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Syngenta : Dancing to the parent company's tunes - Outside View by Luke Verghese

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Syngenta : Dancing to the parent company's tunes
Mar 13, 2013

The company is serving its masters very well and that should be the end result of any business

Run in true MNC fashion

This company is run in true multinational fashion - that is for sure. A part of the Switzerland based conglomerate group sporting the name Syngenta AG, it claims to be one of the world's leading companies in the field of agribusiness, with over 25,000 employees in over 90 countries. It claims it is the leader in crop protection and ranks high in the commercial seeds market. The website claims that it is the only company in the world to offer complete and high end solutions to farmers from seed to grains and beyond. In India it contributes to Indian agriculture through products and solutions for enhancing productivity and yield.

More specifically the Indian operations are organised into two business segments: Crop protection, and, Seeds. The crop protection division manufactures, distributes and sells herbicides (for weed control), insecticides (controls pests), and fungicides (controls pest diseases). The seeds division mainly grows seeds for growing corn, oilseeds, vegetables, and flowers. The Indian operations are headquartered out of Pune and the company makes do with three manufacturing facilities - in Goa, Karnataka and Andhra Pradesh.

The parent company controls over 96% of its outstanding equity base of Rs 159 m, with the balance 3.7% parcelled out among the Indian public, mutual funds, institutional investors and such like. The foreign stake is held partly by the holding company, Syngenta Participation AG (50.99%), and partly by its lackey Syngenta South Asia AG also based out of home base. Everything it would appear is planned out down to the letter T. Given the shareholding pattern, the shares are not listed any longer for trading in the Indian bourses. There are two other fellow subsidiaries operating out of India and both appear to be closely held. One is called Syngenta Biosciences Pvt. Ltd and the other goes by the name Syngenta Crop Protection Pvt. Ltd. Syngenta India does not have an investment portfolio of its own. The inter-se transactions between Syngenta India and its two fellow Indian siblings appear very limited, from the information on tap. The Indian company is 13 years young as a corporate entity.

A rock solid balance sheet

As I stated at the very beginning of this copy, the company is run in true MNC fashion-though it has a rock solid balance sheet. It has a paid up capital base of Rs 159 m backed up by reserves and surplus of Rs 10.75 bn, and a wee bit of short term debt. The latter is hanging around more for cosmetic purposes -- than is need based. Though the company has three manufacturing facilities there appears to be considerable importance to routing both purchases and sales through group companies given the manner in which it chooses to conduct its business. There are very stark examples to the point I am making. During the year the company purchased raw materials of the value of Rs 12.2 bn. Another schedule informs that the company purchased raw materials and capital goods of the value of Rs 11.3 bn from group companies - mostly though from its fellow subsidiary based out of Singapore. It is unclear the capital goods quantum that is included in this total but the total amount of capital goods that it added to its fixed assets during the year toted up to Rs 143 m. Even if one adduces that this entire quantum of capital goods was sourced from the parent-which it well may have-the total value of raw material imports would still amount to Rs 11.2 bn. This in turn would work out to 92% of all raw materials purchased. This implies not only a veritable stranglehold by the parent in the purchasing decisions of its minions, but also that it amounts to meagre purchases of raw materials from the domestic market.

A lackey of the parent

This situation also implies that the parent prefers to source the raw materials (meaning probably seeds and the materials that go into the manufacture of pesticides, fungicides etc) in foreign domains and then shipping them to India rather than sourcing them in India. How this helps the cause of improving Indian agricultural standards is not very perceptible. Separately the company also bought traded finished goods of the value of Rs 4 bn - consisting of both formulations and seeds. There is no information on whether any part of this quantum was imported or not, or on whether it was purchased from any other domestic group company. In any case there is little value addition to the purchase and then the sale of traded finished goods.

Cut to the sales figures on hand. The company realised gross revenues of Rs 22.7 bn from finished products, and a further Rs 3.38 bn from traded products. Then there is operating revenues of Rs 59 m. Deduct excise duties of Rs 763 m and one gets net revenues of Rs 25.4 bn. We are informed that the company sold finished goods and raw materials of the value of Rs 11.9 bn to group companies including the major chunk to its minion based out of Singapore (the same was the case with the purchases side of the equation).There are no excise taxes on exports. Mark the words 'raw materials'. The quantum of raw materials that it exports is not individually known. However, is one to understand from this equation that this company imports raw materials from group companies to India and then exports them back to the same group companies? What in heaven's name is the game plan here? Is this another name for round tripping or what? Does the Indian operation make any money in the bargain? It also infers that the exports to group companies of finished goods (as is characterised in the sales schedule) amounted to 47% of net sales -that is sales net of excise. But another schedule informs that the total net export sales during the year amounted to Rs 11.66 bn. Which of the two schedules is correct please?

It is not that there is no value addition in India. The company processes most of the raw materials in its factories. Besides, more than 50% of the net sales are generated in India. It is not immediately known the margins that the company obtains on its traded finished goods sales as the quantum have not been furnished, but apparently it must be generating margins in the process. But there appears to be an anomaly about the quantum of finished goods purchases and sales. Based on the financials that the company has provided, the company should be having a closing stock of traded finished goods of the value of Rs 969 m according to my calculation. But the company figures show a balance stock of only Rs 486 m. Or, have I not got the big picture all mixed up or something?

Are margins on the lower side?

The margins in the agro biz are on the lower side for sure. This is because the input costs of raw materials and bought goods amounts to over 65% on net revenues from operations. But given the manner in which such items are procured and then sold, there is no knowing the level of efficiency of the company in this matter. But the point is also that the parent has a stranglehold on the voting stock and can therefore do what it so pleases. This is precisely the case as it stands today. The company is however very judicious in terms of human resources inputs. It is even more judicious in the financial management of its funds requirements. The total borrowings which consists entirely of short term borrowings amounted to Rs 618 m at year end, and the company suffered interest charges of Rs 40 m to service this debt. The flip side to this is that since the parent has complete control of its operations, it becomes that much easier to manage its finances.

The interesting aspect of its financial management is that inspite of the closeness of the company to the group the company still took advances and separately deposits from customers towards future sales presumably. Such advances amounted to Rs 539 m and deposits of Rs 90 m - small change in relation to total revenues - but still. As stated earlier a slice over 50% of net revenues from operations came from sales generated within India. In all probability the advances refers to such sales as it is heretical to think that the parent would have forked out any advance for future sales. But nevertheless such tricks help to contain working capital costs. The other very notable aspect is that the trade payables at year end are more than the trade receivables-and by quite some at that. Now, what the company purchases on revenue account (trade payables) is substantially less than what it sells on revenue account (trade receivables). The difference between such purchases and sales is very broadly referred to as 'value addition' in economists' jargon. But the catch is also that it purchases almost all its requirements from within the group as stated earlier, but restricts sales to group companies to less than half of its overall net sales. In any event it makes eminent sense to defer payments while collecting dues to it in a hurry! This unfortunately is the manner in which all sane businesses are run-and there is no use crying about it. The ability to squeeze another gives one better vibes than getting to be squeezed by another!

Where the company is also not on a roll is in its working capital management. One would have thought that with the whip hand at its disposal, the current liabilities would weigh in more than the current assets-at least at year end. But that is not to be. By merely resorting to more sound working capital management, the company could have more than wiped out its debt and increased its cash kitty by quite some.

Difficulty in generating cash from operations

Inspite of drumming up a higher pre-tax of Rs 2.6 bn as against Rs 2.2 bn previously, the company generated far less cash in the latter-showing yet again that there is no direct link between profits on the one hand and cash flow generation on the other. Thanks to a substantially higher tax outgo-it is difficult to understand from the figures on how it happened-the cash generation from operations slumped to Rs 286 m from Rs 1.3 bn previously. This had the effect of a reduced outlay in fixed assets -with capital asset addition declining to Rs 232 m against Rs 494 m previously. Thanks to dividend (the percentage dividend amounting to 100% on an equity capital base of Rs 159 m) and interest payments to be taken care of, the company was a net borrower to the tune of Rs 225 m.

All in all it represents a very insipid performance from the minority shareholder point of view.

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 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.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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