If one is looking for a classic case study of how not to run a company, then look no further than Saregama India Ltd. Not surprisingly it is a member of the Kolkata based Dr Rama Prasad Goenka (RPG) group of companies, and is steered by his son Sanjeev. (The RPG group is better known for its ability at acquiring units, and begetting new units, than in nurturing them. As a matter of fact the group is 'little known' for its 'success' in the latter aspect.) Of late the pace of acquisitions etc. has also mellowed down. This tackily named company is supposedly in the business of bringing music to the ears of the arty set, but its financials ring in a very jarring tune.
The company has had a long and chequered history in the Indian subcontinent, having first taken root as an overseas branch of Electrical and Musical Industries Ltd (EMI), London. It subsequently metamorphosed into The Gramophone Company of India (GCI) but was better known by its brand name HMV (His Master's Voice). The RPG group acquired the controlling stake in GCI in 1985 from EMI, and later lost the trade mark right to HMV after EMI pulled out of the company completely in 2000. It adopted its present avatar in 2000. The group is now trying to push the RPG Saregama brand.
Coming to such a sorry pass
It is indeed sad to see 'Sa-re-ga-ma-pa-da-ni-sa' come to such a sorry pass, and it is not because of the lack of trying to flounder. The cause for its present debacle is the management's lacklustre effort at making a go at running Saregama in a professional manner on the one hand, and the feckless diversification into allied businesses which appear to be headed straight for ground zero. Just imagine, the company could only muster up a turnover of Rs 994 m in FY10 which is lower than the Rs 1 bn that it recorded in the preceding year. It somehow managed to scrape through with a pitiful pre-tax profit of Rs 41 m (Rs 20 m previously). The joker in the pack here is that it also drummed up 'other income' of Rs 80 m (Rs 208 m previously). Juxtapose these receipts against the pre-tax profits. In other words barring the other income factor, the company would have netted a clean loss from its main business activities. To top it all, the company has provided a tax provision of Rs 34.5 m on a pre-tax profit of Rs 41 m in FY10. That works out to a percentage tax provision of 85%!
The makeup of this 'other income' is in itself a class act. In FY09 the write-back of provisions, royalties and other liabilities accounted for Rs 173 m out of a total other income of Rs 208 m, while in FY10 such write-backs accounted for Rs 51 m out of a total other income of Rs 80 m. It is as simple as that. (Should companies be given the unfettered freedom to tamper with write-backs in such an indiscriminate manner? The government should seriously do something to rein in the vaunted abuse of such book entries.)
The many small business divisions
This is only the beginning of a rather sad story. The company has six business divisions - it is not lacking in vision and variety for sure. There is the Music Audio business, Publishing and New Media,
Films business, TV Software, Home Video, and, Publications business. It has a piddling manufacturing set up where it makes a few pennies worth of pre-recorded cassettes, as also a minuscule quantity of audio compact discs for recording and then sale. The vast bulk of the sales of recorded audio compact discs and digital versatile discs are from outsourced material.
The turnover is shown under the heading Sales and Licence Fees. The biggest contributor to sales in FY10, and the second biggest in FY09 was income from License fees. In FY10 this source brought in 55% of all sales (Rs 550 m) against 39% (Rs 408 m) previously. Under which categories of its 6 businesses this income is seen as having been accrued is not known. The other big income earner is from sales of pre-recorded discs, audio compact discs and digital discs. Together they brought in another Rs 306 m (Rs 441 m). It is not known which of the business lines ring in this income. Then there is an income called Free Commercial Time which recorded sales of Rs 105 m (Rs 101 m previously) - no clues here either. There are a few other driblets too, but by and large these three receipts just about round up the picture on the top-line side.
In a state of flux
The directors' attribute the decline in sales of pre-recorded cassettes etc to several labels dropping the prices of music sold in various physical formats, to increasing availability of free music, and the mushrooming of
social networking sites. As a matter of fact going by what the report has to say, almost all the lines of business seem to be in a state of flux due to the emergence of new trends and what not, in the media scene. But at the same time the report is chalk full of enterprising wordings like the company is in a strong position, aggressively planning, appears to be promising, rich catalogue will increase the company's market share, and such like, to take care of what appears to be an increasingly topsy turvy scenario.
The devil as always is in the details. The expenses schedule shows provision for debts, and diminution in the value of investments etc of Rs 83 m for the year (Rs 71 m previously). This is only the tip of the iceberg. The schedules to the balance sheet are replete with provisions on assorted counts. The book value of its investments has been written down by Rs 103 m, trade debtors at year end considered doubtful at Rs 115 m accounts for 42% of all debtor dues for the year end against 27% (Rs 82 m) in the preceding year. Not only are its sales declining but it has to provide for a higher level of provisioning via trade debtor dues. Now you know where exactly the business is headed for. The loans and advances schedule is a piece of iced cake. It has loans outstanding to its subsidiaries to the tune of Rs 363 m. In the preceding year it had made a provision of Rs 27 m on its outstanding loans of Rs 148 m. It has separately made a provision of Rs 8 m (Rs 5 m previously) on loans advanced for making movies, and another provision of Rs 51 m (Rs 31 m previously) for some other advances .It has totally advanced Rs 378 m for movie making. The gross amount of loans and advances is in excess of Rs 1 bn! The note on contingent liabilities states that the company has payables to the tune of Rs 175 m against certain receivables of the company taken over by an assignee.
The fixed asset schedule
The fixed assets schedule is slowly getting 'wasted' or so it appears. The negligible additions to gross block in both years are counterbalanced by similar deductions from gross block. Almost 56% of the total gross block of Rs 1.1 bn consists of the book value of freehold land. (The vast bulk of the present book value of the land and buildings of Rs 734 m is on account of revaluation.) The balance is spread out amongst the several other individual assets, including IPR (intellectual property rights) assets. And, to confound matters, it realised Rs 1.8 m from the sale of assets during the year, but appears to have booked a loss of Rs 26 m from this sale. Separately there is a profit of Rs 38,000 on the sale of fixed assets. (The assets sold must have been of real 'raddi' variety or something).
The investment schedule
The investment schedule is a sell out by any reckoning. The gross book value of investments is a tidy Rs 520 m. As stated earlier it has made a provision of Rs 103 m towards the depreciation in the value of its investments. (The gross investment yielded a dividend return of Rs 6 m in FY10, which can be termed as a fairly comfortable return on investment by RPG group standards. Who is there to pick up a panga anyway? The promoters control close to 55% of the voting stock in the company.) The investments made include in its four subsidiaries and a few other notable outlays. Top of the pops is its investment in CESC, a group company operating under the eagle eye of Sanjeev. With an investment book value of Rs 397 m (acquired at an average price of Rs 257 per share on a face value of Rs 10 per share), this outlay represents a little over 76% of all investments. This is a tied investment (it is classified under other investments), and is one of the players in the family control over CESC.
For the uninitiated, CESC is an acronym for Calcutta Electric Supply Corporation, a company which started life in England under the English Companies Act, eons ago. The four subsidiaries account for a cumulative book value of Rs 108 m, while a trade investment in Saregama Regency Optimedia accounts for another Rs 15 m. One of the four subsidiaries, Saregama Plc is British BGP currency denominated, while another, RPG Global Music, its Mauritian based offspring is dollar denominated. The other two subsidiaries are rupee denominated.
It of course makes no difference to the outcome, in which currency its capital base is denominated. The subsidiaries that do any business at all are a royal rip off. (The parent has also provided fully for its investment of Rs 102 m in its wholly owned subsidiary RPG Global Music as its net worth is fully eroded.) The parent has very graciously provided the full form P&L and Balance Sheet of its subsidiaries even though the infinitely shortened version is the escape route that all other companies take. Saregama Plc has accumulated losses of Rs 47 m. In FY10, on sales and licence fees income of Rs 62 m, and event income (which is shown under the head of other income) of Rs 53 m. It posted a loss from operations of Rs 3.8 m in 2009-10. Trade dues at year end amounted to Rs 75.7 m, and this is larger than its sales and licence fees income for the year. It has a paid up capital of Rs 69 m and is a 70% subsidiary of the parent. Its assets of Rs 145 m comprise entirely of copyrights. The saving grace of Saregama Plc is that it has reserves of Rs 167 m, entirely composed of share premium reserves. It is not known why anyone would want to pay a hefty premium for its shares.
RPG Global music is another crowd stopper. For starters its accounts have been audited by a different Kolkata based accounting firm as compared to the audit of the accounts of its parent also based at Kolkata. But let that be. This company's chief claim to fame is that its net worth of Rs 103 m comprising entirely of its paid up share capital is fully eroded as the accumulated losses at year end amounted to Rs 125 m. Its other claim to fame is that it is Mauritius based. On a total income of Rs 8.5 m it recorded a loss of Rs 4.5 m during the latest year. This company too is in the business of selling music and earning licence fees but Mauritius is apparently not the right place for a music company to be based out of. In any event what is the advantage of basing it out of this island paradise please?
Then there is Kolkata Metro Networks, which is in the process of setting up a web based portal for hosting of audio, audio visual and other content relating to entertainment and media. It has made a splendid start. Its losses to date are Rs 6.4 m and it has yet to register any top-line as yet. Stay tuned for more interesting news.
The last of the four musketeer subsidiaries is Open Media Network which is the publisher of a weekly current affairs and features magazine OPEN. This publication was launched in April 2009 and its working for the first one year is enough to give one the heebie-jeebies. On an income of Rs 20 m the company toted up losses of Rs 206 m. The accumulated losses to date amount to Rs 299 m. That is to say the net worth is fully eroded and the company has provided for the erosion in its books to the full extent of Rs 1 lac being it's paid up equity capital. It also has a negative current net asset base of Rs 323 m at year end. There is no way that one can run a weekly journal on a capital base of Rs 1 lac, but who is to listen…
That leaves its other investment - Saregama Regency Optimedia a joint venture in which it has a 26% stake. This too is a loss making venture with an accumulated loss of Rs 3 m. What exactly this company does to earn its living is not known?
The point that is coming across very clearly is that the management is making determined efforts to start new businesses and then running them as close to ground zero as is possible. Why this mentality persists within the promoter management is not known, and why they should hire a chief executive at remuneration in excess of Rs 10 m, if this is the stated intention is another equally absorbing thought. One can only fondly hope that there will be a change in outlook at some point of time, whenever that is. Till then we have to bow our heads in silent prayer.
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.