United Nilgiri Tea: Better to drink than invest
An epochal year
The year 2011 was an epochal year for the amalgamations group. It marked the end of the journey for the long serving chairman of the group, Mr. A Sivasailam, son of Sivasailam Anantharamakrishnan who acquired control of the group from British interests just before the dawn of independence. Sivasailam the elder passed on in 1964, and the chairmanship of board of directors of the group then fell on Sivasailam junior. The United Nilgiri Tea Estates Company Ltd is one of the arms of the hydra headed Amalgamations group, which also boasts of the Simpsons, TAFE, and the Stanes brand. As far as Indian corporates go this company is quite ancient having just celebrated 89 year of corporate life under the simmering sun. It has also had a glorious past. Bonus shares account for almost 99% of its paid up capital of Rs 50 m!
The company per-se
In terms of area it is fairly large sized. It boasts of a total area of 1,499 hectares (3,703 acres) - but the catch here is that 701 hectares (1732 acres) of the total area consists of fuel areas, reserves, roads, buildings, and such like. The balance consists of 780 hectares (1,927 acres) of mature tea, 10 hectares (24.7 acres) of replanted tea and eight hectares (20 acres) of un-mature (or is it immature) tea. The replanted and immature tea areas seem to be a flea bite in the overall scheme of things. (The foot notes to the accounts states that the company is contesting the government order to vacate 336 acres of unirrigable vacant land contiguous to the planted area, and that the eviction proceedings have been stayed by the Madras High Court). The total holding of tea etc appears to be made up of four tea estates situated in the Nilgiris district.
The 1,927 acres of planted tea area yielded 49.50 lac kgs of green tea (50.77 lac kgs previously) harvested from its four estates. That would work out to a yield of 2,569 kgs of green tea per acre, against 2,634 kgs previously. A yield of this magnitude would anoint the company as a fairly efficient producer of tea. The efficiency is also dependent on climatic conditions. The company also purchased 46 lac kgs of green leaf tea against 50 lac kgs previously. Thus the total green leaf tea consumed amounted to 95.6 lac kgs against 100 lac kgs previously. The company appears to have paid an average price of Rs 11 per kg for the green leaf tea against a price of Rs 15 per kg that it paid in the preceding year. Compared to the sale price per kg of made tea, the price paid per kg for the green leaf tea is a mere trifling. In other words the manufacturing costs and the subsequent value addition to the green leaf tea is substantial before it is made ready for consumption.
The 95.6 lac kgs of green leaf tea in turn produced 23.7 lac kgs of made tea, or a conversion factor 1:0.25. The conversion factor in the preceding year was the same in the latter year. It also purchased 1.5 lac kgs of tea during the year for Rs 10 m against a marginal purchase of tea for Rs 1.4 m in the preceding year. The objective of this purchase of tea appears to be to match the total amount of tea on hand in the current year with that of the preceding year. The company also claims that the lower production of green leaf tea by 1.3 lac kgs in 2010-11 was due to inclement weather. This marginal decline in production is not really such a big deal. What is however coming across very clearly is that the fortunes of the plantation industry, besides the yield and quality factor, is basically dependent on two factors - the weather conditions, and the price that the produce is able to obtain in the open market. In the last six years the production of made tea fluctuated between a high of 26.2 lac kgs in 2007- 08 to a low of 21.9 lac kgs in 2005-06.
The company's working
The company obtained sales revenues of Rs 266 m against Rs 284 m previously implying that the unit price realisation dropped during the year. It appears to have obtained an overall average unit price realisation of Rs 104.8 per kg against Rs 112 per kg previously. But this average price includes the price per kg that it realised on exports. In volume terms the company exported 1.3 m kgs or 53% of all tea volumes sold, against 1.3 m kgs or 53% of all volume sales previously. The company realised higher margins on its export sales than on domestic sales. The company could pony up an average price of Rs 119 per kg on exports in both the years, against an average price of Rs 92 per kg for domestic sales in the current year, and Rs 105 per kg in the preceding year. The decline in unit sale price in the domestic tariff area led to a fall in the pre-tax profit. But what is very remarkable about its performance is that it has no trade due over six months, and for a tea manufacturer it boasts of no provisions against such trade dues! Wow, this is swell!
The pre-tax profit, excluding the other income factor, fell to Rs 20 m from 29 m previously. This is inspite of the fact that it paid less for the green leaf tea than in the preceding year. Another factor causing the drop in profitability could well be the purchase price paid for the made tea. It paid an average price of Rs 66.4 per kg on bought tea. But looking at it another way, if it is so easy to secure such easy mark-ups on the end product, why then does the company not buy more made tea for sale? What made matters a trifle bearable at the end of the day was the large contribution of other income - but more on this later on.
A peek at the fixed assets schedule shows that the company does not appear to have spent much money on the development of the estate lands in the year past. The vast bulk of the Rs 16 m that it spent during the year was apportioned among buildings and plant and machinery. This spending on capital assets has not led to any increase in the installed capacity of its made tea manufacturing capacity, which stands at 2.5 m kgs, on a single shift basis. The plant is now operating at full tilt relative to its rated capacity. But the fixed assets schedule also shows that the company is now embarking on a major capital asset revamp of sorts. The capital work in progress shows that the company spent Rs 100 m during the year. (The gross block at year end excluding the capital work in progress stood at Rs 207 m). So, one can get an idea of the quantum of expansion that is being contemplated. Since this expenditure has yet to be apportioned among the fixed assets categories we do not know where the spending is concentrated. The directors' report has also not made any mention of this sudden splurge in spending, and what it is likely to lead to. Probably it is a piffling matter or some such. Hopefully there is some good news in the offing.
The cash flow funding puzzle
But it is the manner in which it has funded this expenditure which makes it quite intricate. The company was sitting on mega cash resources of Rs 162 m at the beginning of the year. At end March 2011 it was sitting on cash resources of Rs 134 m. Besides, it also boasted liquid investments to the tune of Rs 8.3 m. At year end, the borrowings had accelerated to Rs 42.4 m from Rs 3.7 m previously. The gross block work in progress stood at Rs 100 m. As one can see this just does not add up. And, the cash flow statement only adds to the confusion. The company generated a cash inflow of Rs 26 m from operations. The total cash flow from investing activities led to a net cash outflow of Rs 68 m, which could well have been financed from the cash and cash equivalents in its books. But it still sought to go in for debt to the tune of Rs 40 m, despite the lode it was sitting on. What is more, the cash flow statement says that the cash and cash equivalents at the beginning of the year was only Rs 54 m, while the cash and cash equivalents at year end was even lower at Rs 38 m! How could this be? Has the company made a gross error in its computation, or am I hallucinating or something?
The other intriguing aspect of the company's gross assets base is that Rs 21 m of its total gross block of Rs 469 m (before deducting for current liabilities and provisions) is held outside India. But a perusal of the items that constitute the assets does not reveal any assets of this value which would appear to be held outside India. And, if these assets are held outside the country in which country is it being harboured, and what is the constitution of these assets please? And furthermore what is the objective of holding these assets abroad?
The investment schedule
This also brings us to another equally moot point. The bulk of its investments is in group companies. It is not exactly the investment schedule that one would hope to see, but this is a cross that all family owned enterprises have to bear. The book value of its dated investments totes up to Rs 35 m. Of this, Rs 29 m is in group companies, with Kuduma Fasteners hogging the bulk of this investment outlay. The investments in group companies belong to the unquoted category and hence the present break-up value of these investments is not known. It has assorted lilliput investments in other India Inc companies which add up to nothing and make for even little else. But to be fair to the management, the market value of these quoted investments is more than twice that of the book value.
The total of 'other income' added up to Rs 23 m, against Rs 32 m previously. In this agglomeration, the dividend income added up to Rs 1 m. Not exactly what the investment manager ordained, but that is the reality of the situation. The dividend receipts from group companies added up to a miserable Re 0.6 m! Quite obviously, it has several non performing investments in this list. The income from its prodigious bank balances brought in another Rs 9 m. But the biggest contributor was miscellaneous income at Rs 10.8 m. If indeed this is the largest contributor, why is it classified under the miscellaneous category please? It lost out on subsidy receipt from the tea board, which brought in Rs 5 m previously.
Nothing to it
At the end of the day there is really very little to recommend in this share. It is run in a very conservative manner (listed at the Madras Stock Exchange only for example) with a low dividend payout ratio to boot. The funds management is not exactly what would be expected of a member of a large group such as this, with insufficient disclosures to boot. It is a pure play tea company and its fortunes are linked to the harvest, the amount of tea that it buys, and the vagaries in the price of tea both in the export and domestic markets. A heady concoction if one may say so.
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.
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