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Century Ply boards: Growing at a fast clip - Outside View by Luke Verghese
 
 
Century Ply boards: Growing at a fast clip

The company is growing in all directions, but most notably through its minions-and that is not necessarily a very positive sign

Patting itself on its back

The management thinks much of the path that the company has traversed so far. This is a thirty one year old Kolkata headquartered company which is in the business of plywoods & block board - including laminates, veneers, pre-laminated particle board, and medium density fibre, agri products, ferro alloys (ferro silicon and silicon manganese), power, and, logistics services. Soon to come on board is furniture. It also proposes to promote a green-field medium density fibre board and particle board unit in Andhra Pradesh. Then there are its many siblings and associate companies, and add to it the offspring of the siblings etc which have charted their own career paths in diverse fields including cement. Growth has always been our mantra it states. 'In the last 25 years we have become the No. 1 plywood company'. Here is another memorable line "It's only possible for a leader to look beyond the familiar and explore the unknown, and Centuryply is a leader. Centuryply being the daredevil has dared to venture into newer projects and tread the uncharted road".

The company makes do with four manufacturing units to make veneer and plywood in the states of West Bengal, Tamil Nadu, Haryana and Assam, a laminate unit in West Bengal, and a ferro alloy unit in Meghalaya. The logistics operations are run out of two offices in Kolkata. From the makeup of the board of directors, the company appears to have several parent groups including the Bhajankas, Agarwals and Khemanis, or some such. Between them they control 72.9% of the voting stock of 223.6 m shares of Re 1 each. And to accommodate the crowd it even makes do with a chairman, a vice chairman, three managing directors and one executive director. They all appear to be members of the promoter group. These directors personally control close to 33% of the voting stock, and they collectively took home some Rs 27 m as pagaar during the year. The next generation is now muscling in. Ms Nikita Agarwal the daughter of one of the three managing directors, Sanjay Agarwal, is now safely ensconced in a managerial role in the company.

A diverse potpourri of products and services

The revenues from operations include sales of finished goods products, traded goods, and income from logistics services. Manufactured goods accounted for a slice over 82% of such revenues, while traded goods tossed in another 12.5% into the kitty, with logistics services bringing in the balance moolah. (The purchase of traded goods includes plywood, medium density fibre (MDF), pest control kits and, others). Revenues also include other operating income of Rs 77 m. This is made up of scrap sales of Rs 31.4 m, export incentives of Rs 22 m, sales tax subsidy of Rs 19 m, and miscellaneous income of Rs 4.6 m. In this overall total exports accounted for a minor amount of Rs 341 m.

The manufactured goods sales are broken down into 12 individual items of revenue. Plywood sales bring in the vast bulk of revenues at Rs 7.6 bn. (Some 30% of the total quantity of plywood sold was outsourced-and one of the siblings Auro Sundram Ply - was a major supplier). Next in line are laminate sheets at Rs 1.5 bn, followed by veneer (decorative fine wood applied to coarse wood) at Rs 924 m. The other big items of sale include ferro silicon, and pre-laminated boards. The remaining items such as power, pets control kits, chemicals, and such like are mere naam ke vaaste stuff. As a matter of fact five of the items on sale are fully outsourced including adhesives, MDF/PPB, chemicals, pest control kits and others. But, cumulatively, they brought in sales of only Rs 155 m.

Inspite of the 28% hike in net revenues to Rs 11.18 bn, the profit before tax fell 17% to Rs 630 m. The consumption cost of materials including purchased goods rose in tandem with the increase in net revenues. This control on costs can be deemed as most creditable, as 50% by value of the materials consumed is of the imported variety. (It may be noted that the company's exports amounted to Rs 341 m, while its total imports amounted to a very sizeable Rs 3.5 bn). On the face of it, the sales of traded goods helped some. The company was in positive territory on such purchase/resale. On a rough basis the company would have realised a gross margin of Rs 351 m during the year against a gross margin of Rs 301 m previously on this activity. According to the segment information the revenues have been classified under six heads - which includes the ubiquitous 'Others'. In this grouping all the divisions barring ferro alloys are bringing in positive margins. The most profitable division is Logistics which proferred a return of 34% on revenues. The profits also amounted to a payback of 24% on segment assets. The largest division, Plywood, returned a profit of 9% on sales, and 20% on segment assets. The second largest, Laminates, turned in margins of 11% and 16.6% respectively. The returns of the Power division cannot be calculated as some of the power generated is consumed internally.

The fall in profits

The fall in profit was primarily due to two factors. On the one hand the receipts from other income fell to Rs 41 m from Rs 159 m previously. On the other hand the finance costs debited to P&L account rose sharply by 195% to Rs 400 m from Rs 136 m previously. It received no dividend income from its siblings against Rs 118 m that it cashed in, in the preceding year. This non receipt led to the drastic fall in other income. But the book value of its various investments rose to Rs 733 m from Rs 556 m previously. It may be noted that its dividend income from its other investments is inconsequential. Finance charges were substantially higher due to the booking of a forex loss on borrowings, and higher year end borrowings. The booking of this forex loss alone amounted to Rs 212 m in the total figure of finance costs. The total loss on this account was as high as Rs 344 m -but it has booked only Rs 212 m in the P&L account, under exceptional items. The company seems to have got it all wrong on several counts - the hedging of its forex loans, on account of trade payables and receivables, and buyers' credit horribly wrong, or something to that effect. How could it have gone so horribly conky on so many counts? The company also generated far less cash from its operations due to a multiplicity of factors that played out against the company in its working capital management. There was for example a simultaneous sharp increase in trade receivables, in inventories, in loans and advances, which was coupled with an increase in trade payables. It had the effect of reducing the cash flow from operations to Rs 237 m from Rs 545 m previously. Thus the increase in revenues was achieved on the face of it, under tight market conditions, in a manner of speaking. Some of the negative factors were however avoidable.

The company also simultaneously spent more on its productive fixed assets. It purchased fixed assets to the tune of Rs 642 m against Rs 429 m previously, and this expenditure had to be funded through additional borrowings. (The total borrowings at year end grew to Rs 3.5 bn from Rs 2.1 bn previously, or by Rs 1.4 bn, a considerable increase of over 67%). The capital expenditure includes capital work in progress of Rs 133 m, and capital expenditure on new expansion projects of Rs 230 m. In these difficult times the company tried to eke out extra cash flow by buying and selling debt securities for a cumulative value of Rs 4 bn. For all its efforts it could make do with only Rs 3.5 m on this exercise!

The several tribulations

To add to its tribulations, the company suffered from two other blows - one of which was self inflicted. The first blow as stated earlier was the forex loss, which arose out of laxity possibly. The second was the massive outflow in the form of dividend - in a manner of speaking. In the preceding year the company paid out a dividend of Rs 56.1 m. In the latter year the dividend payment inclusive of dividend tax rose astronomically to Rs 507 m. This would infer a dividend payment of 200%. It is not known why the company resorted to such a massive hike in dividend payment in the latter year especially when the net profit was actually lower and it had to borrow to pay the dividend. Is it family compulsions or something? This is yet another reason why the company had to depend on higher borrowings during the year. The directors' statement has acknowledged an interim dividend payment of 100%. But the report appears to be silent on the balance 100% payment.

The multihued siblings

As stated earlier the siblings are also some sort of a drain on the company's resources. The company has investments in five direct siblings and in four associates. Then there are another seven companies where the enterprises are owned by key management personnel or their relatives. The book value of its investments in its direct siblings stands at Rs 662 m against Rs 504 m previously, while the value of investments in its associates is a puny Rs. 19 m. The shareholding in Meghalaya Power Ltd was subscribed to at an average price of Rs 40.35 per share, against a face value of Rs 10 per share. The shares in yet another sibling Auro Sundram Ply was acquired at an average price of Rs 45.45 per share against a face value of Rs 10 per share. The shareholding in the five direct siblings ranges from 100% at the higher end to 51% at the lower end. These siblings in turn have given life to four offspring of their own. This includes two cement manufacturing units going by the names of Meghalaya Technical and Engineers Pvt. Ltd, and Star Cement Meghalaya Ltd. The Group is going the whole hog in cement manufacture it would seem. The cement division of the various siblings is implementing an expansion in cement capacity from 1.20 m tonnes to 2.8 m tonnes. It is also putting up a clinker unit of 1.75 m tonnes. (Clinker is the half way stage in the manufacture of Portland cement). Besides the direct investments that the parent has affected, it has also advanced loans to its siblings. But this loan mela also appears to be two way traffic or some such. A separate schedule shows that the parent borrowed Rs 580 m during the year from siblings and associates, while the parent in turn advances loans worth Rs 235 m to them. It is difficult to get a fix on whether these two way loans attracted any coupon rate, and if so how much.

Minor inter-se dealings

The parent basically has minor inter-se deals with its siblings. It buys some finished goods from them as stated earlier, and sells even less to them. In other words, the offspring are really standalone units in this respect. And as stated earlier the offspring decided to turn off the dividend spigot on the parent. Not all the siblings are in a position to pay any dividend, and the ones which could, decided to give it a go by given the concurrent expansion schemes in raising cement production and the need to conserve funds. The largest of the direct siblings is Cement Manufacturing Co Ltd with a paid up capital base of Rs 419 m and total assets of Rs 7.14 bn. On a turnover of Rs 3.48 bn it notched up a pre-tax profit of Rs 401 m. Another unit which is somewhat on a roll is Auro Sundram Ply with a paid up capital of Rs 10 m, assets of Rs 208 m, revenues of Rs 493 m and a pre-tax profit of Rs 10 m. Yet another unit sporting the name Aegis Ltd is waddling along with revenues of Rs 67 m, and a pre-tax profit of Rs 17 m. Meghalaya Power Ltd with a capital base of Rs 171 m and assets of Rs 2.6 bn. This unit has yet to go on stream. Why then has the parent acquired shares in this unit at a fancy premium?

Of the five step-downs, Megha Technical & Engineers and Star Cement Meghalaya have large asset bases. Megha Technical also generates revenues. A turnover of Rs 3.6 bn and pre-tax profits of Rs 522 m is what it was able to drum up in the latest year. The latter company has yet to go on stream. Aegis Overseas, another step-down, is also generating revenues and profits - though on a very muted scale.

For whose benefit?

All in all, it appears that the siblings will be more than able to stand on their feet on their own, and face the challenges that come their way. But the parent will be a beneficiary only when the siblings start parting with some of the post tax profits as dividends, if any. And as for any goodies coming from the step-down siblings, the parent will benefit only very indirectly. This manner of going about generating sales and profits is of little use to the minority shareholders of Century Plyboards. But in all probability the parent is going about securing the future of the next generation of the founders of the company in this manner.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

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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