Indian Hume Pipe: Needs to use brand equity
What comes across very clearly is that there is no attempt to cut corners in the financial management of this company
A creation of a titan
Indian Hume Pipe is a part of the business empire created by the business titan of yesteryears, the late Seth Walchand Hirachand. Other notable co-creations of his include the Hindustan Aeronautics Corporation (HAL), ACC Ltd, Hindustan Construction Company, Premier Construction, and Premier Automobiles Ltd, the maker of vintage Premier Padmini cars. This company is a pioneer in the field of water industry. And it has been at it for some 84 years running. It claims it is present in almost all water supply related activities and does turnkey jobs in water supply (and sewerage) from source to distribution centres, including penstock (or pipes that bring water to the turbine) for hydro power generation. Towards this end it is also in the business of manufacturing, laying, and joining of pipelines of a wide variety of pipe materials. The company also supplies concrete railway sleepers to the Indian Railways. It also has a rifles division which manufactures 10 types of air rifles and air pistols. This latter line is presently under suspension following an order by the Delhi High Court squashing the exemption of air rifles and pistols from the provisions of the Arms Act. The matter is now being heard by The Hon. Supreme Court.
The company has declared and paid a dividend of 100% for the latest accounting year ended. That is to say it paid out a dividend of Rs 48.4 m, but this figure excludes a dividend tax of Rs 7.8 m. The paid up capital is a miniscule Rs 48.4 m, but it is souped up with humongous reserves of Rs 2.05 bn. The company has also furnished in brief the important financial statistics of the company since 1926-27. The very interesting revelation is that it has omitted dividend payment in only nine of the intervening years till date, and this includes the first four years of its existence. This is indeed a very creditable achievement by any yardstick.
Its revenue generation
It generates its revenues from two principal sources - manufactured sales and from project billing. The latter dwarfs the former by a mile. In 2010-11 the former tossed in Rs 818 m into the kitty while project billings brought in Rs 5.7 bn. Then there are trifling receipts in the form of other operating income (which includes a grouping of misjudged entries) and Other Income. That is to say gross revenue receipts of Rs 6.6 bn. On the revenue expenditure side of the coin the biggest entry not unexpectedly is construction expenses, and within this subhead it is the subcontracting expense which is the biggest constituent. Construction expenses accounted for Rs 3.5 bn followed by raw material inputs at Rs 1.2 bn.
As is to be expected the game changer in the revenue and capital accounts of any construction company or a turnkey contractor is the valuation of the construction expenses on the revenue expenditure side, the works bills on the revenue side, and the valuation of the capital work in progress on the asset side. The three respective figures in this instance are Rs 3.5 bn, Rs 3.7 bn and Rs 5.7 bn respectively. The latter includes a whacking sum of money retained by contractees amounting to Rs 890 m. The foot note to the accounts states that the work in progress is valued at lower of cost or market value in case of inventories. The goods in process are valued at contract rates or cost whichever is lower. The point is that these are not necessarily finite items of incomes, expenses, of even year-end assets, but based on value judgement.
Accounting for revenues
In any event given the manner in which turnkey contractors have perforce to book their revenues, the company rattled up lower revenues during the year, and also posted lower pre-tax profits to boot. The gross revenues for the year added up to Rs 6.5 bn against Rs 6.8 bn previously. These figures include excise levies which have been directly debited from manufactured sales in the company's books. (The manufactured sales receipts in the large part include sales of pipes and a marginal quantity of railway sleepers and air rifles). In line with a lower top-line, the pre-tax profit too registered lower figures of Rs 423 m against Rs 506 m previously. Going by the accounts, the company is subject to two different excise levies. There is a second and much larger excise levy which is added in revenue expenses. Apparently this excise debit is for project billings. On the shareholder front not much more than a small farthing of the post tax profit of Rs 280 m that it reported was required to pay out the cent percent dividend. This then is the power of having a small equity base.
Like all turnkey contractors and their ilk the company has to stock up on working capital loans. The reason for this is the mountain of inventories that it has to carry at any point of time. And given the low capital base it becomes even more vulnerable in such aspects. The borrowings at year end amounted to Rs 2.2 bn and this overhang partly supported the inventory base of Rs 4.2 bn. (Trade creditors amounting to Rs 1.8 bn helps to cushion the balance inventories or something). In percentage terms the value of inventories amounted to 65% of the Income from operations for the year, against a marginally lower 63% previously. On a rough reckoning the company would have paid an interest of a little over 8% on its borrowings. That would appear to be a very well meaning way of managing its finances. And to the company's credit it is able to squeeze its dues out of its trade debtors in double quick time - excluding that is, the monies retained by contractees. On a rough basis the year end trade debts amounted to a mere 3% of total income from operations against an even lower 2.5% previously. What is more there is only a marginal provision for bad and doubtful debts against these trade dues.
Astute management of its finances
Another reason why this company is able to get its finances in order is that even though it is involved in myriad other turnkey contracts, it does not simultaneously involve the outflow of any funds from the company's coffers in any manner of speaking. For that matter it possesses only a miniscule investment portfolio. The book value of the entire portfolio added up to a mere Rs 14 m. And it does not boast of any subsidiaries either. It has a marginal investment of Rs 1 m in group company Hindustan Construction-period. And the loans and advances schedule – which is substantial in its own right - does not expose any advances to any group companies. This is indeed a revelation by the standards that India Inc adopts in the corporate governance arena.
As a matter of fact the company has 20 joint venture schemes going in a number of water supply schemes, lift irrigation schemes, cement plants, hydro electric projects, sewerage projects, reservoir projects, and such like, as per the balance sheet information that it has furnished. In eight of these JVs it has a co-share of over 50%. And in five of these eight ventures its current holding in the venture is 100%. But the catch here is that the JVs' do not involve any capital outlay by the parent. Neither does it have any capital commitments in these ventures, nor any share in the contingent liabilities of these ventures. It appears to have iron tight agreements on these contracts barring some minor bank guarantees that the parent has to furnish in the case of some of the co-ventures. On the flip side though, no revenues or profits will accrue to the parent. But that is fair enough. The parent on its part gets to focus on its main activities. Given this masala mix it becomes impossible to get a take on the value of the contracts on hand.
Not enough bang for the buck
Where the company appears to be lacking is in its ability to get more gyan for the buck from its manufacturing facilities. At year end the gross block added up to a neat Rs 1.2 bn. But the revenues realised from this gross block amounted to only Rs 818 m. Even the composition of its gross block appears to be a bit incomprehensible. For example, it boasted assets classified under buildings at Rs 501 m, but its plant and machinery was valued at only Rs 492 m. It appears to be paying more emphasis to the quality of the outward enclosures than to the material that lies beneath these enclosures. Besides, the production of concrete pipes amounted to less than 50% of its installed capacity, while that of steel pipes, specials and structures was a pitiful 16% of capacity. It appears to have created capacities which appear to have no bearing with its ability to make use of them. Even the production of railway sleepers is way below its capacity to manufacture them. Is there a story in all this? This is another reason why it is unable to realise the optimum benefit on the revenue front.
As stated earlier this is a company which has hardly ever skimped on paying dividends. It has also shown a steady increase in turnover each year in the last decade, but the post tax profits have however been on a right royal roller coaster ride. The number of projects under implementation also appears to be under strain. It appears to be a tightly run ship, though it clearly unable to put a lid on costs. Its line of business and its years of experience will stand the company in good stead in the years to come. It is also a booming market out there for what the company purveys in, given the increasing industrialisation and rapid urbanisation, if only the company can get a fair share of the spoils on offer. This does not look like a share which will let you down.
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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