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Bhoruka Aluminium: A Lilliput in a huge industry - Outside View by Luke Verghese
 
 
Bhoruka Aluminium: A Lilliput in a huge industry

Generating low leverage

Bhoruka Aluminium manufactures and sells a value added product - aluminium extrusions, but being a two bit player within the industry, it generates very little leverage in the process. It also implemented a fixed asset rejuvenation programme in the last two years, which appears to have been put in cold storage for the time being. Consider the following evidence. Between FY09 and FY10, it expanded gross block by Rs 374 m to Rs 710 m, and this was partly implemented through capital goods imports. The effect of this expenditure meant that it more than doubled its gross block.

The installed capacity for manufacture of extrusion products in either year stood at 18,000 tonnes. But the production of extruded products was a mere 35% of capacity in FY09, rising marginally to 45% in FY10. Fortunately it managed to sell all that it produced in either year. Or more correctly the production was tailored to meet the demand side scenario. Why was so much capital spent on the gross block, if the company was severely hampered in making use of the capacity on hand? What is the real story here? These production figures become even more inexplicable given the leading statement in the directors' report that the aluminium extrusion industry is poised for exorbitant growth in the near future. One of course fondly hopes that the company will be an active participant in this growth story.

Financing capital growth through debt

Almost the entire gross block addition was financed through additional debt, simply because the cash flow generation was not succulent enough to defray the cost in any measure. However the total debt as on March 31, 2010 includes a curious item called 'Deposit including security' amounting to Rs 120 m, which is a new entrant in the books of the company. Another schedule shows that the company also received loans during the year from Bhoruka Greens Ltd worth Rs 119.6 m. It is quite plausible then that the two figures are inter-linked. What is not known however is if this loan is interest bearing or not.

Besides, the interest burden of Rs 115 m (Rs 91 m previously) is eating into the company's vitals. So much so that it made a preferential issue worth Rs 89 m (3 m shares) to bodies corporate to try and ease the burden. This capital issue was a half hearted measure by all reckoning. (The preferential offer may have well been acquired by the management itself. They presently control a shade over 35% of the voting capital.) The issue size was however small beer. It did nothing to reduce the debt burden at year end. The borrowings at year end toted up to Rs 673 m against Rs 689 m previously. So the debt burden is almost at a status quo level, though the 'status' of the deposit that it received during the year is not known. The second factor costing the company dear is the working capital environment. Inventories and trade debtors together add up to a humungous Rs 696 m against Rs 434 m in the preceding year. As a matter of fact the business conditions were apparently so tough, that the trade receivables increased 100% to Rs 328 m, on a marginal increase in gross turnover to Rs 1.4 bn from Rs 1.3 bn. Now you know why the company was not in a position to increase the level of production. Which begs the question as to why the company is not able to make inroads into the market for what it makes and sells?

Change in operating strategy

There was also a complete change in strategy on the raw material input front. In FY09 the company imported raw materials to the tune of Rs 215 m, as a part of the plan to pump out the final product. In FY10 it reversed this line of thinking, and imports of raw materials were limited to a mere Rs 40 m with a shift in focus to the domestic market. But if the change in sourcing option was meant to ease cash flow, then it did not go as planned. The cost of materials consumed as a percentage of gross sales increased to 62.2 % in FY10 from 61.4% previously.

Inspite of all the disadvantages, the company also 'managed' to rustle up a pre-tax profit in a very difficult year. As a matter of fact it even engineered a turnaround of sorts at the bottom-line level. A pre-tax loss of Rs 40 m in FY09 was converted to a pre-tax profit of Rs 11 m, or a turnaround of Rs 51 m. The significant factors at play in the turnaround effort appear to be three folds - 'miscellaneous income', closing stock valuation, and the sharp fall in the excise duty paid on higher gross rupee sales (thus increasing the contribution of net sales). Miscellaneous income rose dramatically to Rs 10 m from Rs 0.7 m previously, while the higher stock valuation added another Rs 46 m to the top line, against a contribution of Rs 10 m previously. Excise duty paid fell dramatically to Rs 105 m from Rs 126 m previously.

No positive vibes

There is really very little to complement this company. It has been a lacklustre performer for years and matters do not seem to be improving one penny bit. The management states that it supplies its products to an array of industries. Even if the company operates at full tilt it cannot dramatically alter the fortunes of this company. The only positive aside about Bhoruka Aluminium is that its investments in its group companies- TCI Industries and TCI Finance are trading well above its book value. Against an investment value of Rs 11 m, the market value of its portfolio was as high as Rs 127 m as on March end 2010. But this is small consolation for all concerned as it represents tied investments and cannot be counted upon to bring any succour to the company.

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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