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India Sugars: Not bringing sweet tidings - Outside View by Luke Verghese
 
 
India Sugars: Not bringing sweet tidings

Seventy six years old and showing its age

The brothers Morarka, Siddharth and Rahul, who today jointly run India Sugars and Refineries, must be thanking their lucky stars that this company operates in the Indian space, and that they have an 83% stake in the voting capital to boot (from data culled from other sources).

More than 76 years into the making, the company is almost down to its knees, but the top guns who are responsible for bringing the company to its nadir, continue to lord over its functioning. It is only in third world countries like India that the impossible becomes the possible. The lenders of capital have no leeway in enforcing a change in management, the Ministry of Corporate Affairs and even Capital Market watchdogs like SEBI appear powerless, or is it clueless, about bringing succour. Non management shareholders in any case, are as a rule a rudderless ship, and besides, the management has an airtight control over the voting stock. Inspite of all the improvements which have been affected in corporate disclosure requirements over the years; and the 'naam ke vaaste' changes in corporate governance, the latter is still basically virgin territory crying out for change.

What the auditor's have to say

Have a look see at what the auditors have to say on the state of affairs. 'The accumulated losses of the company at the end of the year are not less than 50% of the net worth. The company has incurred cash loss for the year and not in the immediate preceding financial year'. (Mark the intricate wording that the auditors have resorted to). The auditor's further state 'Regarding dues towards provident fund and commercial taxes, amounts of Rs 691,000 and Rs 106 m respectively were in arrears for more than 6 months as on September 30, 2010. The company has defaulted in the payment of dues towards principal and interest to financial institutions and bank and the defaulted amounts aggregated to Rs 47 m covering the period of one year to September 30, 2010.

When the accumulated losses are more than 50% (or as in this case not less than 50%) it comes within the ambit of the BIFR (Board for Industrial & Financial Reconstruction) paranjapole. In such instances the BIFR's key function is to play the role of 'sugar daddy' to the defaulter. The BIFR has now written to the Karnataka state government to consider the case of the company sympathetically in line with other sick companies in Karnataka and provide necessary relief and deferment of purchase tax. (To be fair however, the BIFR has extracted some largesse from the management by getting them to fork out an interest free loan of Rs 48 m to the company, as a part of the resuscitation effort). The company's manufacturing facility is located at Hospet in Bellary district in Karnataka state.

For the matter of record the debit balance in the profit and loss account at the end of September 2010 was Rs 169 m against Rs 105 m previously. This amount is excluding the several defaults that the company is already charged with. Then there are disputes in excess of Rs 90 m on account of disputed cane price. The total borrowings at September end of Rs 285 m, includes a Government of India Sugar Development Loan of Rs 55 m. On what basis are these sugar development loans parcelled out?

What's cooking?

So how did this company of such vintage come to such a sorry pass? It is not that it has depreciated machinery or some such, and besides, sugar companies' in spite of the many vicissitudes that they have to face, are thriving. The accumulated depreciation of Rs 247 m is 56% of the gross block of Rs 437 m - unless the company is coming up short in providing for depreciation. But there are no qualifications to this effect by the auditors. Sales in 2009-10 fell 71% to Rs 105 m from Rs 361 m previously. As a matter of fact the sales generation in each year over the last five years has been on a roller coaster ride, much like the open market price of sugar. Sales peaked at Rs 548 m in 2005-06, and has since then been oscillating like a yo-yo. The lowest sales of the last five years were recorded in 2009-10.

There are clear pointers to other factors at play against this company. For one, its capacity to manufacture sugar is grossly underutilised. It has a capacity to make 2,500 MT of sugar per day, and it manufactured only 2,017 MT for the whole year! Now, how is that for capacity utilisation? Further, and from the look of things, it appears not to exercise much control over its credit sales. The provision for bad and doubtful debts at end Sep 2010 of Rs 53 m accounted for 56% of all trade debtor dues at year end. In the preceding year such provision accounted for 51% of all trade debtors. Interestingly, close to 96% of all trade debtor dues are in excess of 6 months. Besides, trade debtors at year end accounts for some 80% of all sales during the year! This is nuts! Or am I reading something wrong here?

And precisely when the company is struggling to stay alive, the directors have thought it fit to hike the salary of the brothers Morarka, who also officiate as the managing directors. Though the exact outgo on account of salaries and perks on their account is not readily ascertainable it may well be in the region of Rs 300,000 per mensem (every month). In such an event it would work out to Rs 3.6 m per year per brother. Juxtapose this with the total outgo on all employee emoluments of Rs 54 m in 2009-10.

The many travails of the company

It did crushing operations of sugarcane for a mere two months from March 8 to May 14 for the 2009-10 sugar season - or 67 days. In the preceding year it was for a lesser period of 59 days. But the difference is that in 2008-09 it crushed 72,600 tonnes of sugarcane against 19,700 tonnes that it crushed in 2009-10. The quantity of sugar produced was 74,658 quintals against 20,136 quintals in the latter year. The sugar recovery as a percentage of the sugar cane crushed was almost identical at 10.2% in either year. But the paradox here is that inspite of the sugar recovery percentage being identical, sales of molasses accounted for 22% of all sales in 2009-10 against a much lower 13% in the preceding year. How is this possible? In 2008-09 the company merely scraped the bottom of the barrel with a pre-tax profit of Rs 600,000. In 2009-10 it logged in a pre-tax loss of Rs 70 m. The latter year loss would have been significantly higher but for some deft accounting. Other income got a boost of Rs 24 m due to the write back of provisions, and from profit earned on the sale of fixed assets. The company managed the feat of selling assets of the book value of Rs 365,000 and earning a profit of Rs 520,000 in the process! If only it could do a similar with the manufacturing operations!

The reasons given by the directors for the sharp reduction in the crushing of sugarcane and the consequent fall in the bottom-line is that there was rampant illegal transportation of sugarcane by the other sugar factories from the reserved area of the company. More than 200,000 metric tonnes of sugar cane was illegally procured in this manner the management claims. This is a preposterous enough suggestion to put out in the first place. The directors go on to add that the company has taken sufficient steps to prevent illegal transportation of sugarcane. (What are these steps please?) This it states will improve productivity and profitability of the company.

The point is that if other companies can transport sugarcane illegally, why is it that India Sugars and Refineries cannot pay back these sugar factories with the same coin? If this is the name of the game, then this company too should adhere by the same rules that others follow. In reality the possible reason is that India Sugars was so cash strapped that it did not have the liquid cash to pay farmers for the sugar cane, and the farmers in turn preferred to sell it to other sugar factories which were more prompt in payment of their dues. The company's ability to function as a going concern at year end was a bit precarious. The net working capital as at September end was a very negative Rs 112 m, against a minus Rs 38 m previously.

The management was apparently so seriously concerned about this illegal transportation, as it calls it, that the company even filed a special leave petition before the Supreme Court in the matter. The Court however dismissed the petition on the ground that the case has no 'locus standi' as the crushing season has come to an end!

Some light at the end of the tunnel?

The interesting aside that the directors' report adds is that the company has commenced crushing for the 2010-11 season on Dec 15, 2010 ( a lot earlier than in the preceding two years) and that maximum care has been taken to attend to all the problems experienced in the preceding season. The working of the factory is smooth and all the efficiency parameters are within the norms it adds.

It will be interesting to know what the company has to unveil at the end of September this year.

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 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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