The 75 year old Indian sibling which has wisely chosen to ride out into the sunset from the perspective of listing in its platinum jubilee year
Delisting from the Indian bourses
This is my second take on Alfa Laval (India) Ltd having first covered its financial results for the 12 months ended December 2010. In the interim the company organised a buyback of shares from the Indian public offering a price of Rs 4,000 for each equity share tendered. The offer went down well with the desi shareholders and the parent Alfa Laval Corporate AB, Sweden, was able to hike its stake in the Indian sibling to 94.45%. Following the increase in the stake holding the company delisted its shares from the local bourses from April 2012. Thereafter an exit offer was made for the remaining minority shareholders and as on January 2013 the parent held 97.73% of the paid up equity capital of Rs 181.6 m. The company seems very intent on a full buyback of its public holding of shares. But there are still some diehard Indian shareholders still clinging on to their shareholding and this copy is for them. I may add here that the first visible causality of the delisting process is the forgoing of any dividend payment for the just concluded year. This may well be the beginning of the shape of things to come.
The product range
The company specialises in the manufacture and sale of capital equipment---separators, decanters, heat exchangers, fabrication equipment, fittings and other parts, and manufactured components in the main. The item classified as spares is bought out and resold. The other major revenue accrual is an item labelled as bought out/erection items. Then, at the relatively minor level there is income from ‘maintenance and other services’ of Rs 93 m against Rs 61 m previously, and income from scrap sales of Rs 54 m against Rs 64 m previously. The products on offer are used in a host of industries ranging from food and water supply, energy, environmental protection, and pharmaceutical industries. Together, all the items on offer including ancillary services brought in gross revenues of Rs 10.45 bn against Rs 11.47 bn previously. Separately, other income added its mite by contributing Rs 289m to the top-line against Rs 409 m previously-a wide variation. The two big contributors here are ‘export benefits’ at Rs 63 m against Rs 85 m previously, and ‘customer settlement and excess liabilities’ written back at Rs 72 m against Rs 50 m previously. There is no set pattern in all this.
The company makes a variety of equipment all of which appear to be of significant importance to its ability to earn its bread, but it is not known however whether each of these items is also interdependent or independent of the other. For example, for each separator that it manufactures does it also have to make a decanter, and so on. In any event the company sold less by value in 2012 than in the preceding year. Why this should be so has not been suitably explained. Then there is an item called Contract Revenue which in 2012 amounted to a sizeable Rs 2.45 bn which again is difficult to track. This is followed by ‘Service income’ and ‘Scrap sales’ which also contribute to the top-line in some haphazard way. Simultaneously, the company also bought and sold manufactured items like heat exchangers and spares during the year, as is the practice. The company bought items worth Rs 441 m and sold items worth Rs 781 m. On a fairly good reckoning the company would have made a hefty gross margin of Rs 340 m on this exercise. The margin that it would have made in the preceding year is not known due to the lack of data. It becomes impossible to get a fix on how the revenues tote up at the end of the year given the manner in which all the incomes add up. The ‘other income’ which again can vary significantly accounted for 17% of pre-tax profit against 22% previously.
A complex generation of incomes and expenses
If the income side is difficult to comprehend, then the expenditure side is just as tricky. There is a significant item called ‘subcontractor charges’ which features under two heads of account. Probably there is a very valid reason for doing so. Then there are such imponderables as liquidated damages, and warranty charges which collectively run into over Rs 100 m, and IT charges of Rs 110 m --which appears to be entirely outsourced. Compounding the issue is the substantial inter-se transactions with group companies.
The sale of products and services to group companies amounted to Rs 3.6 bn while the purchase from group companies amounted to Rs 862 m. The value of such sales amounts to close to 38% of gross sales which gives an indication of how the group companies are interlinked. It is possible that all the traded goods bought for resale were entirely sourced from affiliates. What is interesting in this masala mix is that the trade receivables accounted for 21.5% of group company sales while the trade payables accounted for 32% of group company purchases. That is to say it gets more leverage to pay its dues than it gives credit for revenue receipts. Is this deliberate or accidental please?
There are numerous other group company debits and credits on revenue account which do not have to be gone into in detail-barring driving home the point that the Indian sibling cannot exist without group support. It is all planned down to the letter T. One may add here that the annual report has furnished the names of 71 group companies, including two operating out of India with whom transactions have taken place-presumably during the year. The companies are based out of 38 countries excluding our own Bharat. The two Indian companies are Alfa Laval Support Services Pvt. Ltd, and Tranter India Pvt. Ltd. Then there are another two companies ' the holding company, and the other being the ultimate holding company. It is a pyramid structure out there.
Myriad group company interactions
The effect of the group company interactions is vividly pictured in the following footnote in the latest annual report. The note states that for the assessment year 2008-09, the IT department has passed an assessment order demanding adjustment on account of transfer pricing and other matters under various sections of the IT Act. The tax amount involved is Rs125 m excluding interest-Rs 135 m in the previous year. The company has filed an appeal with the Appellate authorities against the order. The company has also received a transfer pricing order for the Assessment year 2009-10 proposing an adjustment of Rs 22.3 m excluding interest. What about the subsequent years also please? Besides these contingent liabilities, the company is also faced with another demand of Rs 155 m from the Commercial Tax officer, Pune towards the demand of recovery of sales tax of Rs 155 m for the period FY04, FY06 and FY07.
Financials in fine fettle
But one must also add here that in spite of the many complexities within which the company operates, the year end financials reveal a company in fine fettle. The company has no borrowings for starters. The reserves and surplus at Rs 5.86 bn towers over that of the piddling paid up capital. The cash flow statement reveals a company operating on a high. The cash flow from operations was more than sufficient to fund the capex of Rs 740 m (Rs458 m previously) and the company also indulged in some large scale purchase and sale of securities. It bought debt securities of the value of Rs 2.5 bn and sold debt securities of the value of Rs 2.1 bn leaving a surplus of Rs 412 m in its kitty. It made some money in the bargain, and this capital accretal is accounted for in the other income schedule.
Its investment schedule is divided into current investments and non-current investments. From an analysis of the two profiles it is difficult to comprehend why the company resorted to such a bifurcation as the investments in both portfolios consist of similar debt securities. But anyways the company is able to profit on two counts here. It earns a profit on the purchase/sale of securities and earns a dividend on the portfolio. The total portfolio at book value at year end amounted to Rs 977 m against Rs 549 m previously. The net increase in book value in a sense represents the additional net investment from its free cash flow.
Being in the manufacture of capital equipment, erection services and sub-contracting-- the company has quite some working capital locked up in inventories and in trade receivables. But the good news here is that it is also simultaneously able to collect substantial advances from customers for orders -- which reduces the receivables burden by a fat amount on the one hand, and on the other the fact that the amount of trade payables is almost on par with that of the trade receivables. This is also one of the few companies which bifurcates some of its assets into current and non-current-meaning out-standings over one year from the date of the balance sheet and dues within one year. The assets so bifurcated include Loans and advances, trade receivables, other loans and advances and other assets. It is, as I implied earlier, all a trifle too complex.
Singing its swan song
As I mentioned earlier, the first visible sign of the company going off the radar of the bourses is the skipping of the dividend. This may well become a permanent feature in the years to come. There are other ways of getting succour. For example, the inter-se transactions between the group companies especially on revenue account may witness a sharp spurt. And, this is also a company that barring its brand equity is more than a fistful for any analyst to decipher competently. Its very nature of operations makes it so.
But at the end of the day it is sad that another branded MNC is singing its swan song from the Indian shareholder point of view.
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.