Even the savviest and most wizened investor is unlikely to have heard of Bengal & Assam Co. Not that one is missing anything of import in the process. The company in question has a very unlikely name too. It took birth as Bengal & Assam Investors Ltd in the very year that we won our independence from foreign rule, and has been around as a non entity of sorts since then. In 1982, it affected a name change to its present and equally muddled nomenclature. The company is a baffling oddity in more ways than one, but that is because of the express intentions of the management. Its portfolio management skills, the juggling of its funds flow, and the return on its investments from its family silver, all put together, is some sort of a comic act. But more on this masala mix later.
The twists and turns
The primary function of this investment company is to keep a tab of the investment portfolio of one of India's bigger industrial houses of yesteryears - the JK group, as it is known honorifically. More precisely, it is a holding company on the group investments of the Lakshmipat Singhania clan. The late Lakshmipat had four male offspring - Hari Shankar, Bharat Hari, the late Sripati, and Raghupati. The spoils that fell into their lap when the undivided group was carved up included JK Paper (which started life as Straw Products), JK Industries, JK Sugar,
JK Lakshmi Cement, Fenner India (formerly Fenner Cockill), Udaipur Cement Works, and probably JK Agri Genetics and Umang Dairies. This is one's understanding from a reading of the investment portfolio of Bengal and Assam Company.
Fenner which makes fan belts was a FERA (Foreign Exchange Regulation Act) company which the group acquired from A&F Harvey Brothers who also controlled Madura Coats. It is today a subsidiary of the parent investment firm. Udaipur Cement Works (UCV) appears to be a BIFR (Board for Industrial and Financial Reconstruction) case, and the book value of the company's investment of Rs 30 m in UCV may be a total write off. So is its investment in JK Pharmachem which is under liquidation. The company is invested in the equity of some 259 corporates, but this is more for a 'naam ke vaaste' effect than for any practical purpose. This list includes phalthu holdings in 9 companies (one share each) incorporated in Mexico, for god knows what reason. The real joke here is that these shares, which have no book value, have been pledged with banks for loans availed of by certain foreign investees! What is the 'unsaid meaning' behind this foot note?
A piddling paid up capital
As on March 31, 2010, the company made do with a 'mandatory sort of' paid up equity of Rs 86 m. The reserves and surplus on the other hand is a humungous Rs 2.3 bn. The management obviously believes in the adage of small is beautiful. But there is a reason behind this. The smaller the paid up equity base the easier it becomes to manage the effective control of the company. The group holding in the voting stock of this company is not specified, which is a compulsory requirement, but from the details available in the annual report, the four family representatives on the board between them control 21% of the paid up equity. Quite obviously the family hold on the company is much more humungous, but the exact stake remains in the realm of conjecture. It will also be interesting to see how events unfold when the next generation comes online and stake their claim to the high office.
As at end March 2010 the book value of all the company's investments amounted to Rs 2.9 bn against Rs 2.8 bn previously. Of this lot, the book value of the equity shares was Rs 2.2 bn, the book value of its holding in the preference capital Rs 480 m, and the book value of its holding in debt capital Rs 222 m. The list includes four subsidiary companies with a total investment outlay of Rs 552 m - the biggest of which by far is Fenner India, with a holding of Rs 527 m.
Its investment portfolio
The book value of its holding in group company equities is an overwhelming Rs 2.1 bn or 95% of the total value of all its equity holdings, while the book value of its holdings in the preference capital of the group ventures is 100%. The only free float investments are in its debt securities. In other words the total value of its equity holdings in the myriad other companies are mere dribblings. Its single biggest equity investment is in JK Lakshmi Cements at Rs 534 m (at an average purchase cost of Rs 19.6 per share), followed by Fenner India at Rs 527 m (average cost of Rs 241.5 per share) and JK Tyres at Rs 494 m (average cost of Rs 58.50 per share) and JK Paper at Rs 254 m (average purchase cost of Rs 17.8 per share). Its single biggest investment of Rs 555 m however, is in JK Agri Genetics. (Inspite of the size of the investment, this company does not qualify as a subsidiary.) The preferential capital stake in this company is Rs 425 m (average purchase cost of Rs 85 per share) and an equity stake of Rs 131 m (average purchase cost of Rs 96 per share). One wonders what JK Agri Genetics has got to show for the efforts put in by the parent.
The total dividend return on its equity and preference holdings amounted to a princely Rs 158 m against Rs 115 m previously. That works out to an 'avaricious' return of 6% on its total investment outlay. (The return in the preceding year was even less lustrous). This cannot be anybody's idea of a return on investment, especially of the family silver, but that is how it is panning out. There is no mention of any interest income from its holding in debt capital instruments which is even more inexplicable. The only other receipt in its schedule 'Income from Operations' is interest receipts of Rs 14.3m on its Loans and Deposits. From the available evidence even this return is a rip-off. The total outstanding in loans and deposits at year end was a considerable Rs 215 m and the return here for the year on a rough reckoning is a mere 6.8%.The company appears to be more in the business of loan melas than in the business of investing. The loans and advances include ICDs (Inter-Corporate Deposits) to LVP Foods of Rs 79 m, and advances recoverable at some point of time during the year of Rs 30 m from Fenner India.
Separately it has rental income of Rs 39 m, probably from its extensive real estate holdings. The book value of its buildings is Rs 142 m, and the value of its freehold land is stated as Rs 64 m. Since these holdings are stated at historical cost, the current market price of its real estate holdings must be truly humungous. These assets in reality constitute the true family silver. It also has leasehold land amounting to Rs 3.2 m.
A study in opaqueness
The manner in which this company takes in monies, and lends money is a study in opaqueness. Why it needs to borrow monies in the first place is very unclear. But let that be. At year end it had borrowings to the tune of Rs 926 m. This includes unsecured loans of Rs 760 m from bodies corporate, and another Rs 69.5 m from SASF (what this stands for is not known). The Rs 760 m includes an interest free handout of Rs 600 m at that, while another Rs 160 m was care of a subsidiary company - in all probability Fenner India. (The company seems to have several deals going simultaneously with its subsidiary Fenner India.) The only other subsidiary 'bright enough' to extend a loan is BMF Investments. BMF, which became a subsidiary in September 2009, has in turn extended a gratis of Rs 192 m (a part of the Rs 600 m), which is shown under a separate schedule called 'Payable to'. Why would BMF Investments, an investment company, want to advance interest free monies to the parent investment company when the latter has no specific need for the money? Separately, it has also availed of a loan of Rs 65 m from Kotak Mahindra Bank. It will be very illuminating to know the names of the other suckers besides BMF who were cajoled into advancing an interest free loan of Rs 600 m (previous year Rs 630 m), and that too to a company which did nothing in particular with the money that it received. There is definitely some sort of a quid pro quo going on here.
The company paid total interest of Rs 25.5 m on the coupon bearing term loans and ICDs during the year. Based on a very rough back of the envelope calculation (and assuming that the loans and ICDs that it took on remained constant throughout the year) then the company would have paid an interest of a mere 11% - based on the average of the loans for the two years. This is a ridiculous proposition, but as I stated earlier, the percentage interest paid is on a very rough calculation. On top of the interest free loans that it begets from mysterious benefactors, it is even able to command yet other sucker entities to part with lucre at ridiculously low rates of interest. This company has definitely mastered the act of taking, but not the art of investing.
The other big income item is 'profit on sale of investments' which in any given year is indeterminate at best, as it depends entirely on how the Board manages the environment. In FY10 the company earned a tidy Rs 93 m (Rs 37 m previously) from this exercise. Which exactly are the investments that it sold which could have realised this profit is not readily ascertainable. The cash flow statement only shows that it purchased investments to the tune of Rs 258 m, and sold investments to the tune of Rs 249 m during the year.
The colourful siblings
The subsidiaries are another colourful bunch. In its investment schedule it boasts of four subsidiaries. Another schedule shows that it has nine subsidiaries, but one - Hifazat Chemicals - is under liquidation. The obvious inference is that four of the remaining siblings are step down subsidiaries, or some such. It has an 87.9% holding each in five of these subsidiaries, including Fenner - why such an exact figure? It has also published the brief working results of eight siblings. Collectively they have registered a turnover of Rs 5 bn. Fenner is the top dog by far with a turnover of Rs 3.3 bn, and a pre-tax profit of Rs 554 m. Fenner has an investment portfolio of Rs 1.4 bn of its own. Whether these investments yield any return or not to Fenner is not known. It is also the only subsidiary which has declared any dividend - Rs 99 m. (The parent has shown a dividend income from subsidiary of Rs 22 m). LVP Foods is the next biggest in top-line contribution at Rs 892 m, but has yet to make a mark at the tail end of the game. It is also the recipient of quite some free oxygen supply from its parent.
BMF Investments, on a capital base of Rs 3 m, has built up an asset base of Rs 436 m including an investment portfolio of Rs 229 m. But its gross income is a paltry Rs 11 m -which is not surprising given the way it manages its cash flow. Besides, its investment portfolio is apparently a dysfunctional one. The two textile siblings generate top-line income but yield no return for their efforts. These companies in all probability are sinecures for family members who have to be accommodated.
This, in a very large nutshell, is what this bizarre company is all about. It belongs to pure and simple Wild West country territory.
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.