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Bayer Cropscience: Finely tuned operations - Outside View by Luke Verghese

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Bayer Cropscience: Finely tuned operations
Apr 21, 2014

The company is a well tuned operation with more dependence on outsourced goods and materials and less on manufactured sales to generate revenues given its worldwide operations. This is how all multinationals keep their well oiled operations ticking.

Minimalistic in approach

This is a large sized company which makes do with just two executive directors-both of Teutonic pedigree. In 2012-13 the company registered gross revenues of Rs 28.4 bn against Rs 23.6 bn that it recorded previously. There is other income too-but that is extraneous to the point that I am making. If that is all it takes in terms of senior leadership to run a market leader of its size, then why do so many companies pepper their boards with whole-time directors of all hues? The good news of course is that Vijay Mallya is only the naam ke vaaste chairman of the board of directors. One of his chief lieutenants too is a non executive director.

The company is but one of the many siblings of the Germany headquartered giant Bayer AG which spans continents in its operational reach. It commenced operations in India some 55 years ago initially under the name plate of Bayer Agrochem Pvt Ltd, and following its name change to Bayer India had its share listed in the Indian bourses. It took on its present avatar somewhere along the line. The German parent owns seven other group companies in India, and the only listed company is the one under the scanner. It owns 35 companies worldwide under the heading 'Parties under common control'. Interestingly, Bayer Cropscience does not have any equity stake in any of the fellow siblings.

It is a fairly complex operation from the manner in which the revenues are derived and from the manner in which its materials are sourced. There is a deep family inter-connection here which makes it all possible-though in terms of such interactions only a few siblings fit in. According to the company website it operates in three business divisions -crop protection, bioscience and environmental science.

The revenue flows

Total revenues for 2012-13 amounted to Rs 27.9 bn. The revenues were higher by 20.6% over that of the preceding year. This is inclusive of such incidental receipts such as tolling charges, export incentives and income from scrap sales. Such receipts amounted to Rs 993 m in the overall total. The revenues accrued manufactured and traded sales in the ratio of 39.4% to 60.6%. This ratio is almost identical for the preceding year. Thus traded sales were the major constituent in the overall total. It purchased quite some materials too for conversion into the final saleable product.

The company earned a sharply higher profit before exceptional items and tax of Rs 3.9 bn against Rs 2.6 bn previously. This increase in margins came not from a decline in input costs of materials which was static, but from a less than proportionate increase in the cost of 'employee benefits' and 'other expenses'. The scope if any of increasing profitability through such measures in future would however appear to be limited unless the revenues increase by leaps and bounds. Atleast this is the way that I see it. I may add here that other income did play some part in this profit generation. Such other income made up of interest income, rent income, dividend income from current investments, and yet other entries --amounted to a slice under 18% of pre-tax profit in the latest year against 17.3% previously. The 'other income' also included a small slice of write-backs of liabilities no longer required in both the accounting years.

It purchased stock in trade worth Rs 11.6 bn during the year. It also imported raw materials valued at Rs 3.8 bn -which amounts to 67% of all raw materials consumed. Of the goods outsourced, the nominees of the holding company were beneficiaries to the tune of Rs 8.8 bn. There is no separate accounting for raw materials purchased by the company from group companies. Therefore one must assume that no raw materials were sourced from group companies. If so, then 76% of the finished goods that were outsourced were from group companies. There is however less dependence on group companies to derive its revenues. The sales to group companies amounted to Rs 4.8 bn against Rs 3.2 bn previously. This revenue accretal amounted to less than 18% of all net revenues for the year against an even lower 14% previously. On a rough back of the envelope calculation the company would have earned a gross margin of Rs 4.8 bn from the purchase/sale of finished goods in 2012-13 against a gross margin of Rs 4.4 bn previously.

Excessive dependence on imports

Given the excessive dependence on imported materials - both raw material and finished goods-- in the final make up of sales, the dependence on fixed assets to earn its tithes is also limited. The gross block at year end amounted to a relatively puny Rs 3.9 bn, and this generated total net sales from operations of Rs 27.2 bn. The plant and machinery is the largest item in this list at about Rs 2.2 bn, and interestingly, the depreciation on this machinery amounted to 57%. Apparently the tactic is to give more business to group companies in the sourcing of vital ingredients, but its resorts to a different strategy when it comes to sales realisations. The efficacy of this methodology has not been adequately explained but this is the reality of the matter.

The company which operates on the zero debt policy also suddenly became mega cash rich in the last two years. It sold landed assets consisting of land and buildings in Thane district in Maharashtra and in Powai in Mumbai in the last two years for a bomb. This is a gold mine that companies of long standing can encash on. The company realised a cash inflow of Rs 13.3 bn and booked a profit of Rs 11.9 bn on the sales. The company also paid capital gains tax of Rs 2.65 bn on the profits that accrued on the sale. The company boasted of cash and bank balances of Rs 9.7 bn at year end against a balance of Rs 3.9 bn previously. Some of the cash has been absorbed in higher working capital needs-in the preceding year the current assets and current liabilities evened out, some of it has gone towards the purchase of tangible and intangible assets, and the fairy god mother that the company has become it extended a sizeable loan to a third party too.

Sale of landed property

The management has not quite explained the need to dump its surplus landed assets and what it intends to do with the cash hoard that it has realised in the process. The two should in reality be complementary. Obviously there is game plan but what it is will probably be known at a later date. In all probability it could mean more spending on capital assets or some such. The surplus cash has to be profitably utilised. But there is an immediate fall out of this game changer. The parent wants to elevate the foreign stake holding to 75%. It is getting there alright. The foreign promoter shareholding is held through myriad fronts including through an Indian affiliate called Bilag Industries Pvt Ltd. With so much moolah on hand why not give it a go.

To be sure the company is a well run ship. On a paid up capital base of Rs 395 m the reserves and surplus amounts to a very impressive Rs 18.9 bn. The reserves and surplus showed a sharp spike from Rs 7.5 bn previously thanks mainly to the profits accruing from the sale of landed property. And as stated earlier it operates on zero debt. For an agricultural product marketing company it is also able to realise its sales dues without having to resort to much credit, though the trade payables at year end is much lower than the trade receivables. This skewed position could be a direct result of its dependence on imports to fuel its revenues.

Sensing the shape of good tidings to come the market has already revved up the price of the scrip in the secondary market. Over the last financial year the scrip moved up from a low of Rs 749 in May 2012 to a high of Rs 1,342 in December. I suspect that this was mainly due to the buyback offer engineered by the parent. The share price has since moved up even further in the current accounting year.

Disclosure: I hold 25 shares in the company

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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