The financials present the picture of a company with no purpose or direction --which is about saying the very least
Is there any real purport?
From a perusal of the latest annual report it is a trifle difficult to understand the real purport of Khoday India Limited. It remains in the public domain, but barely. That it makes such iconic brands as Peter Scot whiskey and Hercules rum is another matter. It is a very closely held entity and it functions in that manner. It barely breaks even in its operations, and manages its business through a sole manufacturing facility located in the outskirts of Bangalore. It boasts whacko investments in group companies which do not appear to pay back a dime as tithes, or hand down favours of any sort as a way of compensation. It adopts strange practices to generating revenues and profits. The accounting for ‘other income’ is another well thought out exercise - 50% or more of this receipt consists of write-backs. It is unable to pay even a modest dividend simply because it lacks the cash resources at the end of the day-but the biggest losers in the process, the Khodays, who constitute the promoter family, are not complaining. That a booze company of 46 years vintage is unable to come up trumps is equally disturbing. The directors’ report to the shareholders is about as insipid fare as it can get-with no purpose or direction. The wonder is that the share is still traded in the bourses. In the course of just two months, Jan and Feb 2012 it touched its high and low for the financial year - a high of Rs 75.60 in Feb from a low of Rs 22.50 in the preceding month. That is a mighty swing in the price in a one month period alright. One wonders what caused such a swing in the first place. The volume of trade has however not been made available.
The promoters together collectively control 89.54% of the outstanding equity of Rs 376 m is made up of equity shares of the face value of Rs 10 each. Some 68% of the outstanding equity is held either through HUFs or by a corporate entity, Gayathri Holdings Pvt. Ltd. But by far the highest stake in the company is held by K L Ramachandra, the chairman of the Board. Individually he holds 16.3% of the outstanding shares and through the HUF route another 15.46% making a total of 31.76%. In other words the buck stops at his table. Such a large group composite holding also runs afoul of Securities and Exchange Board of India (SEBI) diktats. The promoters will either have to exit the market totally as the holding is just below the upper exit limit of 90% or issue shares to the public to reduce the holding of the promoters to meet SEBI mandated limits. There is no mention of such a possibility happening though.
The company generates its top-line through the manufacture and sale of Indian made liquor, glass, contract income, sale of services, and ‘other sales’. It also buys finished goods for resale - but finished goods under which category of sales and the value of such purchase is not known. It registered gross sales of Rs 3.4 bn against Rs 3.2 bn previously. Liquor sales account for 87% of gross revenues against a more wholesome 98% in the preceding year. Since the liquor business is also subject to ‘sin tax’, the excise taxes at Rs 1.8 bn amounted to a hefty 52% of gross revenues against a higher 58% previously. Excise taxes on liquor are a state prerogative and it differs vastly from state to state. Quite a bit of sheen of the top line is taken away when the excise component is stripped off.
There is a drastic change in the format of revenue receipts during the year as compared to the preceding year. Gross liquor sales are down from Rs 3.17 bn to Rs 2.96 bn - for what earthly reason it is not known. Not only have liquor sales fallen in value, the company has also written off obsolete stock valued at Rs 26 m! I am assuming here that the write-off refers to finished stocks of liquor - which is its mainstay. How can the swift moving Indian Made Foreign Liquor biz record negative growth for starters? (Granted the liquor industry is a mugs game given the extortionate level of taxes that it has to endure, and the spate of regulations that govern its functioning - but still). Sales of ‘Others’ brought in Rs 42 m to the top-line against Rs 27 m previously. Where refractories fit in is not known-but let that be. The big winner - and by a mile at that -is ‘contract income’ bringing in Rs 407 m in revenue accretals against a puny Rs 6.3 m previously. The revenues realised from the sales of ‘services’ and sales of ‘glass’ bring in the rear end. There is no separate information on what this contract income refers to - but it could be a group company transaction.
An interesting masala mix
But what makes this masala mix very titillating is the ability or otherwise of these product groups to bring home the bacon at the end of the day. The directors’ report informs us that the liquor segment was out of pocket to the tune of Rs 110 m, the glass segment made a loss equal to 56% of sales value, the systems segment, whatever that is, also posted a loss equal to 57% of the sale value. Why then continue with these businesses? The big winner was the contract segment which posted a profit of Rs 400 m on contract revenues of Rs 407 m. This is really swell and on the face of it makes for absolute nonsense too. What type of outlandish contracting business is this that brings in margins which are almost equal to the revenues that it earned? Is it some sort of a book entry, perhaps? Will this line be able to do an encore in the current year perhaps? Then there is the ‘Others’ business which earned a profit of Rs 7.7 m on sales of Rs 446 m. It sounds implausible that the liquor business could ring up negative returns in the first place - and that too minus returns of this magnitude. Neither do we know the contribution of ‘bought out products for sale’ in terms of revenues nor margins, given the manner in which it accounts for such purchases and sales in the books of account. It is a truly a nutty situation out here.
This is only one of the puzzles that confound. The proprietors of the company have invested Rs 615 m as capital in a partnership firm sporting the name Lakshmi Estate in which the biggest investor is Khoday India has a 75% share. Four of the promoter directors separately have a share of 6.25% each in this venture adding up to cent percent. That is a lot of money to put down. Just compare this investment with its paid up equity base of Rs 376 m to get the bigger picture. What exactly is the return that the parent gets from this investment is not immediately decipherable. The other income schedule gives no inkling of any return on this investment. In all probability Lakshmi Estates is the proud owner of loads of real estate. The other very interesting quirks are the Rs 123 m that it has placed as a ‘lease deposit’ with one of the group companies. This deposit probably refers to office space or some such that the public limited company is occupying and owned by a group company in the private domain. A real cool deal alright. Then there are the dues of Rs 48 m outstanding from related parties and coming within the definition of ‘loans and advances’. There was no such entry in the preceding year - so this is a new development. It could be a short term advance or something but it is also interest free. The other group company investment is in KhodayProperties Pvt. Ltd - a subsidiary. Mercifully the capital investment in this outfit appears to be limited to Rs 0.1 m. It has also locked up a sum of Rs 77 m under the head of Trade advance - whatever this represents.
No spend on capital assets
The problem is that the company is simply not spending where it should be throwing good money. Take the depreciable gross block for example. (The land is valued at a pitiful figure of Rs 24 m. It must today be worth a whole lot more than the book value). This gross block amounted to Rs 1.55 bn against Rs 1.51 bn previously. The accumulated depreciation at year end amounted to 70% of the depreciable gross block. More to the point the items classified as plant and machinery had a pre-depreciation value of Rs 582 m. The accumulated depreciation was as high as 83% of this block. In other words the company is operating on obsolete machinery. There appears to be no attempt to rectify this lame duck situation. It is so ludicrous that the depreciation provision for the year is more than the gross block addition for the year! So contracting income is the only solution for the present to get out of the rut.
The wonder then is that the company is loading itself with even more debt in this depressing scenario. The total borrowings at year end has risen to Rs 1.14 bn against Rs 1.07 bn previously. One reason for the excessive dependence on debt is that the company has locked up large sums in working capital outlays. The inventories at year end amounted to 58% of gross revenues (excluding other income) for the year, against an even higher 63% previously. This is an abnormally high inventory level to carry and does not appear to be in order. The trade debtors at year end accounted for another 26% of such gross revenues. The only saving grace was its ability to garner trade deposits and advances from customers which at year end amounted to Rs 266 m which would have reduced working capital costs.
The company generated net funds to the tune of Rs 153 m from operations. With minimum spend on gross block addition there was some money to spare. But the mood spoiler here was the interest payout amounting to Rs 225 m. The interest payout appears to put a considerable burden on the company. On a rough back of the envelope calculation the payout works out to over 19% per annum for the year on the year end debt figure, against a similar percentage payout previously. This is not tenable. What this percentage payout infers is that the company was borrowing heavily during the year for working capital reasons or whatever, and then presenting the sunny side at year end.
A hydra headed group
The group is also a hydra headed monster so to speak. The number of entities over which the management is able to exercise control amounts to 70 at year end. They are all closely held companies. The list includes a number of entities which are wine, brewery and distillery units. Given the working of the publicly listed company would it be in order to speculate that the performance statistics of the other group companies may be any different? The good news is that Khoday India does not appear to have any inter-se transactions with these group companies. All in all it represents a very melancholic scenario.
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.