Premier Ltd.: Needs to focus financially - Outside View by Luke Verghese

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Premier Ltd.: Needs to focus financially
Apr 25, 2012

The company is on the long haul to stay in the reckoning in the automotive segment

A long story made short

Established way back in 1944, as Premier Automobiles Ltd, and a part of the pioneering Walchand Hirachand group, it was initially capitalised to make cars under licence from Chrysler Corporation of America. It subsequently metamorphosed to make the Fiat car which after the expiry of its collaboration agreement was I think initially named the Premier President and finally as the Premier Padmini car. It also made the Premier 118 and 138 D models and other bits and ends, which were however all short lived. It also made the Dodge and Fargo trucks which were the trademarks of its American collaborator. But all that is now history. The new name plate is not exactly the right way forward given its present engagements and immediate future plans, but that is the reality of the matter.

Today Premier Ltd. subsists in the twin fields of the engineering and automotive businesses. The engineering segment has two activities-CNC Machine division and the engineering division. The engineering division has now turned its focus on the wind energy segment and makes large components for wind turbines. The automotive segment consists of light utility vehicles and sports utility vehicles. During the year the company introduced the RIO SUV on a trial basis. It is quite apparent that the company has not sung its swan song as yet in the automobile segment and it is still raring to shift to overdrive in this overly competitive industry. On the contrary the RIO assembly line has an installed capacity to produce 30,000 vehicles per annum, and towards this end has put in place a pan India dealership and service network. It will help if it thinks ahead very clearly before making the plunge into turgid waters. The company now functions out of its plant facilities in Chinchwad in Pune. The board of directors is today chaired by Maitreya Doshi, the son of the former long serving CEO Vinod Doshi.

Back from the brink

That the company continues to toot its horn after its disastrous showing in the 1990s is in itself a story of fortitude, and the luck of the draw. It also got its fingers badly burnt when it subsequently kindled a JV with Peugeot of France for an automobile venture. It had to write off Rs 791 m in equity that it invested in this venture. What ultimately saved the company from the hangman's noose were its large land bank, which it still continues to possess and its ability to capitalise on it. It is in the process of monetising 218 acres of land that it owns in Dombivli. But any such monetisation represents revenue accruals far into the future. Besides, land development can also be a mug's game from the minority shareholder point of view.

Its financials

What of the present? From the brief financials for the three accounting years that it has appended to the report, the company appears to be prospering top-line wise under the stewardship of Maitreya. In 2008-09 the company registered sales of Rs 1.4 bn, and a profit from operations (profit after tax) of Rs 136 m, on a paid up capital of Rs 304 m. By 2010-11 the sales had soared to Rs 2.4 bn, but the profit from operations had only inched up marginally to Rs 184 m. But, nevertheless, the company was able to pay a dividend of 27% against 25% previously. The gross block to turnover ratio was a mere 1:1. That is one reason for the low margins. The other reason is that the interest charges weigh very heavily on this company given the mountain of debt that it has accumulated. Debt at year end stood at a cool Rs 3 bn against Rs 2 bn in the preceding year end. The foreign exchange earnings and outgo in the three year period however shows an inexplicable and wildly wavering pattern. What is quite clear however in the figures for the three years is that the outflow of forex is infinitely greater than the inflow. In 2010-11, for example, the inflow was Rs 7 m but the outflow was Rs 351 m. This could be another limiting factor in profit growth given the marked weakness of the rupee in general.

The company makes do with a very bloated balance sheet. It has revalued its land, and the revaluation reserves on this count stand at Rs 5 bn. The value of freehold land stands at Rs 5.75 bn, in a gross block at Rs 8 bn. This revaluation was obviously done to avail of additional debt capital. The company obviously finds it easier to raise debt than permanent capital, the opposite of what it should be doing given the management's penchant for sticking its neck out. Presently, the company makes do with a paid up equity capital base of Rs 304 m on a gross balance sheet base of Rs 10 bn including revaluation. The reserves and surplus stands at Rs 6.7 bn but that is due to the revaluation factor. The promoters control some 43% of the miniscule voting stock (separately, bodies corporate control another 10.7% of the voting stock), and the management should make an attempt to raise more permanent capital. They have the PAL brand to fall back on at least. Are these bodies corporate independent of the management?

High working capital levels

The point is also that the company has to sustain a high level of working capital to contain its inventories and trade debtors. The value of inventories at year end accounts for almost 30% of the gross sales, while the trade debtors account for another 36% of gross sales. These percentage figures are fortunately lower than what it had to churn out in the preceding year. The bigger issue is that the company is simply not able to generate the cash from operations to sustain its mega plans. In 2010-11 it generated net cash of Rs 290 m, but the addition to gross block was in the region of Rs 823 m. So it had to resort to a medley of borrowings including of the inter-corporate deposit variety. The ICDs' include Rs 45 m from related parties. The fact of the matter is that gross block expenditure is of long duration from the revenue point of view, and hence from the cash generation point of view also. The interest on debt accrues from day one. Permanent capital on the other hand is interest free and all weather friendly too.

Presently the interest paid out on debt can also partly be debited to capital account given the borrowings taken on hand to finance gross block expansion. That is precisely what the company has resorted to. Of the total interest payout of Rs 359 m, it debited Rs 101 m to capital account. The interest paid out debited to revenue account thus works out to a percentage payment of 10% or some such. But what of the scenario when these assets start yielding revenues? Currently it also gets to capitalise pagaar payments to employees.

The breakup of its revenues

The way the company earns its keep, the heads of income are broken down into five subheads. At the top of the heap is income from engineering sales of Rs 1.95 bn, followed by automotive sales of Rs 436 m. The rest is made up of a motley bunch consisting of agency commission, scrap sales, and a quirky item called internal capitalisation-whatever that means. Together it added up to Rs 2.4 bn. Other income, including exchange difference chipped in with a piffling Rs 24 m. This then is the revenue side of the profit and loss account. The installed capacities in turn consist of 45,000 units of vehicles (which include 30,000 unit capacity for the RIO) and an engineering capacity which is uniquely mentioned in hours.

The company managed a production of 708 vehicles and sold 649 numbers at an average price of Rs 6.8 lakhs per unit. The engineering unit made a divisional profit of Rs 565 m while the automotive unit ran up a marginal loss of Rs 7 m. Clearly the focus has to be on flogging the automotive unit in the future. To its advantage is the fact that its plant and machinery is of recent vintage. The accumulated depreciation is a mere 20% of the gross P&M of Rs 1.45 bn. But this would entail heavy deprecation provisions in the future.

No siblings to support

By god's grace, the company has no siblings to support and its only investments are in an associate going by the name PAL Credit and Capital Ltd. The total investment accounts for a minor Rs 65 m at the gross level on which the company has provided Rs 29 m for diminution in value. That gives one an indication of this associate's present whereabouts. Needless to add this investment yields no revenue returns to the parent.

There is very little else of import to write on about this company. But the future perfect will be largely decided on by how the market perceives its renewed thrust into the 4 wheeler automotive market. In any event this will be a long haul and the management will have to get its act together on the financial front. It will be interesting to see how events pan out in the immediate future.

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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