Morarjee Textiles is a mere 15 years young having come into being in 1995. But in reality it is merely wizened wine in a new bottle. It has had to undergo many a twist and turn, and name change to boot, to arrive at its current avatar. In a sense it begat corporate existence as Morarjee Goculdas Spinning and Weaving Co. Ltd under the tutelage of the original promoters' way back in 1871, and is the oldest textile mill in the country. It was also among the first five stock market listed companies in India. In 1935 the mill was acquired by a then Piramal Group patriarch, Piramal Chaturbhuj. But for whatever reason the Morarjee brand was already too strongly engrained in the minds of the marketmen-or was it the fact that it was the oldest textile mill - and the original founder's name scored over that of the branding of the new owners.
But, brand Morarjee Goculdas, and the business which ran under this name had floundered by the 1980's, and the company underwent a name change to Morarjee Realities Ltd (MRL). This offspring acquired the remaining business of the erstwhile Morarjee Goculdas. Significantly, the Morarjee name was retained even in this new avatar, and subsequently too. MRL in turn gave birth to Morarjee Textiles (MTL) in 1995 after the former signed a new 50:50 joint venture agreement with Brembana Spa of Italy for the manufacture and sale of high quality cotton shirting fabrics both in the domestic tariff area and in the export markets.
The many contortions
MRL in turn sold its textile business to MTL and consolidated all the textile businesses under the latter. Just to get matters straight, MTL in turn affected a name change to Morarjee Brembana (MBL) to reflect the standing of the new business. But in 2003, the 50% holding of Brembana was sold back to Morarjee Realities, after the Italian collaborator decided to sell its stake in the venture, and MBL reverted back to its old name, MTL. Why the Piramals who have their own standing in the Indian business lexicon - still prefer to mollycoddle the Morarjee name will make for an interesting tale. (To round up the picture, MTL has a pip squeak equity investment of Rs 1,000 in a company sporting the name Morarjee Goculdas Spg & Wvg Private Ltd. The Morarjee name appears to be some sort of a lucky charm or something, and will not be allowed to die.)
How it makes its living
So what is this company, which is currently under the ownership of the family of the late Ashok Piramal up to? The company makes do with its own looms and spindles and manufactures finished fabrics shirt, and finished fabrics on its own. It also has a joint venture company called Just Textiles which is also in a similar line, and ekes out a marginal profit before tax. It merged its wholly owned subsidiary Integra Apparels - which is in the garment business during the just concluded financial year. This erstwhile subsidiary is also out on a limb, and had gross liabilities of Rs 701 m at the time of the merger against gross assets of Rs 471 m. (However the notes to the accounts states that the revision in the assets of the transferee company would be Rs 549 m. It is not very clear to the uninitiated what it is supposed to mean.) The merger was apparently done to give the merged company some additional muscle perhaps - but the picture does not alter for the better one penny bit.
Swimming in turgid waters
Overall the company is swimming in very turgid waters. That is for sure. So turgid in fact that the son of the late Ashok Piramal, Harshvardhan, who is the executive Vice chairman and the highest paid employee, has waived his remuneration from the company with effect from October 1, 2009. At year end March 2010, its accumulated losses amounted to Rs 508 m, though losses amounting to Rs 210 m have been set off against share premium reserves - in all probability resorted to, to present a less alarming picture. In an effort to introduce some spunk into the company, the board made a 1:1 rights issue equity offering during the year at Rs 15 per share, or a premium of Rs 5 on the face value. The issue raised a net amount of Rs 263 m - but, with the minority shareholders not very enthused by the offer, the promoters had to chip in more than their share, and consequently their holding in the company post issue rose to 64% of the voting stock. The directors' report states that the funds so raised were used to repay borrowings. Oh yeah? The borrowings at year end aggregated to Rs 2.5 bn as against Rs 2.1 bn previously. What is one to make of all this please? The fact of the matter is that the company is still very highly geared, and interest costs are eating into its margins.
The results for the latest year are not strictly comparable with that of the preceding year as it incorporates the working results of Integra for 3 months - January 2010 to March 2010. Not that it alters the overall picture for the better any one bit. It makes for very depressing reading, statements to the contrary from the management notwithstanding. To this potpourri add the two subsidiaries, and two joint ventures, whose purpose of existence is difficult to understand. It has a 50% stake in a joint venture with an Italian company called Castiglioni (it appears to have a weakness for ventures Italian) and another JV called Just Textiles in which Morarjee Textiles is a 49% shareholder. The balance is held by Mr Pradip Modi and others. Why has it chosen to be a minority shareholder in a business that it knows so well? Its wholly owned subsidiary Morarjee International which is spearheading its thrust into the export markets has a paid up equity amounting to all of Rs 0.6 m. With a capital infusion of this magnitude it should have little difficulty in making a royal splash in the European markets.
The financial performance
So what is the performance like for starters? On a total income Rs 2.6 bn (Rs 2.0 bn) the company reported a loss pre-tax, pre exceptional items loss of Rs 37 m against Rs 319 m previously. The directors' report prattles that this is a considerable reduction in the loss compared to the preceding year. Yes and no. For sure the book loss is lower, but what has NOT been properly calibrated is how this book loss has been arrived at. The company is a big player in the forex market as it is primarily an exporter of finished goods (Rs 1.4 bn in export realisations against Rs 1.2 bn previously) on the one hand, and not including the numerous other material imports that it resorts to in the ordinary course of business, and the marketing and sales commission expenses that it effects in foreign currency trades. Betting incorrectly against the rupee/foreign currency parity in FY09, the company lost Rs 179 m, but gained Rs 26 m in the latter year. That works out to a turnaround of Rs 205 m in the P&L account in the latter year. If these two exceptional entries are neutered from the respective pre-tax, pre-exceptional item losses, then the company would have reported a loss of Rs 140 m in FY09 against a loss of Rs 63 m in the latter year. The turnaround would then work out to be a lot less lustrous, if one may call it so. (In FY09 there is another exceptional debit entry of Rs 59 m being provision for diminution in the value of investment. This makes the turnaround even less exalted.)
The principal reason why the company is not able to get more bang for the buck at the top-line level (inspite of increasing volume sales) is that the realisations per metre of fabric that it sells is stagnant. In FY09 it sold fabrics at Rs 117 per metre while in FY10 it was marginally lower at Rs 116 per metre. The input cost per metre of cotton and cloth on the other hand have both rocketed. This is not a very happy portent and what the foreign markets have in store for this two bit player is difficult to comprehend. As a matter of fact what appears to provide the real high value life sustenance to the company is the spinoff sales realisations from DEPB (Duty Entitlement Pass Book) licence, waste cotton and such like, which clocked revenues of Rs 113 m (Rs 74 m).This revenue stream, realised from the domestic tariff area, does not entail any specific revenue expenditure - though it is a by-product of the main income. The directors have raised their own red flag in the matter by stating that there has been a significant shift in textile and garment manufacturing of late to low cost emerging countries like Vietnam and Bangladesh. However they add, they are cautiously optimistic about the company's future (mark the wording).
Compounding its troubles
If the times are not taxing enough, the company even managed to compound its troubles by promoting inanities like the subsidiaries and joint ventures that it has incorporated. These appendages do not appear to add one morsel to its brand equity. The Italian JV Morarjee Castiglioni up a piddling turnover of Rs 8.2 m in FY10, which is marginally lower than that recorded in the preceding year. Its equity holding of Rs 6.4 m consisting of Rs 1 m shares of Rs 10 each in this company was acquired at a discount to the face value, or an average price of Rs 6.4 per share. Why is this so? With subsidiaries like these, the company is also forced to pony up overdraft facilities on their behalf, which only compounds its own liquidity troubles.
Unless the directors make some sharp chess moves which will put the company on the fast forward mode, it may have a much shorter life expectancy than the original avatar.
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.
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