Carrier Airconditioning: Not So Cool!
A fine branded company which is struggling to keep up to its image and that is only because of the shenanigans of the principal shareholders
Losing its sheen
The company has lost its mojo over the years. That a brand of its standing has chosen to do so is another matter. The annual report also lists five pages of material on disputed tax dues on account of both direct and indirect tax dues, and being contested in various fora. The disputed indirect taxes consist of sales tax and value added tax dues with various state governments, and with the customs and excise, and the service tax departments. The direct tax disputes relate to various demands raised by the IT authorities. Together, the sums under dispute add up to a very striking number. The largest disputed sum is with the customs and excise department amounting to Rs 1 bn -no less. Separately there is a similar dispute amounting to a sum of Rs 208 m and so on. Whether the charges will stick or not is another matter.
The company has for some time now been delisted for trading, but there are still some diehard minority shareholders counting on better times. The holding company Carrier Corporation and its subsidiary together hold some 96.4% of the outstanding capital of Rs 1.06 bn. Internationally, Carrier is a large conglomerate. Besides the holding company, there is an ultimate holding company going by the name United Technologies Corporation -a top of the line American Fortune 500 company. The company also boasts 34 fellow siblings including six companies based in India. The Indian fellow siblings are UTC Fire and Security Ltd, Otis Elevator Company, United Technologies Corporation Pvt Ltd, Carrier Race Technologies Pvt Ltd, Agnice Fire Protection Ltd, and Chubb Alba Control Systems Ltd. There are three other associate companies based in India. Carrier Airconditioning has no shareholding in any of the desi based affiliates.
I do not know on what basis the company classifies group entities. For, there is a company based in India called Carrier Media India Pvt Ltd to which Carrier Airconditioning has sold some of its room air-conditioning business during the year for a net consideration of Rs 538 m. The tangible gross block at year end of Carrier Airconditioning amounts to Rs 837 m, down from Rs 1 bn previously. (This is over and above the assets that it sold to Carrier Media in the preceding year). Carrier Media India does not feature in the list of fellow siblings. As a result of the sale of its productive assets, the company produced only 96,326 room ACs during the year against 198,355 units produced previously. The purchases of ACs for resale declined only marginally to 65,320 units from 70,862 units previously. In any event the total volume sales were sharply lower. What is the real game plan here please? There is yet another group company called Foshan Midea Carrier Air-conditioning Equipment Co. Ltd -which is a joint venture between Carrier and a Hongkong based company. This entity also does not find any mention in the group listing.
The company’s India operations are run in true MNC fashion-very cut and very dry if I may add. And since almost the entire share capital is held by the parent there is no one to question. Fair enough. There are many inter-se transactions with group companies both on revenue and capital account for starters. This includes moneys doled out to siblings. Carrier Airconditioning is both debt free and cash rich to boot, and so what the hell-do what you wish.
How the revenues tote up
The company registered lower revenues in the current year than in the preceding year but that appears to be because the company is being stripped of its productive assets or some such. The revenues from operations from net of excise clocked in at Rs 10.3 bn against Rs 12.1 bn previously. Other income tossed in another Rs 194 m against Rs 138 m. The revenues are inclusive of large purchases of finished goods - from group companies for resale. Not surprisingly, the company earned a lower pre-tax profit of Rs 886 m against a pre-tax profit of Rs 1.1 bn previously. (It is impossible to get a fix on the consumption cost of inputs relative to the revenues earned from manufactured goods, given the manner in which the various schedules have been presented. It is equally difficult to arrive at a gross margin on purchased goods sold for the same reason).
The breakup of the gross revenues reveal product revenues of Rs 7.67 bn, Service income of Rs 3 bn, and other operating revenues comprising of commission income and scrap sales of Rs 173 m. (There does not appears to be any direct relationship between product sales and service income, from the available evidence). On a product wise basis, the revenues comprise of sale of room air conditioners, chillers, stabilizers, truck refrigeration, freezers and condensers. At the top of the heap are the revenues from room air conditioners, followed by stabilizers, and freezers. One may add here that the contribution of other income - consisting largely of interest income on surplus invested funds-was rather healthy at 22% of pre-tax profit against a much lower 12.4% previously.
On a ‘business segment wise’ recording of the revenues and expenses, one finds that the refrigeration segment lost money, while the transport segment just about made some money. It is the air-conditioning segment which made all the moolah. And wonder of wonders, this segment is being slowly stripped of all its productive assets. Is the larger plan to turn this company into a shell or what? If so, then the management is well on target.
Routing of purchase and sales
The profitability of the company to a large extent will also be decided on by the American parent. It routes purchases and sales through group companies. Consider the statistics for a moment. The company purchased goods worth Rs 1 bn from group companies. Probably this refers to manufactured goods. The total purchases of all finished goods amounted to Rs 2.8 bn. The value of imported raw materials and components in toto amounted to over 75% (Rs 1.9 bn) of all material consumption. The value of imported stores consumed amounted to 70% (Rs 891 m) of all such consumption. The total value of imports-including materials, finished goods and capital goods amounted to Rs 4.1 bn against Rs 5.5 bn previously. It is not known why there is such a top heavy dependence of imported materials to make the final product. This is especially so, given the gyrating rupee/dollar parity rate. Not surprisingly, no dividend was declared.
However, working capital wise the company is a very well run ship. As I had mentioned earlier it has no debt, hence there is no interest burden. It has some Rs 1.8 bn in surplus cash at year end, besides having advanced some Rs 576 m worth of interest bearing dosh. The cash flow statement reveals a company generating cash from operations which is far in excess of its requirements for capex. The trade receivables at year end at Rs 1.5 bn are lower than the trade payables of Rs 1.7 bn as should be the case with a company which is a dominant player. The gross current assets at year end are however much higher than the gross current liabilities, but that is mainly because of the excess cash on hand on the one hand, and the loans advanced to its siblings.
A very difficult call
It is difficult to take a call on this company since it is totally at the mercy of its principal shareholders. The minority shareholders are well - very much in the minority. One hopes however that this company is not taken to the cleaners by its overbearing owners. That in itself would be an achievement.
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.
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