The origins of this company date back to more than 150 years ago, when James Warren decided to become a tea planter. In 1977 the agglomeration of tea estates came under the umbrella of Warren Tea Limited, a company incorporated under the Indian Companies Act and controlled by Warren Tea Holdings Ltd of the U.K. Since the mid 1980's however, it has been operating under Indian ownership. The two ‘promoters' as they label themselves - both Indian (Goenka) and Foreign (Ruia) control a humungous 84% of the paid up equity capital of Rs 107 m. (That makes for very marginal floating stock.) The company makes do with 14 tea estates based in Assam, and plucks tea from 7,570 hectares (or 18,700 acres) of mature area. It produced 14.4 m kgs of tea in FY10 with an average yield of 1,905 kgs per hectare. The figures for the preceding year are 7,652 hectares, 14.9 m kgs and a yield of 1950 kgs per hectare. This is in line with the yield per hectare that the Goodricke Group is getting from its gardens in Assam.
Its operating divisions
The company makes do with two operating divisions - tea and travels. The poor apology of the travels division managed to scale up a turnover of Rs 4.9 m, while the tea division brought in Rs 2 bn. The respective figures for the preceding year are Rs 5.8 m and Rs 1.68 bn. The travel division is a drain on the company's finances and may be operating as an in-house agency of the group. What synergy there is between the two is beyond comprehension, but let that be.
It has also invested in the equity of a steel structural unit in Rajasthan going by the name of Warren Steels Private Ltd. This unit is apparently an associate unit, and the company has a stake of Rs 42 m, acquired at an average acquisition price of Rs 125 per share on a face value of Rs 10 per share. Why did the company fork out such a heavy premium on the face value, for this investment? Like the travel division this is another totally offbeat and inexplicable investment. This equity outlay is classified under the head ‘long term investments' in the investment schedule, and the total book value of the long term investments is Rs 43 m. The dividend return to the company in FY10 from its long term investments is Rs 0.5 m, the same as in the preceding year. In other words this particular investment begets no return to the parent, but who is to ask? How this associate company is faring is not known either.
How it ante's up
Inspite of such ‘eccentric' diversions the company was more than cash rich in FY10, and thanks in no small part to the yield that it generates from its tea gardens, and the price that it obtains in the open market for its produce. Liquid investments at year end came to Rs 213 m (nil previously). And the reason for this is that in FY10 the company obtained an average price of Rs 140 for each kg of tea that it sold, against Rs 114 per kg that it obtained previously. This price is inclusive of the value that it obtained in the export market. Exports accounted for Rs 243 m against Rs 171 m previously, on a total sales turnover of Rs 2 bn (Rs 1.7 bn). The biggest revenue expenditure item by far is salaries, wages and attendant benefits, which toted up to Rs 868 m (Rs 797 m) - an increase of 9%. The next biggest expense item being consumption of stores and spares at Rs 288 m (Rs 237 m) - but this rose 22%. What does this consumption entail? (On the face of it, the directors appear to be a making an unnecessary noise about wage increases.) But, with the increase in revenues outstripping the increase in expenses, the company generated a pre-tax profit of Rs 314 m (Rs 177 m) previously. At the end of the day the game changer in the tea industry, like in any other plantation crop, is the price that the company realises in the open market, with yield and efficiency in operations coming in a distant second. And the market prices criss-crosses a very cyclical pattern.
Spending on fixed assets
What the management has not explained is how the production in FY10 is a million kgs less than in FY06 when it produced 15.2 m kgs. As a matter of fact the production in FY10 was by far the lowest in the last 5 years. Its claims of following optimum agricultural practices, and the concentration on production of quality green teas have also to be seen in the context of the money that it spends on ‘estate development'. In FY10 the company did not spend a dime (that's right - not a dime's worth) under this category, though it spent a total of Rs 106 m under fixed asset expenditure (Rs 123 m previously). The vast bulk of the expenditure was on buildings, roads and bridges, followed by plant and machinery. As a matter of fact the company appears to have a fetish for the latter two. It spent a wholesome Rs 74 m (Rs 67 m previously) on revenue account to spruce up these facilities. It would appear to have its priorities all mixed up. (It is interesting to note that the company received a tea board subsidy of Rs 13 m (Rs 4.4 m previously) through all this).
But what really marks this company out is in its working capital management - at least from what its year-end figures detail. The company had a negative net working capital of Rs 161 m (negative working capital of Rs 95 m previously). So the negative figure in FY10 is not just a one off entry, but a continuing practice it appears. Only companies which have a complete hold on the market can operate on a day to day basis on a negative net working capital basis. The cardinal accounting principles on this score state that the gross current assets (excluding cash) must be at least 50% higher than the gross current liabilities. This eventuality is to take care of any sudden depreciation in the value of stocks, and also a possible default by trade debtors. But instead this management is sticking its neck out, and taking the bull by the horns. In the process it must be saving quite some bit perhaps on interest outgo, as it reduces its dependence on working capital borrowings.
Not much ado
There is really very little if at all anything to recommend in this share to an investor. The directors add to the concern by stating ‘that the company continues its emphasis on uprooting and replanting, as additional land for extension planting continues to be unavailable. Therefore the reduction in crop in the short to medium term is unavoidable'. Therefore, assuming that the management continues to keep the tea plantations in fine fettle, then its financial outcome will continue be decided by the prices that the green is able to extract in the open markets. It is of little succour to the minority shareholders that the value of the property is a multiple of the value that is shown in its books.
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 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.