Texmaco Ltd: Planning Big? We have to wait and see - Outside View by Luke Verghese

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Texmaco Ltd: Planning Big? We have to wait and see
Feb 23, 2011

Leaving no stone unturned

Saroj Poddar is leaving no stone unturned to prove, and in double quick time, that he is a most worthy and honourable inheritor of his share of the crown jewels that befell the late Krishna Kumar Birla (K.K.) after the great carve up of the eponymous group. (To be fair he seems to be making a go of it - but more on this later). Texmaco at some point of time apparently fell into the lap of the late G.D. Birla, and became a part of the legacy assets of his son K.K. (Saroj however very reverentially refers to K.K. as the founder chairman) after GD's holdings got parcelled out among his three male offspring. Saroj inherited Texmaco as his share of the spoils, from his father- in- law, (K.K. passed on in Aug 2008) along with Zuari Industries. Saroj is better known as the Indian co-promoter of Indian Shaving Products, now sporting the name of Gillette India. His group is also a major shareholder in several other Indian companies.

The point that the chairman is trying to make

So what is the point that he is trying to make? He is injecting the 70 years young engineering and steel structural company with some new vigour in his own style. For starters, the ageing CEO, Mr Ramesh Maheshwari, who was at the helm of affairs for some 50 years, has just been elevated to the post of executive vice chairman. He has however been replaced by another ageing CEO. The plan involves hiving off some of the divisions to a wholly owned subsidiary, with the basic premise of the plan being to unlock value for the shareholders, and allow both businesses to grow independent of each other. The company currently has a Heavy Engineering division, a Steel Foundry division, an Agro Machinery division, a mini Hydel Power division, and the Real Estate division. It is also into exports, and dabbles in R&D work. It intends to de-merge the engineering and steel foundry divisions. The new thrust within the parent will be on the real estate division.

The way the drama is acted out today, the company earns its revenues on paper from 16 different streams, though in reality several of these resources are appended purely for cosmetic purposes. (Stupidly enough it even classifies rental receipts from its property in Delhi, amounting to a sizeable Rs 98 m, as sales income in this revenue schedule. Besides, this income will get nixed when the property goes under the hammer.) For example, its capacity to manufacture sugar mill machinery is dormant, as is an item called Water Tube Boilers. Its capacity to make several textile machinery items, and Points and Crossings, has also been iced. Its trading portfolio is in the boondocks, and its exports business could do with a revival. However the management says that it plans to re-organise and expand the product range of the sugar machinery and boiler segments.

The agro machinery division will introduce new agricultural machines, tractors and reapers, and road repair machines etc. Currently it principally earns its revenues from just two items - Railway Wagons and, Steel Castings and Ingots. Of the total revenues of Rs 11.2 bn (Rs 10.9 bn previously) that it rang up item wise, as listed out in the 'breakup of sales' schedule (including inter segment revenues), the above two product lines rang in sales of Rs 10.1 bn (Rs 976 m). Put differently, they accounted for 89.7% (89.4%) of all revenues. The balance revenues come from sales generated by a motley mix of items including Pressure Vessels and Heat Exchangers, Structurals, Site fabrication, Scrap sales, and from an item labelled 'Others'. However in the segment wise breakup of the working results, 99% of the revenues are shown as accruing from these two divisions.

The emerging scenario

What the company is now in the process of doing is in transferring the above two big ticket items which presently bring home the bacon, to its wholly owned subsidiary, sporting the name of Texmaco Rail and Engineering Ltd. For a start the parent has invested Rs 54.5 m in the equity capital of this sibling. In other words the rail coach division and its supporting infrastructure will become a separate entity. That will still leave the parent with only the real estate division, its investments, and the mini hydel power assets. These represent a motley mix of diverse activities which have no synergy with one another. But let that be.

How exactly the company intends to unlock value for the non management shareholders in the manner that it proposes, is not very clear. For a start Rs 54.5 m of hard to get cash has already flown out of the coffers of the parent to its sibling as permanent capital. This excludes any 'loans' and 'advances' that the parent may have to put at the disposal of the sibling either on a coupon rate basis or on an interest free basis, or any other tid-bits that it may also dangle. Further, the bulk of the revenues will accrue from the sibling and just as possibly will the bulk of the profits - at least for some time to come. The latter is a separate entity from the parent, and yes the sibling will also be listed in the secondary markets for trading. Presumably the management will continue to hold a 47% stake in the equity of the sibling through the parent, while the balance will be vested in the hands of the minority shareholders or some such. The parent will not get to consolidate the accounts of the sibling as it is not a subsidiary and hence will book only the dividend income accruing to it from dividends declared by the sibling. But this is really not the point.

The real catch lies elsewhere. The parent raised the money from the rights issue using the brand equity of the assets that have now passed on to the subsidiary. But the former now gets to keep this windfall, by and large, and use it as the seed capital for its real estate venture. This is money for jam. The sibling will now have to find other resources to finance its own expansion and modernisation schemes, which according to the directors' report are many. Coming to think of it, Saroj appears to have made an excellent start to his vision of unlocking value!

A fuddy duddy enterprise

This company was a 'fuddy duddy' enterprise for decades at a stretch and it switched to a higher gear only in the last decade or so. (The company has never given a bonus issue in its long and unillustrious history for example.) As a matter of fact it acquired its new look only by the year FY04. The turnover acquired a quantum leap to Rs 3.0 bn in FY05 from Rs 1.7 bn in the preceding year. So did the paid up equity base which doubled to Rs 103 m, following a rights issue at a premium. Since then it has been on a roll. In FY10 it recorded its highest turnover ever of Rs 11.2 bn as also the highest profit before tax of Rs 1.4 bn. (One may add here that its other income, including rental receipts, is a fairly significant constituent of its pre-tax profit both in FY10 and in the preceding year.) In FY10 it also made its second rights offering, on a preferential basis, at a premium of Rs 103 per share on a face value of Re 1, by way of qualified institutional placement (QIP). This issue raised a net amount of Rs 1. 7 bn, but the paid up equity only inched up to Rs 127 m, from Rs 111 m in the preceding year.

Financial management

So what has it done with the monies that it raised? Very little as yet. Though it pocketed large dollops of dough through the issue of additional equity capital, it simultaneously generated a negative cash flow of Rs 127 m from operating activities. The latter was largely due to the cumulative negative changes in its working capital management. (In other words the higher sales were realised by resorting to extreme means.) But in any event this net additional injection of cash flow also led to a very peculiar situation. It purchased debt securities for the value of Rs 2 bn, while simultaneously increasing its debt capital stock by Rs 483 m to Rs 1.2 bn. It obviously decided to do a double whammy when the going is good. As stated earlier, it also placed Rs 54.5 m as equity in its wholly owned sibling. On the other hand it plonked down a mere Rs 156 m in fixed asset replenishment, which may not exactly be called a perfect start to its stated intentions. It also spent another Rs 27 m in redeeming its preferential capital.

The current year should hopefully see a spurt in its real estate business, in which it appears to be going it alone, but this activity will take time to yield any addition to the company's brand equity. Besides, ands more important, it has no expertise whatsoever in this rather high value, high risk line of business either. (The front cover page however states that it is getting ready for the global connect through strategic partnerships - whether it also applies to the realty venture are not known). Besides, its investment portfolio barring its debt securities, basically may account for nothing. Its biggest equity holding in listed companies is in Zuari Industries with a book value of Rs 477 m, and in sundry other investments in other Birla group companies. However the total book value of its listed stock holdings valued at Rs 500 m had a very significant market value of Rs 1.5 bn at end March 2010. But by and large, these investments are not for sale as they represent family silver - except for their hypothecation value that is. The company apparently has no plans for its puny power division.

The subsidiaries

Other than its subsidiary Texmaco Rail, it has two other subsidiaries which appear to have limited value for the parent. They go by the names of High Quality Steels Ltd and MacFarlane and Company. The former is a wholly captive supplier of steel to the parent, and is reimbursed just enough to help keep its head above water. Whether it manufactures the steel or buys the steel and then supplies it to the parent is not readily known. The parent also has some other obscure financial transactions with both its subsidiaries but they are of minor import. And fortunately, its investment in these two companies is of a miniscule nature.

It will be very interesting to see how Saroj's vision of brave new world turns into reality. More precisely, his world view of unlocking value in the manner that he intends to do so. Hopefully the company will get its numbers right as events move forward. That precisely is the objective in the first place.

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 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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