Blue Dart's operations in India come replete with a complex group structure in place
All Systems Go!
It is a fairly voluminous annual report all right - 118 pages of it and printed on quality paper not to be sniffed at. The company is also running at full throttle thank you. Its performance, barring some very visible hiccups, is roughly in keeping with their vision to be the best and set the pace in the express air and integrated transportation, with a business and human conscience. In the domestic air express industry Blue Dart commands almost 46% market share according to the chairman of the board, Mr Sharad Upasani. (The Indian organised Express market - a part of the overall logistics market-is valued at about Rs 45 bn and is expected to grow at a CAGR of 17%). In the ground services segment the company commands a market share of 12.4% he adds. In the company's total revenue pie, the air express segment accounted for 64% of total revenues while the ground services segment tossed in another 19%. The ground segment, the chairman adds, was launched only in 2007 to complement the air express services. The upshot of the launch is that while the air segment grew 28% during the year, the latter segment posted a 46% growth - though on a lower base. In the management's esteemed opinion the company plays a vital role in the logistics segment. Its capital assets in the main consist of three Boeing 737 aircraft, and four Boeing 757 freighters, offering a payload of over 370 tonnes per night, as also a flotilla of over 6,272 vehicles, 365 facilities including 56 domestic warehouses and 12 express hubs. At year end the gross block amounted to Rs 3.9 bn against 3.2 bn previously. It offers delivery of consignments to nearly 36,000 locations in India and to over 220 countries and territories worldwide. The chairman also states that demographically India is the world's second largest market. But the copy does not go on to further buttress this claim in any manner whatsoever.
Its operative figures
In the 21st year of its existence the company achieved sales revenues of Rs 14.8 bn against Rs 11.4 bn previously or by 30%. Other income rose dramatically to Rs 242 m from Rs 53 m previously. Consequently total income from operations grew 31% to Rs 15.1 bn. But profit margins could not quite keep pace. The gross profit before depreciation and tax grew 25.7% to Rs 2 bn. But due to a relatively lower tax provision, the post tax profit grew 29.5% to Rs 1.2 bn. The reason for the lower growth in profits is that the biggest revenue expenditure by far, Freight, Handling and service costs, rose by close to 35% (more on this aspect later on in this copy). On a paid up piddling paid up capital of Rs 237 m the company has proposed a dividend of 20%. In simple English the dividend payout including tax thereon amounted to a mere 4.5% of post tax profits. What exactly is the purpose behind such a dividend payment is not clear, but whichever way one looks at it, it appears to be some sort of a poor joke.
The point is that the company is debt free and is cash rich to boot. Put simply it has a surfeit of riches. One reason is that it almost sells cash down. The trade debtors at year end amounts to less than 12.6% of its revenue accretals, and besides, the entire trade dues is under 6 months old.The bad debts presumably emanating from sales , is a mere Rs 8 m. It has humungous investments of Rs 525 m in liquid debt funds, and the cash and bank balances at year end amounted to Rs 377 m. It has also forked out an Rs 2 bn loan/ICD to its subsidiary, Blue Dart Aviation Ltd, which is classified as an associate company. It is also more than able to meet its capital expenditure requirements from its cash flow that it generates from operations. In 2011 it spent Rs 521 m on capex when the cash flow from operations was Rs 1 bn. Corporates, especially forward looking ones like Blue Dart - which chortles ad infinitum about its superior management skills should fashion some sort of dividend payout policies, as a part of its corporate governance package, which is based on its post tax profits for the year and also based on its cash flow requirements in the immediate succeeding year or so.
Corporate governance should extend to shareholder benefits too
They should also have other defined shareholders benefit parameters in place. In this specific instance the company has a piddling paid up capital of Rs 237 m and humungous reserves of Rs 6.3 bn. It appears that the management at the behest of the primary shareholders is playing a back peddling policy of keeping the company out of the glare of the arc lights, and try and evince shareholder disinterest in the stock in the process, in its eventual preparation of a total exit from the Indian markets. The majority shareholder is Deutsche Post AG, Germany, who through its many arms controls a slice over 81% of the outstanding voting stock. This stake holding is not very far from the delisting option available to Deutsche Post.
Extending its largesse
Though the company possesses its own aircraft, the supply of aircraft is still inadequate it appears, given its scale of operations. So it has invested in an associate company called Blue Dart Aviation Ltd. It has an equity stake of Rs 183 m in this company - shares which were acquired at Rs 15.5 per share on a face value of Rs 10 per share. Its percentage equity stake in this company is not immediately known and neither is the ownership pattern of the balance equity stake. Anyways, the kind tooth fairy so to speak, has advanced Rs 2 bn to the company as an interest bearing loan/ICD, which is up from Rs 1.1 bn previously. (The loan component is Rs 894 m while the inter-corporate deposit component is Rs 1.1 bn-what is the difference between the two terminologies in this instance?) The coupon rates of interest that it levy's is not exactly deductible, but on a rough back of the envelope calculation it appears to be around 8%. Of the total freight, handling and service costs of Rs 10 bn that it paid out, the expenditure on account of aircraft charter costs was Rs 5.2 bn. This entire sum of money on aircraft charter was paid to Blue Dart Aviation Ltd. In other words this associate seems to be the kingpin in its air express operations. From the looks of it, it is entirely possible that this associate has a bigger gross block than Blue Dart has. The operational aspect of this associate is not known publicly, so one cannot comment on the viability of its operations - but this company will be well taken care of.
This brings us to the bigger question as to why this associate company's operations are kept separate as it directly hinges on the wellbeing of Blue Dart. The associate does not pay any dividend at the end of the day - that is for sure. It would make more sense to merge this company with Blue dart unless there are other bottlenecks involved in doing so. Or do the ex-promoters of Blue Dart have a finger in the pie in this entity?
The subsidiary factor
Besides Blue Dart Aviation, it has a wholly owned subsidiary called Concorde Air Logistics Ltdin which it has a stake of Rs 14.6 m - relatively small beer. On a face value of Rs 10 the company paid a price of Rs 132.7 per share. The premium paid was basically to buy the goodwill which is valued in its books at Rs 15 m. This company has a paid up equity is Rs 1.1 m and it is in the business of clearing and forwarding of air cargo packages. Like the parent it too is debt free and is a profitable entity to boot -not surprising that its only client is the parent. The reserves and surplus is more than 46 times the paid up equity. It is cash rich enough to plonk down Rs 21 m into debt securities. This company is however a minor player in the overall scheme of things.
There are several other companies constituting the group which are of interest. Three of the group companies, DHL Express India Pvt. Ltd, DHL Lemuir Logistics Pvt. Ltd and Skyline Air Logistics Ltd are classified as fellow subsidiary companies, implying that the three like Blue Dart have a common parentage, but are not directly linked, shareholding wise. They are all privately held too. Blue Dart has inter-se dealings with two of the three. It appears to have received Rs 523 m from DHL Express being domestic service charges income-meaning probably that the ground services segment expenses of DHL is being catered to Blue Dart. This amount is shown in parenthesis () and hence in this instance assumed to be a payment made by DHL to Blue Dart. Separately there is another figure of Rs 821 m being international servicing cost - probably paid by Blue Dart to DHL. This figure is not in parenthesis and tallies with the expenditure schedule of Blue Dart. It also received Rs 327 m as fees on similar account from DHL Lemuir Logistics. That is to say that close to Rs 850 m was received by Blue Dart from its two fellow subsidiaries. Skyline Air Logistics however does not appear to be in the picture for whatever reason. It is of-course impossible to take a call on all these inter-se transactions but overall the amounts involved are humungous in the context of total expenditure. But it is a totally integrated operation in a convoluted manner. It is also some sort of a remote controlled operation with hydra arms so to speak.
From the looks of its there appears to be some weird pussyfooting being put on display by Blue Dart to earn its place under the sun. This is especially so, since its income and expenditure account is dotted with payments to and receipts from group companies. The group companies are a holy mix of either wholly owned subsidiaries or fellow subsidiaries. Needless to add the ultimate parent is a winner every which way in the process. But even then this company's performance suggests that it is firing on all cylinders. The only note of caution is that the proposed postal bill being framed by the Union Government will bring all courier companies under the ambit of the Indian Post Office Act. Several restrictions are being proposed in the bill on the functioning of courier service companies in terms of freight that it can carry and the rates that they can charge for the letters that they carry. This is a share which can also be looked at as an investment opportunity in the context of the possibility of the company completely exiting the local bourses in due course.
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.