fertilizer, accompanied by a significant decline in working capital costs. And other income got a boost, due to the profit on sale of trade investments. In other words the lesser the emphasis on the fertilizer business, the higher the profit margins.
How the revenues are oiled
The way the revenues are oiled together is that the company primarily earns its top-line from the sale of fertilizers, both the manufactured and the bought out variety, under various nomenclatures. Sales of manufactured fertilizers brought in 50% of all sales, against 52% previously. Sales of the imported bought out variety coughed in another 12% (23%). Between them, the two contributed an overwhelming 62% (75%) of all sales. Sales of soda ash, sodium bicarbonate, and manufactured and bought out vacuum salt contributed another 31% (20%). Together, these basic commodities notched up overall sales of 93% (95%). Since some fertilizer products are subject to doles given by the government - as their end product prices are subsidized, with the subsidies also being dictated by manufacturing efficiencies. The company made do with a humungous fertilizer subsidy income of Rs 20.5 bn against Rs 47 bn in the preceding year. This subsidy alone works out to 37% of overall sales against 55% in the preceding year. As a matter of fact the fertilizer subsidy accounts for a mindboggling 61% of the revenues registered from fertilizer sales during the year, against a higher 72% in the preceding year. What type of business is this and more importantly what sort of accounting is this please? The fertilizer business is such that, any dillydallying on the subsidy and its release by the Central Government, can easily make a mish mash of its cash flow planning.
The company has not provided the breakdown of the segment reporting details of the income and expenditure, and the assets and liabilities, of the standalone company, for reasons best known to it. But it has compensated for it by providing the segment information details for the consolidated turnover. What was it that led the company to not provide the details of the standalone unit in favor of the consolidated statements? Different companies seem to take their own call on the interpretation of the information to be divulged in the audited accounts. It is as simple as that. But even here it is clear that the fertilizer operations are a drag on the company's profitability.
The several puzzling aspects
There are several other puzzling factors at play in the working of this company. For example it is not very clear how the company arrived at the revenue figures of the consolidated entity, or for that matter the selection of companies in the sales agglomeration of the consolidated entity. The investment schedule of Tata Chemicals reveals that the company has 4 subsidiaries with a total paid up equity capital base of Rs 39.1 bn.
Paid up equity (Rs bn)
Homefield International Pvt Ltd
Bio Ventures-1 (Mauritius) Pvt Ltd
Wyoming-1 (Mauritius) Pvt Ltd
There is also a preference capital base of Rs 4.2 bn, held collectively, in Homefield International and in Rallis India. (The capital base of the subsidiaries accounted for 88.4% of the total investment portfolio of Rs 49 bn at year end.)
Rallis became a subsidiary during the latest accounting year. A fifth subsidiary till FY09, Tata Chemicals Asia Pacific Pte Ltd which had a ludicrous paid up capital base of a mere 2 Singapore dollar denominated shares, with nil book investment value, made its quiet exit in the current year. The management has apparently found a safer haven for this rather colorfully capitalized company within the group. One also wonders what in heaven's name this company does for a living. And the way companies have started naming their siblings, one would think that the world run out of ideas. Tata Chemicals too has not been able to resist the pull of Mauritius, and what's more, to be on the doubly safe side has chosen to incorporate 'private' limited companies there.
The sun soaked beaches of Mauritius
(One wonders at what is the mysterious 'honey trap' chemistry of Mauritius (the idyllic island nation in the Indian Ocean, off the African continent) which beckons large Indian corporates in droves to it, in the same manner that moths are attracted to a flame. Incorporating letter head holding companies in Mauritius, which control the videsi operations of expanding Indian corporates, is the flavor of many seasons of late. Is it because Mauritius has more fail safe strong rooms, or some such? It definitely is not the sun soaked beaches for sure, or even the possible tax benefits that accrue to them, as these dummy companies by and large do not generate any revenues in the first place. It would help if corporates give a logical explanation for this seemingly incongruous and perplexing state of affairs.)
The composition of the consolidated results
From one's understanding of the legal requirement for appending financial statements, the consolidated accounts are to feature the financials of all direct subsidiaries. But the bigger point here is how many direct subsidiaries are there to start with? One requires the services of a Sherlock Homes to figure this one out. It is a mad hatter's party out there if you please, but more of this 'mirch masala' mix as we go on.
The management states that the consolidated results of the company reflect the operations of the following subsidiaries and 3 of the 5 joint ventures. (This is a very different take from the investment schedule of Tata Chemicals.) According to this reckoning there are 9 such subsidiaries (if my understanding of this jumble is correct) along with their numerous siblings, and they include Brunner Mond Group Ltd, Homefield Pvt UK Ltd, the UK SPV and its holding company Homefield International Pvt Ltd, Mauritius, Valley Holding Inc, the holding company for General Chemical Industrial Products US, Gusiute Holdings (UK) Ltd, the UK SPV, Wyoming 2 (Mauritius) Pvt Ltd, Mauritius SPV and its holding company, Wyoming 1 (Mauritius) Pvt Ltd. Bio Energy Venture 1 (Mauritius) Pvt Ltd, and its 100% subsidiaries Bio Energy Venture 2 (Mauritius) Pvt Ltd, and Tata Chemicals Asia Pacific Pte Ltd. The last named is Rallis India. The joint ventures are Indo Maroc Phosphore, out of Morocco in which it has a 1/3 rd stake, Khet-se Agriproduce, its 50:50 India incorporated JV with Total Produce of Ireland and, JOiL Singapore, its 1/3 rd stake offspring with Temasek Life Science Laboratory.
The tamasha here is that yet another schedule states that the company has 15 subsidiaries and 19 step down subsidiaries, and 5 joint ventures. Separately, the company has also furnished the brief working results of 11 subsidiaries, and these companies together toted up a turnover of Rs 39.5 bn. Actually the collective turnover is accounted for by only 3 of the 11 companies featured in this schedule. (Incidentally the paid up capital of Tata Chemicals Asia Pacific in this listing is shown as Rs. 480 m. This company appears to have undergone a transformation of sorts over the year, presumably for the good of all concerned.) If all this is not bamboozling enough, the schedule detailing the related party disclosure list reveals the names of 5 direct subsidiaries, 30 indirect subsidiaries (29 of which are based out of 9 foreign countries), 2 direct joint ventures, and 3 indirect joint ventures (4 foreign and one Indian). The company now proposes to step foot in Mozambique also, which would take its foothold to 30 countries.
Its Investment Portfolio
As stated earlier, it had investments of the book value of Rs 49 bn against Rs 45 bn in the preceding year. Of this lot, the investment in its subsidiaries alone accounted for Rs 39 bn (Rs 35 bn) in the preceding year. The bulk of the balance investments are in group companies, and hence also categorized as of the long term variety. The company also bought and sold debt investments for a cumulative value of Rs 220 bn against Rs 115 bn in the preceding year. And what miracles did it engineer to show for all this good work? A 'other income' inflow of Rs 1.9 bn (Rs 940 m). This includes profit on sale of investment, which accounts for almost half of the other income. Such return on investment does not make for very savvy investment management skills - but then the investment portfolio of India Inc by and large, is normally a product of the 'complex and bewildering' priorities of the management. The principal culprit in this specific instance is the company's 'long term' investment portfolio which includes the moneys put down in its subsidiaries. The dividend return is a pitiable Rs 65 m (its sole dividend income being its 50% share of the dividend declared by Rallis India.)
The company has also provided the brief financials of 11 subsidiaries, and they incorporate the results of the subsidiaries of the subsidiaries (or step down subsidiaries). The Brunner Mond Group is incorporated in the UK, and has 9 subsidiaries. Valley Holdings Inc, its US subsidiary, is the holding company of General Chemical Industrial products, and the latter in turn boasts 10 subsidiaries. And these companies are a colorful bunch to say the least. Brunner Mond has a laughable capital base of Rs 6.8 m, but boasts asset base of Rs 8.9 bn. It was also able to drum up revenues of Rs 18 bn, but lodged a pretax loss of Rs 400 m. After a tax credit of Rs 155 m, it logged a post tax loss of Rs 246 m. The company makes it look so easy.
Still more of the same
The American company with the subsidiaries does an even better take. It has a capital base of a mere one dollar, and reserves of Rs 35.5 bn. It has an asset base of Rs 48 bn, notched up revenues of Rs 17.6 bn, and posted a pretax profit of Rs 3.4 bn. The only other company which could drum up any revenues was Rallis India. But the real nuggets here are the two Mauritius subsidiaries (Wyoming 1 and Wyoming 2), and a UK based subsidiary called Gusiute Holdings. They each have identical paid up capitals of Rs 32.3 bn, identical asset bases of Rs 32.3 bn, identical investments of Rs 32.3 bn odd, and guess what, not one of the three could generate any revenues. What whacko investments are these please? Companies without an asset base generate revenues, but companies with an asset base are unable to do so. Another class act in a manner of speaking is Homefield International and Homefield Pvt, both based in the UK. The former has a capital base of Rs 4 bn, while the latter has an equity base of Rs 4.6 bn. The former has positive reserves, while the latter has negative reserves. The former has investments totaling Rs 4 bn while the latter ahs investments adding up to Rs 9.2 bn. The former generates revenues of Rs 165 m, and an almost equivalent pretax profit of Rs 164 m. The latter had revenues of Rs 14 m, but registered a pretax loss of Rs 360 m. It appears that the investment portfolio of the former is a success while that of the latter is a failure, or some such. None of the subsidiaries barring Rallis has paid a dividend. The management of the parent company seems to think nothing of this.
It has also been kind enough to furnish the brief financials of its 5 joint ventures. Only 2 of them have business of any kind. There is Moroccan venture in which it has a 1/3 stake, and the American venture with a 50% stake. But both these companies in reality add up to nothing, in part due to the accounting treatment of incomes and expenses of joint ventures. The capital stakes in all the 5 ventures too add up to not more than a few pennies. It is all working out to be a giant jigsaw puzzle.
With working results like this, Management Institutes should compulsorily set up specialized departments to teach students on running enterprises in tax havens and such like. And they will have little difficulty in getting a steady stream of guest lecturers from the companies that run these dodgy enterprises to elucidate on the subject matter. Demand for students graduating from such disciplines will definitely accelerate in the future.
Disclosure: 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 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.