The management seems to be losing sight of the main objectives of this company
Baptism by fire
Chronologically speaking, this holding company is a pup, but it has achieved several very notable milestones in its brief but eventful career. Using this company as the backdrop, the promoters have furthered their sinecure in the company. This holding company is a mere nine years young, but it was born out of fire in a manner of speaking. For starters, following its germination, among its first acts of wisdom was to swallow up the partnership firm Deccan Chronicle and then amalgamated Deccan Chronicle Pvt. Ltd and Nandi Publishers Pvt Ltd with it. Then during 2010-11 it amalgamated another three subsidiaries with it - Deccan Chargers Sporting Ventures, Netlink Technologies Ltd and Odyssey India Ltd. It also had a company called DC Investments which was sold during the year. This looks like a group company which has been hived off. Deccan Chargers incidentally is the Hyderabad based IPL franchise. (The company still has another six associate companies. One of the six is named Nandi Publishers Pvt Ltd and this company must obviously be different from the Nandi Publishers Pvt Ltd which was amalgamated with it or some such). To add some more colour it also decided to swallow some of its own outstanding capital through a share buyback scheme. This appears to have been resorted to through a two pronged attack. The cash flow statement reveals that the company brought back shares worth Rs 270 m in the financial year 2009-10 or some such. It continued the good work in the second tranche that it activated in May 2011.
The capital base as on 31st March 2011 stood at Rs 487 m comprising of shares of the face value of Rs 2 each. (The reserves and surplus at year end on the other hand was a humungous Rs 12.3 bn). This paid up equity was marginally more than the capital base of Rs 484 m as on 31-03-2010. What apparently happened in between is that it converted foreign currency bonds worth Rs 134 m that it issued earlier into shares at a very respectable premium. From my understanding of the math, it issued 1.3 m shares of the face value of Rs 2 each at around Rs 107 per share, on conversion. The company at year end also boasted share premium reserves of Rs 5.2 bn partly as a result of an earlier issue of capital at a premium. The present share premium includes the premium on the conversion of Foreign Currency Convertible Bonds (FCCBs) of Rs 128 m, but after deducting the amount utilised to buy back equity shares for Rs 270 m in the preceding year. During the year the company also repaid the borrowings of the amalgamated subsidiaries amounting to Rs 509 m. So it made immense sense to have merged the three companies with the parent.
The promoters' stake
The holding of the promoter group in the company as on March 31, 2011 amounted to 63.37%. This holding is held individually by three persons - the two brothers, T Venkattram Reddy and T Vinayak Ravi Reddy and one P K Iyer. They each hold 21.12% of the paid up equity. Subsequent to the close of the latest year end, the company pressed into action another buyback of equity shares. In this buyback the company has mandated a maximum repurchase of 34.5 m shares at a price not exceeding Rs 180 per share at a total outlay of Rs 2.7 bn. (At year end the company had a cash hoard of Rs 7 bn to take care of such exigencies). The directors' report states that the company has bought back 26.2 m shares. The total outlay involved in this exercise does not appear to have been mentioned anywhere in the annual report - which it may have been accidentally omitted to mention. Of the shares purchased it has extinguished 18.7 m shares and the balance will be extinguished in due course. Going by the information available, the holding of the three promoters in the voting capital of the company after the shares are extinguished would increase to 71%. The paid up share capital in turn would reduce to Rs 217.3 m shares of Rs 2 each from 243.4 m shares of Rs 2 each. So by spending dollops of the company's hard earned dough, the promoters get to be ensconced even more firmly in the saddle. What exactly was the exalted purpose of this exercise other than increasing the promoters hold has however not been spelt out. Depending on the whims of the management there will presumably be yet another round of share extinguishment next year same time. Given the cash outflow involved in this exercise, the directors have very sensibly decided on forgoing the dividend for the year. The reduction in the public holding should however lead to an uptrend in the share price, all other parameters being on keel.
Lording over the management
This is not all. The chairman of the board, T Venkattram Reddy has also deemed it fit to employ his immediate kith and kin in the mainline activities of the paper. His son T Vijay Reddy has joined as VP Finance on a gross monthly remuneration of Rs 1.5 lakhs. The chairman's wife, Manjula Reddy is the senior features editor at a gross monthly remuneration of Rs 2.5 lakhs. And just to round out the picture his daughter, Gayatri Reddy, is the features editor on a gross remuneration of Rs 2 lakhs a month. These expenses incurred by the company will no doubt correspondingly add to the family kitty by a like amount. One wonders what the next annual report and accounts will bring out on this score.
Launching new editions
In between all this the company has also increased the number of editions of its flagship newspaper, The Deccan Chronicle. It launched two editions during the year-one out of Coimbatore, and the other the Kochi edition. It is today the leading English language newspaper in South India with an average daily circulation of 1.4 m copies as certified by the Audit Bureau of Circulation (ABC) for the six month period Jul-Dec 2010. The newspaper now makes do with a number of editions, with Andhra Pradesh hogging the bulk of the editions. Andhra also hogs the bulk of the circulation - 8.6 lakhs or 60% of the total. It also makes do with 11 plant locations, with eight plant locations in Andhra Pradesh, two in Tamil Nadu and one in Karnataka. The company is now contemplating starting an edition from Thiruvananthapuram. The company also publishes the English daily The Asian Age, the English financial newspaper Financial Chronicle and Andhra Bhoomi a Telugu daily. The directors' report does not separately chronicle the well-being or otherwise of these publications. They may not amount to much or some such.
In any event there was considerable spending on capital assets during the year. The company spent Rs 893 m on gross block addition as compared to Rs 235 m previously ---a considerable mark-up over what it had spent in the preceding year. The spending was largely on land, buildings and furniture and fixtures, rather than on immediate productive assets. This would infer spending on new office space and such like. At the end of the day the total revenues including other income grew 12% to Rs 10.3 bn from Rs 9.2 bn previously. But, significantly, the two major revenue accretals - advertisement and circulation revenues together fell marginally to Rs 8.77 bn from Rs 8.92 bn previously. A big contributor to revenues was sales merchandise at Rs 984 m against NIL previously - the only visible positive fallout of the recent merger. (The fall in its mainline revenues have to also be seen in conjunction to the significantly higher levels of inventory holdings and that of trade debtors that the company nursed at year end). Other income also grew to Rs 555 m from Rs 308 m previously. There is no separate information on which of the merged companies kicked in what amount into the income kitty, but overall it apparently does not amount to much.
The cumulative fall in total sales and advertisement revenues have not been suitably explained in the annual report. This is especially so in the context on the launching two new editions during the year, and the good response to the new Coimbatore edition, and the promising response to the new Kochi edition. The fall in advertisements has been somewhat explained to the uncertain situation in the markets in which the company operates. The fact that the bulk of its circulation is limited to Andhra Pradesh may be a limiting factor here.
But where it got jacked on the profitability front was the rise in revenue expenses disproportionate to the growth in total revenues and arising from the merger. Consequently the pre-tax profits fell to Rs 2.4 bn from Rs 3.9 bn previously. It appears that the recently merged companies are not all that fine tuned. The principal item of expenditure is nomenclatured as Printing and other operative expenses. The expense under this head rose 34%. The expense item in this subhead playing spoilsport was Franchise fee paid for IPL 3 at Rs 472 m against NIL previously. Raw material costs, probably inferring newsprint expenses, also rose disproportionately – by 26% to Rs 3.2 bn. But the biggest game changer was the item of expenditure titled Sales and administration expenses which rose a phenomenal 177% to Rs 1.6 bn. The chief culprits here again appear to relate to the IPL management. Add to this the 48% hike in employee payouts, which almost rounds out the picture. And, inspite of the 9% year end decline in debt to Rs 3.1 bn, the interest charges debited to revenue rose 31% to Rs 590 m. This was another millstone of sorts, and implies severe working capital misflows during the year. In this context the year- end cash balance of Rs 7 bn also appears to be disproportionate to its working capital needs, and in relation to the year- end debt that it is still clinging on to. The management has a lot of tightening up to do on its working capital management.
A not very happy situation
All in all it is not a very happy situation especially since some of the company's investments appear to be made for reasons not based on sound business acumen. The return on these investments is not yet showing up in the accounts. Clearly then the management has its task cut out for it and they have to pull a rabbit out of the hat soon enough to raise revenues to match cost increases (a not so easy proposition) or cut down on galloping revenue expenses. The written baashan in the directors' report do not have any soothing words to offer on the quality of these investments. But presumably there will be some light at the end of the tunnel. We will have to wait and see when that light emerges out of the tunnel.
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.