CCL Products: Enigma wrapped in a Rubik's cube
The many faces of coffee
This company based out of Hyderabad, and having its factory at Guntur, produces and sells instant coffee. That is to say coffee seeds are processed into instant coffee. This part of the coffee making business is easy to understand. But it is the variety of coffee concoctions that are available which makes it incomprehensible. To start with there are three types of coffee seeds which are grown. There is Coffee Arabica which accounts for approximately 90% of the world's coffee production. Then there is Coffee Robusta which accounts for another 9%, and the balance is accounted for by Coffee Liberica.
The industry is segmented into filter coffee and instant coffee. Within this grouping, if one may call it so, there is the traditional spray dried instant coffee segment, the freeze dried coffee market, and the liquid coffee segment. If it has not become confusing enough, we are also informed that the consumption of soluble instant coffee is on the rise, with growth rates outstripping those for roast and ground coffee. There is also iced coffee, and spiced coffee, austere black coffee, and sweetened milk coffee. CCL Products is also FLO certified to produce Fair Trade coffee, Organic coffee, Rainforest coffee as well as dual and triple certified coffees. It also claims it is also the only company in the world to offer all four types of Soluble Instant Coffees from one location. That is a lot of variety for the humble coffee seed, and enough to drive anyone nuts. But, fortunately, the company is not yet brain fagged by the mindboggling possibilities.
The other interesting tid-bits that the annual report offers are that coffee is the largest traded commodity, second only to oil. The directors' report also adds that coffee is a US$ 70 bn market per year globally, including US$ 9 bn a year in North America alone. These statistics alone the directors say make for coffee being one of the best markets to invest in and reap the results.
Towards this end the company has incorporated a wholly owned subsidiary in Singapore with the primary objective of identifying and making investments in potential instant coffee markets worldwide. This subsidiary has implemented an agglomeration project (whatever that means) in Switzerland through a step down subsidiary, and has started the manufacturing process. The Singapore subsidiary is also in the process of implementing an instant coffee project in Vietnam.
The promoters are on a roll
The company appears to have a dynamic promoter in Chella Rajendra Prasad who is ably assisted by his 27 year old executive director son, Chella Srishant. Together they appear to control a little over 30% of the total voting capital of 13.3 m shares of Rs 10 each. There is however no need to fear their ever losing control of the company in any hostile bid as they have very thoughtfully tied up all the loose ends to retain overall control. A further 26.5% of the equity is collectively held by NRIs/OCBs (8.15%), and by their foreign collaborators (18.36%). Thus their total voting strength at 56.8% is well over the critical cut off point of 50.01%.
The interesting aside here is that one Mr IEA Breminer holds 1.6 m shares or 12.1% of the outstanding equity capital in his personal capacity. This holding is presumably included as a part of the NRI/OCB holding. But the additional bit of information is that the firm Ernest A Breminer is also a 74.9% subsidiary of Associated Coffee Merchants International (ACMIL). (ACMIL in turn is a 74.9% subsidiary of CCL Products Ltd.) This is a very neat arrangement, and presumably Breminer the individual, and Breminer the firm are also directly inter-related. (The firm Breminer is also some sort of a colourful outfit. It has of a capital base of GBP 150,000, an asset base of GBP 177,000 and nothing else. It would appear to be some sort of a shell company - period. It adds to the mystery.)
The father and son duo are also well reimbursed by the board for their contribution to the company's prosperity. Between the ‘twosomes' they took home a shade over Rs 20 m as salary and perks. Compare this with the total salary payout of Rs 58.8 m for the year and the takeaway of these two gentlemen works out to a little over 34% of the gross expenditure on ‘pagaar'. The contrast is very stark. A remuneration package of this magnitude to the whole time directors appears to be grossly out of place, and corporate governance is found wanting here. The promoter family must however be finding it a lot of fun working for this company.
The company's innards
The company does not make any product, but merely converts raw coffee into instant coffee, etc. It has a licensed capacity to process 14,000 tonnes of raw coffee. It consumed 20,000 tonnes of raw coffee worth Rs 1.5 bn to produce 8,510 tonnes of the purified variety. The capacity utilisation is still way off the mark. The extent of the value addition that it realised when the produce was flogged in the market is not known, but it sold 8,770 tonnes of coffee for Rs 2.8 bn. That is to say it realised a lower rate of Rs 322,000 per tonne of coffee that it sold, as compared to Rs 356,000 in the preceding year. The output volume reveals a steady conversion factor of 42.5% of the input volume in either year.
The company exports almost all that it can produce. The FOB (Freight on Board) value of exports was Rs 2.7 bn, or 97% of all exports. Of this Rs 951 m was apparently routed through its wholly owned subsidiary ACMIL, its UK based sibling. This sibling is also used to purchase imports worth Rs 377 m - probably representing raw material imports. The CIF (Cost, Insurance and Freight) value of all imports during the year at Rs 1.3 bn, constituted 84% of all imports during the year. In a sense this is a pure play import-export business.
Though turnover inched up only marginally to Rs 2.8 bn from Rs 2.7 bn, there was a significant decline in excise duty payable at Rs 6 m against Rs 28 m in the preceding year. Other income rose to Rs 51 m from Rs 32 m previously (thanks largely to favourable forex gains). But the value of materials consumed fell sharply, due to a sharp uptick in inventory valuations at year end. The total book value of inventories at year end increased appreciably to Rs 640 m from Rs 472 m previously, occasioned largely by the spurt in the raw materials valuation. This was the singular factor which boosted the profit before tax to Rs 350 m from Rs 238 m previously. The company is obviously taking a call on raw material prices as the value of raw material stocks at year end rose sharply to Rs 445 m, from Rs 174 m previously. (Inspite of higher working capital costs, the company was able to reduce debt at year end by Rs 352 m. As a matter of fact, on paper, the net current assets are maintained at an abnormally high level, reflecting perhaps the very conservative business practices that it follows.)
The company has junked fixed assets worth Rs 54 m during the year - representing plant and machinery. But the income/ expenditure schedule does not disclose separately the after effect of any sale of such an item. It may however represent the assets transferred to its Vietnam based plant. But the fact of the matter is that there is no clarity on this point. The company's investment in its subsidiaries amounting to Rs 180 m may also never yield any direct dividends, as the purpose of their incorporation was to meet more earthy goals. The advances to a subsidiary at Rs 82 m may for the same reason never yield any direct gains either.
The subsidiary imbroglio
The two direct subsidiaries of CCL Products - ACMIL and Jayanati Pte (or is it Jayanti) have between them spawned another 6 subsidiaries. All the subsidiaries are of the videsi variety, and the preferred mode of equity capitalisation, is the pound sterling, of various face value denominations. The Singapore subsidiary Jayanati Pte has however opted for the USD. Curiously enough Jayanati is also the only 100% subsidiary. The percentage equity holding in the other subsidiaries and step subsidiaries is limited to a uniform 74.9%. Obviously there was a very good legal expediency for doing so. The book value of CCL's stake in ACMIL is Rs 76 m consisting of both equity and preference shares of different face value denominations. The book value of its investment in Jayanati is Rs 104 m.
The subsidiaries are a mixed bag, but then their purpose of incorporation was to be facilitators. The subsidiary ACMIL, and its subsidiary Complete Coffee (C.C), have similarities and dissimilarities. The only dissimilarity is in the paid up capital, and in the pitiful dividend declared by ACMIL. The step down subsidiary sibling CC has a paid up capital of GBP 1.4 m, while ACMIL has a capital base of only GBP 280,000. (ACMIL has spawned 5 subsidiaries of its own, and its paid up capital is less than that of one of its own subsidiaries! Just about anything goes in the corposphere.) In all other respects ACMIL and CC are almost identical or completely identical. The two have almost the same asset bases, and have recorded identical turnovers - Rs 41 m pounds sterling - and identical pre-tax profits, tax provisions and post tax profits. What exactly is the game here please? What is the need to have Siamese twins? The other puzzle is that the parent CCL Products, as stated earlier, has sold goods worth Rs 950 m to ACMIL. But ACMIL in turn has registered a turnover of Rs 41 m pounds sterling - or Rs 2.9 bn (taking a conversion factor of Rs 70.5 per pound sterling), while ACMIL's subsidiary CC, also registered a similar turnover. Unless I have got my math all wrong, that is a cumulative turnover of Rs 5.8 bn, and this figure is more than twice as big as the turnover of the parent. (I am assuming that the financials of the subsidiaries are stated in pounds sterling/ US greenback.) Another subsidiary of ACMIL, CCL Products (UK) Ltd is for the moment in a comatose mode. Further, why has the parent decided to show the working results in the respective foreign currencies?
How could the two subsidiaries generate such humungous turnovers? Do they also buy and sell purified coffee on their own account or some such? Also, they are both merely scraping the barrel at the bottom-line level. The youngest sibling of CCL Products, Jayanati Pte, has yet to get off the mark. It has a paid up equity of US$ 2.5 m, and assets of US$ 3.8 m dollars. The financials of the Swiss based manufacturing subsidiary of Jayanati Pte have not been made available. This agglomeration unit as stated earlier has commenced commercial operations. But nothing else is known.
This company is an enigma enwrapped in a Rubik's cube.
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.
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