Balmer Lawrie & Co: Mix of businesses which don't gel
What exactly the company sees in running such a bevy of business units is not easy to comprehend
A company of some vintage
The company was founded by two Scotsmen, Balmer and Lawrie, as far back as 1867 initially as a partnership firm; it was incorporated as a public limited company decades later. From tea to shipping, insurance to banking, trading to manufacturing - there was hardly any business that the company did not foray into in its formative years - says the company website. In 1972 it became a government company under the IBP Balmer Lawrie group of companies. (Prior to this it was a part of the Duncan Goenka group).The acronym IBP stands for the erstwhile Indo-Burma Petroleum Company Ltd which was controlled by British interest in the days of the Raj. It functioned out of Burma, now called Myanmar. It incidentally was also the oldest oil company in India. This company was subsequently merged with Indian Oil Corporation (IOC). Today Balmer Lawrie functions as a mini ratna public sector undertaking under the ministry of Petroleum and Natural Gas. It makes do with eight strategic business units - industrial packaging, greases and lubricants, performance chemicals, tours and travels, logistics infrastructure, logistics services, tea blending and packaging, and, engineering & project services and refinery and oilfield services. If one may add here they represent diverse businesses under one roof.
The company also makes do with eight affiliates - one wholly owned subsidiary, four joint ventures in India, one joint venture abroad and two step down subsidiaries. The wholly owned subsidiary is based out of the UK, which is turn has a sibling based out of Indonesia. And, one JV is based out of the UAE. Presently the central government indirectly owns close to 65% of the teeny-weeny paid up capital of Rs 163 m. This capital base is however backed up by humungous reserves and surplus of Rs 6 bn. The share is listed for trading on the BSE Sensex and NSE-Nifty bourses. The Rs 10 face value share fluctuated from a high of Rs 690 to a low of Rs 468 in trading during the previous financial year.
The company realised gross revenue from operations of Rs 24 bn during the year-up 13.7% over that of the preceding year. The revenues net of excise amounted to Rs 22.8 bn - up by a similar percentage. The sale of services at Rs 13.9 bn is more than that of sale of products at Rs 9.9 bn gross. The sale of traded goods brings in less than a pittance. This gross revenue also includes 'other operating income' of Rs 193 m. What exactly this income consists of is not known. Separately it realised 'other income' of Rs 531 m against Rs 408 m previously. It may pertinent to add that other income - consisting of interest receipts, dividend receipts, and yet other income - accounted for 28% of pre-tax profit against 23% previously. Hence other income is a decisive component in a manner of speaking.
Though its revenue stream comprise of eight verticals - for segmental information purposes it has grouped the revenue receipts under fiveheads of account - including a head of income called Others. The biggest revenue earner by far is Tours and Travel at Rs 9.2 bn but it could only realise a profit margin on sales of 3.2% for its efforts. Such a rock bottom margin for a travel business appears to be deplorable. This division also boasts the third biggest segmental assets of Rs 1.7 bn. Industrial packaging is at No. 2 spot with revenues of Rs 4.6 bn and a margin of 7.2%. It made do with segmental assets of Rs 1.6 bn. At No. 3 in revenue terms are Logistics and infrastructure services. It is also the breadwinner in terms of cash generation. It trumped up revenues of Rs 4.6 bn and generated a margin of 27.7%. It is a pity it cannot generate more bucks from this division. Concurrently, it also boasts the highest segmental assets at Rs 2 bn. Greases and lubricants rings in at number four with revenues of Rs 3.9 bn, and a margin of 7.9%. Taking in the last spot is the ubiquitous 'Others'. It consists of engineering and products services, tea blending & packaging, leather chemicals etc says a footnote. It ponied up revenues of Rs 694 m and runs on a no profit, no loss basis. Same was the situation in the preceding year. Fortunately, it also made do with piddling segmental assets of Rs 503 m. But why the company persists with running such low margin businesses is not suitably explained. But let that be.
Irrespective of the margins that the company is ringing in - the most delectable aspect of this company is that it makes do without any year end borrowings in either year. For a company of its size and scale of operations this is indeed a most commendable factor. Not that it does not do with borrowings at all - the expense schedule lists an item called Finance costs amounting to Rs 47 m against Rs 45 m previously. It either borrows moneys to meet mid-year exigencies, or it borrows some during the course of the year and very tactfully pays it all back before the year-end or some such.
And how does it make this magic mantra possible? The cash flow statement shows that the cash that it generated from operations Rs 1 bn in the latter year and Rs 792 m previously was more than enough to take care of capital account expenses. This capital outlay amounted to Rs 328 m against Rs 431 m previously. To the cash generated from operations, add the inflows from interest and dividend of Rs 336 m against Rs 232 m previously and the company's accountants were then left scratching their heads on where to invest the surplus dosh. In the preceding year a part of this hassle was taken care of by purchasing investments worth Rs 133 m. Given the cash generation on hand the company was also able to pay out a dividend amounting to 35% of post tax profits in the latest accounting year.
Good current assets management
Another good reason for the positive cash flow is the manner in which it handles its current assets management. The year-end inventories amount to a mere 12.5% of the manufactured sales, while the trade receivables amounted to 54 days gross sales. The year-end trade payables however are hovering at a much lower level than that of the trade receivables. The company may have to tighten up in this department. The current assets too at year-end are significantly higher than the current liabilities - but this in the main is due to the excess of cash and bank balances at year end amounting to Rs 3.2 bn. That is a lot of dosh sloshing around without any proper investment objectives in mind. This cash resource excludes short term advances to group companies amounting to Rs 148 m, and long term advances amounting to Rs 200 m before provisions. Whether these advances are interest bearing or not is not immediately known given the manner in which interest income is accounted for in the other income schedule.
Besides the advances to group companies, there is the investment portfolio amounting to Rs 454 m - grouped under the heads of 'investments in joint ventures', in 'subsidiary company', and 'other investments'. The company has accounted for dividend income of Rs 98 m in its books. But more details on the contribution of these investments later on in the copy.
The fixed assets schedule
The fixed assets schedule shows that the fixed assets held for active use had a gross block of Rs 3.9 bn at year end. It also boasts of fixed assets held for disposal with a gross value of Rs 8 m. The latter is small change - real small change at that. Given that the two biggest revenue earning divisions are Tours and Travel, and Logistics & Services, the company does not really require 'core' fixed assets, I presume. The revenues are a good mix of manufacturing and services. In any event, the year end gross block was able to generate gross revenues from operations equal to 6.2 X. That amounts to very high leveraging. But the accumulated depreciation amounts to over 45% of the gross block - excluding freehold land and lease hold land that is. (The freehold land priced in its books at the historical cost of Rs 127 m would be worth more than a king's ransom today). But more significantly, the plant and machinery - the largest individual head of account by far in the fixed assets schedule is depreciated by over 57%, and that is quite some. The company may have during the year also added to its manufacturing prowess. There is for example the addition to leasehold land, buildings, and plant and machinery during the year amounting in all to Rs 448 m. If this addition to gross block has indeed led to higher capacities, then there does not appear to be any mention of it in the annual report. (The capacity levels do not have to be furnished in the revised balance sheet format). The directors' report is more a wishy-washy account of the company.
The consolidated results
The consolidated statements of the company include the working results of its UK based subsidiary, and its five joint ventures. (The consolidated results show total gross revenues of Rs 28.4 bn, and a pre-tax profit of Rs 2 bn. Juxtapose this with that of the results of the standalone entity. It drummed up total revenues of Rs 24 bn and a pre-tax of Rs 1.9 bn. As one can see there is very little value add any which way). It would appear that the operations of the sibling and the joint ventures are not very well thought out. The UK sibling is wholly owned, while the holding of the parent in its JVs range from 25% at the lower end of the spectrum to 50% at the upper end. One of the JVs -Transafe Services-- in which the parent has a 50% stake appears to be some sort of a rip off. The holding of the parent in the equity shares and preference shares in Transafe amounting to Rs 250 m is almost fully provided for. That is to say the equity component is fully written off, and the preference component almost fully written off. This strange alchemy but let it be. The parent also has a 40% interest in a joint venture going by the name of Balmer Lawrie Van-leer Ltd.
A very perplexing note about the latter states that 11.4 m equity shares of Transafe Services (diminution in value fully provided for in the books of the parent) held by Balmer Lawrie Van-leer has been pledged in favour of the parent as a security against loan. It would appear that the latter holds 22.7 m equity shares in Transafe Services Ltd. This is exactly twice the number of equity shares that the parent holds in Transafe. From what I can make of it, the parent has advanced loans worth Rs 182 m to its sibling to acquire these shares. Is the sibling a dummy or what? The parent has now written off half this loan amount or Rs 91 m, given the deprecation in the value of Transafe shares. This logic if any beats me all ends up. Is the sibling as hard up as Transafe that it cannot repay the loan back to the parent? Why should the parent book this loss in its books by writing down the loan when the loss if any has to be accounted for in the books of the sibling? Besides, since the parent has fully provided for its equity stake in Transafe, why has the sibling only provided for half of its holding in Transafe? Or am I reading it all wrong here?
The UK sibling
The UK sibling - its only sibling is another standout it appears. The parent holds 3.4 shares of UK pounds sterling 1 each in this wholly owned sibling at an investment cost of Rs 187 m. This sibling does nothing much for the present having run out of ideas after having exited the two businesses of leasing and hiring of marine freight containers, and tea warehousing etc. It appears to be ageing as it gets on in years. But this company in turn has a 50% stake in a JV based out of Indonesia. That 50% stake amounts to Rs 66 m. The investment in the sibling does not appear to earn the parent a dime as this JV made a loss in operations in both the reporting years. Besides this investment it has a cash balance of Rs 359 m at year end. So what the company may well ask.
Like the proverbial curate's egg this is a company which is good in parts.
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 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.