The seeds of the legacy asset, Williamson Magor, were sown as far back as 1869, when Capt. James Williamson and R.M.B. Magor inked a partnership firm, for the management of tea estates in Assam. Over the years the company became one of the biggest managing agents of tea plantations in the North East. This partnership however metamorphosed into a body corporate under the Companies Act only in 1954. Sometime in the early 1960's, the Khaitan family patriarch Briju M Khaitan came on board, due to other extraneous circumstances, and over time the family eased itself firmly into the driver's seat. What exactly were the long term intentions of the Khaitan family when they acquired the reins of power is not known. But, what is coming across clearly is that what the company is being put through today is definitely not in its best long term interests. And, that is putting it mildly, very mildly, that is.
The souls of the long departed founders must be morphing in their grave, merely observing the ludicrous turn of events that has befallen their creation. The company is being 'rogered' in every which way that it is possible to do so. Why, incumbent managements suffer from such periodic bouts of self delusion, or is it chicanery, is difficult to comprehend, as they have infinitely more to cherish if the business is directed in a manner which creates more wealth for all the stakeholders. Even more so as they have acquired a power brand which took long years of diligence to establish.
How the income is structured
The company has published its brief working results for the last five years for purposes of comparison. From the looks of it, the company appears to have gravitated into a block hole in the last three years or so. What was the trigger for this dramatic change for the worse in its wellbeing from the financial year FY08 on is not the purpose of this note. What is crystal clear is that this abrupt turn in its fortunes is entirely the makings of the management. In this year its total income fell by half to Rs 221 m, from Rs 441 m in the preceding year. It also recorded a loss of Rs 12 m. In the two subsequent years it recorded losses of Rs 35 m and Rs 33 m.
For the matter of record, the way this company is structured, its regular income streams on which it can bank on are meager, and they do not appear to include any management fee accruing from its numerous tea holdings - unless the receipts of Rs 32 m (Rs 37 m previously) labeled under Consultancy Fee Services is on account of this. To earn its revenues it depends on a variety of dribblings accruing from a host of sources, including Maintenance Services, Rental Income, Consultancy Services, Dividends, interest on Intercorporate Deposits and Bank interest. In FY10 such incomes (including a profit of Rs 23 m from the sale of 121,000 shares of McLeod Russel) and a liberal dose of book entry reversals helped the company to register a gross income of Rs 269 m. Of this gross income figure, book entry write backs alone constituted Rs 59 m. Separately there is an apology of an 'other income' receipt of Rs 4 m, which is also liberally spliced with reversal entries. The company is now reduced to 'managing' its gross receipts.
Its investment portfolio
The problem is that the company has borrowings of Rs 1.3 bn, investments to the tune of Rs 2.1 bn, and loans and advances amounting to Rs 438 m. While it pays goodly interest on what it borrows, it earns precious little income on most of what it lends, and even less from its investments. There is a severe mismatch here between the income and expenditure figures. The reason for this malady surfacing is that it is all a planned operation, you see. And the way its investments are splashed out is an eye opener of sorts. Williamson Magor has 2 wholly owned subsidiaries, and 12 group companies. It has a direct stake in 7 of the group companies. The other 5 companies appear to be incorporated in far off lands including Vietnam, Uganda, the UK, and such like. Its investment in these far away entities is apparently routed in some other indirect manner for reasons better known to the management.
Its combined capital investment in its 2 misnamed subsidiaries, Woodside Parks and Majerhat Estates, adds up to Rs 5.2 m. Its biggest investment per se is in Eveready Industries at Rs 936 m; followed by McLeod Russel India with Rs 672 m. (The latter is another tea company that the Khaitans acquired from its British principals). Next in the pecking order is McNally Bharat Engineering at Rs 197 m, and closely followed by Kilburn Engineering with Rs 107 m. Other companies bringing up the rear end include Williamson Magor Bio Fuels, Kilburn Chemicals, Babcock Borsig, Williamson Financial Services, and Standard Batteries Ltd. The provision for depreciation at year end on the book value of its investments is shown as Rs 65 m, against Rs 68 m in the preceding year. (The shares in most of these companies were acquired at a premium relative to the face value.) Further, this is only one of the many provisions that dot the landscape of every other page of the schedules. And more importantly, one must also note here that the company has almost hocked itself to the hilt. The vast bulk of its major holdings have been pledged to the banks for the moneys that they have lent to the company.
The returns on its investments
The company realized Rs 35 m as dividends on its all its investments put together. That works out to a princely return of 1.8% on the book value of its total investment. Quite obviously the vast bulk of the group companies are not paying their tithes to the parent. And it is not that the parent is one bit perturbed at these shortcomings. The continued hold of the family over their minions is an infinitely bigger concern. The biggest entry on the expense side is the interest cost, and the company has paid out Rs 218 m on this count during the financial year. To put it in perspective, on an average borrowing of Rs 1.5 bn for the year, it would work out to a payout of close to 15% annualized.
And where is all this borrowed moolah deployed? Some of this has obviously gone into acquiring stakes in group ventures. Yet some moneys have gone into 'Loans and Advances'. The advances under this head are further broken up into Advances, Intercorporate Deposits, and Deposits. (It will be interesting to know on what basis the company bifurcates the gross advances that it has made in this manner).The advances totally aggregate to Rs 380 m at year end, against a substantially higher Rs 775 m in the preceding year. At year end the company has provided for doubtful advances under all three heads to the tune of Rs 147 m, against (Rs 191 m previously) or put differently a provision of 39% against (25% previously) on the outstanding loans. It is as simple as that. These are doles over which the company has control of, and yet...
The figures show 'Red'
The income from operations schedule lists income from intercorporate deposits of Rs 92 m (Rs 122 m). If this is strictly correct then it has earned a bundle on its ICDs. The ICDs are themselves classified into 'considered good' and 'considered doubtful'. The doubtful ICDs can be termed as substantial, amounting to Rs 97 m (Rs 118 m) previously. Taking into account only the ICDs considered good, then the company may have well earned a return of over 21%, based on a rough back of the envelope calculation. Then there is another balance sheet item called 'Other Current Assets'. In this is grouped 'interest receivable considered good' and separately 'interest receivable considered doubtful'. Of the total amount receivable of Rs 129 m, more than half, or Rs 77 m, is shown as doubtful. It is a similar situation prevailing in the preceding year.
But the most astounding part of the company's operations is featured in the Trade Debtors schedule. It had total trade debtors of Rs 49 m at year end, of which Rs 37 m is shown as doubtful and probably pertains to the interest receivable (mind you the company does not sell anything). Matters cannot get more colorful than this. It is also only a ditto repetition of the scenario in the preceding year. Then we are confronted with the Expenses schedule of the P&L Account with its own set of provisions, including a rather strange item has called 'Loss due on nonpayment of dues for convertible warrants' toting up to Rs 26 m. Some of the bad and doubtful debts are apparently set off against provisions, while some others seem to be debited straight to the P&L Account.
With so much of high octane action being unnecessarily generated by the management, and leaving the outcome of it all in no doubt whatsoever, the company is on a downhill journey. One of the notes in the auditor's report states that 'the company has accumulated losses not exceeding 50% of its net worth as on March 31, 2010...
Just as comic is the state of affairs in the books of its two wholly owned subsidiaries. What exactly Woodside Parks does for as living is not known as it generates no income, though it has funds employed to the tune of Rs 51 m. But that is before one considers the accumulated debit balance of Rs 50 m in the P&L Account. The auditor's in their report state that the accumulated losses are more than the net worth of the Company.
The other subsidiary, Majerhat Estates, is just as conkily named, and is similar in all other respects too. This company has a paid up equity capital of Rs 30 m and debt capital of Rs 167 m, all of it care of the parent. At year end it had advanced loans to the tune of Rs 193 m - a status quo over that of the preceding year. But this company has registered no income - in either year. Further, the catch here is that close to half the loans that it owes to the parent represents accrued interest but not paid. Similarly it has in 'good faith' placed a deposit of Rs 178 m with whoever, from whom it receives no interest. But the company has also shown interest receivable of Rs 12 m, and deducted tax at source of Rs 3.7 m - on an income that it may never receive! The auditors in their report state that that the accumulated losses of the company at the end of the financial year are less than 50% of its net worth.
The management has to do something and apply the brakes to stem the rot, unless their intentions are to let it flounder. But the company will not be singing its swan song any time soon. And why is that? For one the management has the wherewithal to reverse the trend if it so wishes. For another, the company is sitting on a mountain of real estate. The value of its holdings in land and building is listed at Rs 880 m and these assets were last revalued in 2001.
At the end of the day one can only weep in silence.
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.