Alfa Laval: Enduring customer satisfaction is its motto
A mere 73 years young
Alfa Laval has been orbiting around in the Indian geography for long enough now -73 years to be exact - but it is a 'slow' plodder by all accounts. Gross revenue of Rs 8.6 bn was what the top-line could ratchet up for the latest accounting year - which is a shade lower than what it recorded in the preceding year. (The year 2010 is the only year in the last decade when the gross turnover recorded a negative growth). Over the ten year time span 2001 to 2010, the gross turnover including other income moved up a mere 184% to Rs 8.6 bn, in the fag end of the decade, as compared to the figure of Rs 3.0 bn that it logged in the first year of the decade. Okay, it has a limited portfolio, a minnow so to speak, in the Indian capital goods sector. It may not be out of place to postulate that its product portfolio is deliberately kept limited by the parent, or some such.
This 89% subsidiary of the Swedish giant principally makes and sells heat exchange equipment, and centrifugal pumps (fluid separators) for a variety of industries ranging from food, water supply, oil, energy, pharma, environmental protection and such like. It is also up against stiff competition in what it has to offer in the market place. The managing director in his annual pontification to the shareholders states that the company narrowly missed out on a few major orders during the year. It is also remote controlled by its principal who is not only hydra headed but also appears to resort to bouts of benevolence when the times are wanting. (Alfa Laval India boasts 63 fellow subsidiaries including two based out of Bharat). In 2010 however, the tooth fairy was not as indulgent and the order inflows from 'foreign' fell due to the slowing of the European economies.
Indian shareholding at low ebb
It is also quite apparent that the company may be contemplating delisting and making the sibling a wholly owned subsidiary of the parent. The percentage equity holding of the parent is just below the threshold limit for delisting from the Indian bourses. Hence currying the favor of the Indian shareholders and keeping their interests in mind is more of a subliminal perception at this point of its existence. In the last decade the company has not made a single issue of bonus shares and the share capital remain at a piddling Rs 182 m. The Reserves and Surplus on the other hand is a relatively humungous Rs 4.0 bn. (One can therefore safely premise that the company is unlikely to make a bonus issue announcement in its platinum jubilee year - two years down the line). The company paid a dividend of Rs 30 per share (face value of Rs 10) against Rs 25 previously. However if and when the company does finally seek to go private, it will be compelled, so to speak, to dole out a syrupy compensation to the resident shareholders given the net asset value of the company. This is the indeed the most appetizing part of holding on to this portfolio.
Its business credentials
So how exactly does it go about its business? It produces eleven items, all inter-related - needless to add - from Separators, to a classification called Fittings & Others. It earns its bread however from flogging thirteen items. The two additional items in its marketing armory are Project/Erection items, and Spares. The second biggest revenue earner incidentally is Projects/ Erection items and it constituted 18% of gross revenues of Rs 8.6 bn. The biggest grosser is Decanters (used to separate the sediment from the liquid) and it ratcheted up 19% of all sales. The other items of significance are Separators, Heat Exchangers, and Fabrication Equipment. Sales of Spares brought in 7% of the moolah.
For the purpose of segment reporting however, this gross cash inflow is divided into two segments. The two divisions are the Equipment segment and the Process Technology segment. The former accounted for 48% of the turnover, while the latter brought in the rest. The latter also brought in 61% of the gross margin. Of the total turnover, its sales and services to group companies according to the 'Information in respect of Related Parties' was Rs 2.25 bn (Rs 2.3 bn). In percentage terms that works out to 26% against 25% previously. It sold goods and or services to 26 group companies during 2010. In similar vein the company purchased goods worth Rs 724 m against Rs 775 m previously from fellow subsidiaries.
Flawed reporting format
But the detailed reporting format that is now mandatory is flawed somewhere along the way. Separately, entities have also to specify group company specific transactions individually as a part of the disclosure requirements. If one were to total up the sales and services figure in the Related Party Disclosure schedule per individual entity, then the total sales and services figures simply do not add up. Same is the case for the total purchase figure. These form the two biggest items of transactions with group companies. Indian Corporates seem to treat the reporting requirement in a lackadaisical manner, and with no authority to oversee the fine print, it is all reduced to some sort of a joke.
Alfa Laval India's dealings with its two Indian fellow subsidiaries fall on a different footing. Tantor India is the recipient of goodies on capital account such as inter-corporate deposits from Alfa Laval India and there appear to be no other intimate transactions. What Tantor is up to is not readily known. Alfa Laval Support Services the other Indian fellow subsidiary is on to a different footing. What support services it renders to Alfa Laval is not known, and the year-end figures only adds to the mystery. Alfa Laval India appears to have rendered services to its fellow subsidiary and there are also IT charges - by whom and to whom is a bit hazy - and Alfa Laval is also due trade receivables at year end. Trade receivables are for sales affected, but Alfa Laval India does not appear to have affected any sales to its fellow subsidiary. Or am I reading the situation wrong here? It would help if there is more clarity on matters of such import.
A well oiled machine
Given its branding in the market, the company is able to elicit adequate gross margins for what it markets - even if it faces an uphill task in procuring large orders. With minimum spend on its capital assets, its ability to get moneys upfront from clients for orders placed with it, the dual ability to limit debtor dues on the one hand, and extracting credit for trade purchases on the other, and the cash box gets to jingle. So much so that the company has invested over Rs 1.3 bn in debt securities, and also resorted to buying and selling debt securities collectively aggregating close to Rs 3 bn. Besides, it had enough spare cash to dole out to help less fortunate siblings within the group, and the cash balance at year end was over half a billion bucks.
But at the end of the day there is real very little to commend in this company. Being a lackey of a multinational has its benefits and pitfalls. The benefits are that it will be kept afloat come what may, and has access to the latest technologies. But on the other hand, it is hopelessly dependent on the technology and products that the parent wishes it to make and market. There is really no indication that the parent is too keen to give its sibling a long enough rope.
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.