The PSU behemoth, State Trading Corp. is 55 years old, and was set up by the central government in the heydays of India's tryst with Nehruvian socialism to trade in goods and commodities, primarily with the Eastern bloc communist nations. It would seem a rather strange reason to set up a dedicated company to manage trade, and with a limited world view at that, but let that pass. Its initial charter was apparently to give it some sort of a monopoly status in the two way trade between India and the world. India Inc was in any case not in a position to challenge this world view of the government, given the stage of underdevelopment that they were themselves in. The profile of the company states that this premier international trading house has developed vast experience in handling bulk international trade. Today it trades with almost all the countries of the world. It also indulges in domestic trade. It has also spawned a subsidiary which is involved in import, export and domestic trading of spices and other agricultural products. It just about completes the picture in totality.
The profile goes on to add that by virtue of its infrastructure and experience, it plays an important role in arranging imports of essential items into India and developing exports of a large number of items from India. It exports items ranging from agricultural commodities to manufactured products. It is also able to supply quality products at most competitive prices. As can be expected, some of these statements are pure hyperbole. And inspite of all its claims, it could only make it to the Mini Ratna status comprising of 67 central government companies. At the top of the heap in the pecking order are the Maharatna companies -there are five of them. This is followed by the Navaratna companies-comprising of another 16 companies. Incidentally navaratna as we all know means nine. But who cares anyway!
The mission statement
The mission statement of this company which is today 91% owned by the central government is ‘to emerge as one of the largest global trading companies with international standards of excellence, nurturing a blend of quality, business ethics and proactive enthusiasm, to enhance stakeholders' value'. As we shall see as we go along, this mission statement is completely out of tune with the ground realities. But there is no harm in having a mission statement I guess, even if you are unable to work towards its goals. Like all PSU companies it is also blessed with the penchant of providing a revolving chair to its part time official and non official nominated directors. During the year three of them exited the board, while another three were co-opted in their place. One wonders on what basis they are selected for a seat on the board in the first place.
An analyst's delight
This company's annual report is actually an analyst's delight, and much of its claims to being a trading powerhouse in the making, the wisdom that it has acquired over the years and what not, is mere poppycock. If it is extant today, it is merely because it functions as an arm candy of the Central government – period. The annual report however goes for the jugular stating that during the year the corporation laid thrust in developing diverse areas of export such as iron ore, maize, castor oil etc. Oh really? OK, the Corporation as it calls itself, and after 55 years of traction, generates a sizeable turnover. In 2010-11 it generated total sales of Rs 199.8 bn against a slightly larger Rs 215 bn previously. But that is hardly the type of moolah that would qualify itself as an emerging trading powerhouse, but let that be.
Not included in this cash flow is Other Income of Rs 4.9 bn, interest income of Rs 1.96 bn, and miscellaneous income of Rs 564 m. All in all, such other income amounted to Rs 7.4 bn against Rs 8.0 bn previously. Including such incomes the total revenues for the year was Rs 207 bn against Rs 223 bn previously. This sizeable other income generation is not exactly extraneous to the generation of the main body revenues, but it also includes such tricks as favourable exchange fluctuation gains (booked under two heads of account!), interest on trade finance, a whacko but significant item called Claims, and, the write back of provisions. Rent receipts also tossed in a not so insignificant sum. (The point is that such add ons are specific to a particular year and cannot be relied on for a repeat performance in the succeeding year). But there is another very significant angle to these incomes as we will see as we go along.
The sales breakup
Take a look at the breakup of the sales, excluding other income that it generated. Exports amounted to Rs 4.9 bn, imports another Rs 189 bn and domestic sales ratted up the balance Rs 5.5 bn. Thus the individual percentage contributions were 2.5%, 94.8% and 2.8%. As one can see it has developed no skills in the export business or in domestic trade and the skills if any that it has imbibed is strictly limited to the import business. But the skills that it has imbibed here too are very suspect. Take a look at the breakdown of imports. It is about as ludicrous as it can get. Import of gold accounted for 69% of all imports. Import of silver accounted for another 10%. So roughly 80% of all imports are accounted for by metals which are nomenclatured as bullion. The other significant import item was fertilizers. The import of this commodity accounted for 11.6% of all imports. In another words, just three items accounted for 91% of all imports. I think readers would agree if I said that it really does not require the harnessing of any skills to import bullion and fertilizers, for which there is an ever green market in our very own Bharat. What the government is doing is addressing the insatiable domestic demand for the former, and making good the shortfall in the production of non urea based fertilizers, by canalising these imports through its own in-house agency. But for this gratis extended by the left hand of the government to its right hand, this company would have wound up in the sick list in double quick time!
Poor management of debts
As a matter of fact, it cannot even get its cash flow right inspite of the monopoly products that it deals in. In 2009-10, it actually generated a negative cash flow from operations of Rs 1.6 bn, though it set right the position in the latter year by generating a positive cash flow of Rs 15.2 bn. Even more mind blowing is the several strictures passed by the auditors on the out standings owed to the company, in their report to the shareholders of the company. Some of the unrealised dues run in the billions, the largest of which is the sundry debtor dues of Rs 11.4 bn owed by Global Steel Philippines. This debtor has stopped operations of its plant, and in plain English it means that it is unable to honour its dues. Wow, how does a premier international trading house which has developed vast experience in handling bulk international trade get itself into such inappropriate situations please?
This brings us to an even bigger eye popping revelation. The corporation has reported a sharply lower pre-tax profit of Rs 792 m against a pre-tax profit of Rs 1.7 bn previously. The 7% fall in the rupee value of sales, and a similar fall in total income led to a 53% fall in the pre-tax profit. Now juxtapose this pre-tax profit figure with the quantum of Other Income that it rustled up. Other income for the year, as stated earlier, totalled Rs 7.4 bn against Rs 8.0 bn previously. The fact of the matter is that but for the support extended by other income, the corporation would have suffered a severe dunking on the bottom-line front.
And remarkably enough, contributing to the decline in profits in the main was due to one singular factor. This is especially so as the cost of goods sold in either year was more than the sales that it generated from such goods and identical to boot! (The cost of goods sold amounted to 101.5% of sales in both the years. In the latter year the costs were contained due to a 132% increase in the value of stocks on hand to Rs 13.1 bn at year end!). The bewildering fact of the matter is that, also in tune with the fall in the total revenues by 7%, the cost of goods sold fell by a like amount! In other words the fall in other income and the fall in the cost of goods sold appear to be proportionate! The principal cause for the decline in profit is the rise in interest charges by 47%. Remarkably enough, the steep increase in the interest charges to Rs 1.77 bn from Rs 1.2 bn previously came in a year when the year-end debt fell to Rs 15.5 bn from Rs 24.6 bn previously. This could infer that the company was over borrowed during the year, but was able to prune debt at year-end as it was able to drastically reduce debtors' receivables. (This anomaly can be set right to a large extent if only the paid up equity of the company is increased suitably through additional cash inputs to bring it in line with its present scale of operations. The present paid up equity is a piffling Rs 600 m). The other factor impinging on profits, albeit on a marginal scale, was the write-offs under various counts which rose to Rs 277 m from Rs 34 m previously. But if the company so wished, it could have reduced the interest outflow burden during the year if only it had exercised better working capital management skills. The net current assets at year end appear to be far in excess of the balance that is required.
The piffling subsidiary
As stated earlier it has also spawned a subsidiary sporting the name of STCL Ltd which like the parent muddles in assorted trades both domestically and in the international markets. And, like the parent it appears to be all at sea. It is a lilliput by all accounts toting up a turnover of Rs 930 m during the latest year. It made a marginal trading profit of Rs 80 m, but after interest payouts it was awash in red ink to the tune of Rs 1.6 bn! The point to note here is that on a paid up equity capital of Rs 15 m it had borrowings to the tune of Rs 13.1 bn! This is indeed a fine way to manage the financial affairs of a company-which students of management please note.
But since the President of India holds a slice over 91% of the outstanding capital of the parent, and the Presidential office is only a proxy to the shares that it holds, it really does not have to look over its shoulder to see if any trouble is brewing in its backyard. And so long as the situation continues to smoulder in this fashion, expect no change for the better.
From one's understanding of the situation, it is difficult to comprehend what exactly is the point that the company is trying to prove.
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.