Sical Logistics: Needs to support its mindset as well - Outside View by Luke Verghese

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Sical Logistics: Needs to support its mindset as well
Mar 7, 2011

Finances on a limb

Sical Logistics was originally christened as South India Corporation (Agencies) Ltd more than half a century ago when it was first incorporated. It is a part of the M. A. Chidambaram group of companies and is now spearheaded by his grandson Ashwin Muthiah. The most remarkable aspect of this company is that it is still around and somewhat kicking, inspite of its long years of meritorious service. It should be a matter of concern that the board of directors were unable to propose a dividend for FY10, or for the preceding year for that matter. This inspite of the 'Balance brought forward from previous year' in the P&L account amounting to Rs 1.5 bn, which gave a considerable boost to the profits available for appropriation. The reason attributed for the non payment of dividend is that the company has to meet capital expenditure commitments related to the ongoing projects etc. The real reasons lie elsewhere though.

The 'what' of the company

The standalone company has posted a post tax profit of Rs 260 m on a turnover including other income of Rs 5.4 bn. The figures for the preceding year are Rs 54 m and Rs 4.8 bn respectively. The paid up equity stands at Rs 395 m. The consolidated bottom-line results of the company are a shade more depressing - a gross income of Rs 7.3 bn, with a post tax loss of Rs 350 m. In the words of the management the business divisions of the company consist of Port Handling, Inland Handling, CHA (customs house agency), Shipping and Container transportation, as well as CFS/ICD (container freight station / inland container depot) operations. To put its task in a nutshell, it collects bulk cargo, stores the cargo, freights the cargo - by sea, rail or road - and delivers it across geographies. For the matter of record the company is today a much mellowed down version of what it was in FY05. In this year the standalone company clocked revenues of Rs 12.2 bn and posted a post tax profit of Rs 311 m on an equity capital of Rs 687 m.

The annual report dishes out reams of data page after page on the industry, on what the company is all about, and how it goes about doing what it does to earn its place under the sun. What is however coming across very clearly is that it is an industry which is bursting with potential, especially as envisaged under the Eleventh Five Year Plan scenario. According to trade body ASSOCHAM, the market share of the organised logistics players is expected to double to approximately 12% by 2015. Which begs the question as to why the company is not partaking in this boom? The company appears to be witnessing a see-saw revenue generation. In FY08 it recorded revenues of Rs 571 m; it declined to Rs 480 m in the next year, before closing in at Rs 537 m for the latest accounting year.

No positive vibes

For some absurd reason the information that it discloses also includes the educational profile of its employees. What this data clearly shows is that close to 60% of the employees are either graduates or of the yet to graduate variety. Whether this information is supposed to reveal what a benevolent employer the company is, or that this is a business that does not quite require any specialised qualification is not quite coming out. But in any event this is not a company which gives out positive vibes in any manner of speaking. As it is, it has difficulty trying to make sense of what it is up to. To confound matters even further, it is also fast forwarding its activities through the subsidiary and affiliate company route.

In FY10 it also managed to pull several aces from under its sleeve. It wrote down its goodwill assets by Rs 800 m to Rs 883 m - no reasons offered for doing so, it slashed borrowings by Rs 2.8 bn to Rs 4.7 bn, while simultaneously slashing year-end cash balances by Rs 870 m. The reserves and surplus was richer by Rs 1.3 bn, and it drastically reduced gross working capital by Rs 820 m. The foreign currency translation reserves magically transformed from a negative Rs 336 m to a positive Rs 84 m, or a turnaround of Rs 420 m. The interesting aspect here was the credit to the securities premium reserve of Rs 627 m. This is quite a feat as there is no change in the share capital structure during the year. How this figure has made its appearance is not readily known, and the company does not appear to have provided any foot note on this score either. The only slight clue, if any, appears to be from the drawing down of share application moneys from Rs 1.85 bn to Rs 1.8 bn during the year. But even this cannot explain for such largesse to the company. And besides, what these share application moneys pertain to is not known either, and why it is kept pending in a suspense account is also not explained.

The figures just do not add up

There are plenty of asides about this company which simply do not add up. It has provided guarantees against loans availed of by subsidiary companies to the tune of Rs 4.8 bn. Banks in turn have provided performance guarantees on the company's behalf to the tune of Rs 392 m. Sundry debtors, loans and advances and deposits include certain 'overdues' and 'unconfirmed balances' (mark the wording of the sentence). Some of the accounts under reconciliation include retention moneys of Rs 707 m, and dues from ONGC amounting to Rs 234 m under dispute. The icing on the cake is this note is - 'Letters of confirmation of balances in personal account of suppliers, debtors, principals , loans and advances etc have been called for and wherever not received is being followed up'. It cannot get more insensitive and ludicrous than this.

Somewhere along the way we are also briefly informed that the IMFL business (presumably meaning Indian made foreign liquor) was sold during the year. Obviously this should also involve the write-down of some of its fixed assets .But sadly this is not to be. However there is a credit receipt of Rs 9 m (Rs 15 m in the preceding year) being the profit on sale of assets appearing in the 'Other Income' schedule. It is of course difficult to get a proper fix on anything. Adding to the confusion is the Investment Schedule which shows a drawing down of the book value of its landed holdings from Rs 474 m to Rs 260 m during the year. What does this represent, and what if anything happened to this land?

The subsidiaries are a scream

The subsidiaries are a scream beyond compare. The investment schedule shows that the combined book value of its investments in its six subsidiaries, including share application moneys of Rs 1.8 bn, amounts to Rs 3.4 bn (Rs 3.1 bn).The investments in other group companies amounts to another Rs 606 m (Rs 656 m).Then there is the land bank worth Rs 260 m which is down from Rs 473 m in the preceding year. That is to say a total book value of Rs 4.3 bn (Rs 4.3 bn). Needless to add none of its equity investments beget any returns in the form of dividends, but that was never the idea in the first place. Its largest investment out of this listing is in Bergen Offshore Logistics its Singapore listed dollar denominated sibling with a book value of Rs 878 m. This is followed by Sical Iron Ore Terminals at Rs 703 m. The latter company has yet to get off the ground, and besides, the parent's entire holding in this venture has been pawned to banks for facilitating loans. It is a wonder that the banks see collateral value in an as yet coming into being entity. But let that be. Third in line is PSA Sical Terminal, an associate company, with a stake of Rs 540 m. The subsidiaries belong to the partly owned and the wholly owned categories, but that should not make any difference in the outcome. The parent has also made advances to the tune of Rs 721 m to its siblings, but then remember this represents small change and not to be mooned over.

The parent has however furnished the financials of 10 subsidiaries for the latest financial year end. Obviously this includes the working results of step down subsidiaries or some such. Some of the results are also of the non- audited variety, but this is a minor distraction. The ten together have a combined assets base of Rs 10.4 bn. (This is more than the total asset base of the parent at Rs 8.2 bn.) Three of the ten are yet to commence operations. Only four of the 10 have any sizeable operations of any kind. The company with the biggest paid up capital base is Sical Infra Assets Ltd, its 74% subsidiary, with an equity base of Rs 1.8 bn. It has total assets of Rs 2.9 bn, including investments to the tune of Rs 225 m. It actually produced a turnover of Rs 21 m after all this effort, along with a pre-tax profit of Rs 10 m.

More of the same

Next in the pecking order is Sical Iron Ore Terminals, its yet to get into action mode sibling, with an equity base of Rs 1.1 bn, and a total asset base of Rs 3.5 bn. Here the holding of the parent is 63%. This company too has investments to the tune of Rs 604 m but apparently its investments do not register any income either. Why it has been burdened with an investment portfolio so early in its innings is not known.

The third wonder is Bergen Offshore Logistics with a paid up capital base of Rs 854 m and an asset base of Rs 1.1 bn. This company appears to be in deep shit, what with a turnover of Rs 109 m, a pre-tax loss of Rs 289 m, and negative reserves of Rs 327 m. Close to half its net worth may be in jeopardy - which implies that if the show continues in this manner, it will have to provide for the book value of its investment in the next accounting year.

Of the two wonders of this listing, one is Sical Distriparks with an equity base of Rs 100 m. This company has an asset base of Rs 1.1 bn and registered a turnover of Rs 655 m. It ponied up a pre-tax profit of Rs 61 m. The bigger wonder is Sical Multimodal and Rail Transport with an equity base of a mere Rs 47 m. This company registered a turnover of Rs 910 m, but also begat a pre-tax loss of Rs 61 m. The mantra here appears to be that the smaller the capital base, the higher the turnover. The rest of the lot are mere fly in the ointment has beens.

Any concrete plans please?

What exactly are its plans for these subsidiaries is not quite known. But the point is that the company's very well being depends on the success of these siblings. The attention appears to be focussed in their direction, and besides, the company has much at stake here in terms of its investments and advances. So far the body language is not too good. If however it decides to do an encore to the siblings in the same manner as its affairs are being managed then the company may well be out for the count. All the more deplorable, as it claims it is India's top provider of integrated multimodal logistics for bulk cargo.

Sical Logistics has since been acquired by Cafe Coffee Day.What value they saw in the balance sheet, or whether they did any due diligence of the company's innards before easing themselves into the drivers seat is not really the issue here.That bit is history..The new management has its task more than cut out for it Whether it will be up to the task is the moot point.It will be very interesting to see how events unfold in the days to come.

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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1 Responses to "Sical Logistics: Needs to support its mindset as well"


Apr 13, 2011

Sical's numbers do look messed up.

And messed up in a large measure is the author's understanding of the business.

According to him, "To put its task in a nutshell, it collects bulk cargo, stores the cargo, freights the cargo - by sea, rail or road - and delivers it across geographies."

He's overlooked the company's container operations, almost a quarter of consolidated revenues, when it's all over the place in the annual report.

If the summary has missed such a large part of the business, wonder what else is missing in this analysis!

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