A disparate business
This is about as disparate a company as any one will come across. A hotchpotch of businesses curiously named as Triveni Engineering Spread over 11 manufacturing locations, the operations encompass sugar mills, co-generation units, a distillery, steam turbines, high speed gears and gear boxes, and reverse osmosis/waste water treatment plants. The wonder is that this 75 years young company still runs its business as a composite. And the overseer is the long time Lord of the Manor, Mr. Dhruv M Sawhney, almost smiling at the shareholders from the corner office through one of the glossy pages of the annual report. (There are some 52 glossy pages in all putting across the top gun's mantra to the shareholders.) The promoters control 68% of the paid up equity of Rs 258 m, and the company has three executive directors - all three sporting the surname Sawhney. Also holding an office of profit is Rati, the wife of the Chairman. The family is also well remunerated for their perseverance.
The good news is that the management has belatedly wised up reluctantly to the idea that the steam turbine division is better off as a separate entity, especially following the tie-up with GE to make superior turbines. (G.E. will take a minority equity stake in the new venture). But the hunger to diversify in any which way is as strong as ever. The newly formed turbine business is foraying into the Palm Oil segment in South East Asia of all things! Anything goes is more likely the company motto.
Sugar and Engineering
The company clubs its multifarious businesses under two heads - Sugar and Engineering. The sugar business consists of its 7 sugar mills capable of crushing 61,000 TCD (tonnes crushed per day) of sugarcane, co-generation plants from bagasse, and a standalone distillery. The rest of the activities get lumped under the generic 'engineering' nomenclature. The manufacturing locations are spread across Uttar Pradesh, Noida, Bengaluru and Mysore. Its performance results for the last 5 years are almost as diverse as its business activities and its locations, based on the snapshot results that the company has appended.
How to make the accounts look attractive
The last 5 year results include an odd year where the working was tabulated for 18 months. That was because the company considered it undignified to declare a loss in its working for the 12 months ended March 2007, and hence extended the working by 6 months. The elongated life line was sufficient enough to enable the management to resort to the great Indian rope trick and cobble together a bottom-line splashed in black ink. Though the top-line has shown a consistent increase in each of the 5 accounting years, the profit before tax was on a roller coaster ride for sure. The operating profit margin oscillated from a high of 24% in the financial year 2008-09 to a low of 11% for the very latest year. The good news for the minority shareholders is that the dividends were kept at a steadily increasing clip, barring the latest year, when it dipped to 75% from 100% previously.
From the data that the company has provided in the annual report it is the sugar business -period - which appears to do the company in or out. (The company tries to make amends by stating that the sugar operations are partially de-risked from the cyclicality of the sugar industry through integrated operations of sugar making, cogeneration and distillery functions. All major sugar plants do a similar in any case. Besides, the quantum of de-risking that the company has done in this manner is not readily visible). The other businesses - co-generation, distillery, steam turbine, gears, and water treatment are all recording positive margins. In 2009-10, out of a total turnover of Rs 24.5 bn based on the snapshot of the product specific working results, the sugar division accounted for 57% of all turnover, followed by the steam turbine segment with 23%, water treatment segment with 7%, co-generation with 6%, the gears segment with 4%, and bringing up the tail end was the distillery division with 4%. The individual contributions in the preceding year were not much different.
Sugar is very flummoxing
The sugar industry is more intriguingly flummoxing than any other manufacturing segment, and one wonders why any sane entrepreneur would want to muddy his or her hands by slithering into this vacuous business. But there is no dearth of entrepreneurs who are only too keen to rush in pell mell. There are obviously other extraneous spinoffs here. The brief financials of the sugar division that Triveni has separately furnished makes for a bitter sweet masala mix. This is also one industry where there are several variable parameters. The price paid for sugar cane and the yield per tonne of cane crushed for one. And the possibility that the more sugar you produce, the higher the loss you may sustain on sale for another.
The latter is the fallout of both the quantum of the levy quota, and the price per ton that the company realizes on the levy quota, as also the open market price of free sale sugar. (The sugar industry is inextricably woven into the political economy). Triveni has achieved the feat of producing more sugar but incurring a large loss, against a profit previously. Which begs the question as to why it did not cut down on the production of sugar when it knew that the going was getting rather hot under the collar? This becomes all the more suspect as apart from crushing more cane, the company also made more sugar from processing raw sugar-in all the total production was substantially higher.
The sugar industry in its travails has to make the best of the State Advised Price (SAP) and Fair and Remunerative Price (FRP), and the levy quantity of sugar that it has to make available in the open market at a discounted price, and finally the free market price of sugar. The SAP for sugar cane is mandated by the state government concerned, while the FRP, and the levy quota and price, is at the discretion of the Central Government. Given this hotchpotch, the financials of its sugar operations are most revealing. Turnover rose 12% to Rs 14 bn. It led to an operating loss of Rs 573 m, against a profit of Rs 2 bn, or a very sharp negative turnaround of Rs 2.6 bn. The landed cost of cane rose 65% to Rs 2,538 per metric ton, but the production of sugar upped 50% to 505,000 tons! It sold a substantially lower volume of 437,000 tons against 526,000 tons previously, while the average price realized rose 31% to Rs 28,310 per ton!
The company may have however deliberately sold less sugar anticipating a higher price in the current year due to the perceived sugar inventory levels. But the footnote to the accounts adds to the intriguing tale. It states that the sugar inventories have been written down by Rs 558 m during the year, as the realizable value is lower than the cost of production and impacting the profit to that extent! What is one to make of all this please? For the matter of record the sugar inventory at year end has been valued at Rs 25,240 per ton against Rs 21,028 per ton previously.
The several imponderables
There are several other imponderables about its latest financials. The company has made an extraordinary profit of Rs 440 m during the year from the sale of 'long term trade investment'. Presumably this refers to the sale of investments coming under the heading of 'Investments' that the company held at the preceding year end. But the Investments schedule does not show any depletion during the year in its holding held in long term investments which could have led to such a gargantuan profit. As a matter of fact the only depletion is in the book value of its holding in 'Unquoted Current investments' labeled as 'Other Than Trade' of the value of Rs 155 m. The only other investment which showed a change was the depletion of its holding in Carvanserai - a long term unquoted trade investment - of the book value of Rs 3.6 m. If indeed it has made a made such a humungous profit on the sale of this investment then it must surely rank as the sale of the century. In any case it is imponderable that the sale of these instruments together could have led to such a mega profit. (Separately, elsewhere, a foot note states that it has made a profit of Rs 352 m on the sale of a long term trade investment in erstwhile associates).
The company has also rolled over its money during the year by buying debt securities worth a sizeable Rs 2.4 bn, and then selling the securities for an equivalent amount. In other words it did not make a dime on this transaction, or lose a dime for that matter. What exactly was the purpose of the rollover of this money? Was it perchance chasing an elusive mirage here?
Lower Finance Charges
How the company managed a lower outlay on finance charges in the latest year is very perplexing indeed. Take a dekko at the statistics. It paid out on revenue account interest charges of Rs 850 m (Rs 1.2 bn previously) in a year in which the year-end borrowings were higher by Rs 1 bn at Rs 9.3 bn and when the sugar division was bleeding the company red. The latter alone would have very severely dented its cash flow. The cash flow generated from operations during the year was down to a mere Rs 25 m against Rs 5.4 bn previously. But full marks nevertheless to the finance guys for their nimble footwork. Why could not the finance department be as fleet of foot in the preceding year?
Its subsidiaries and associate companies re another colorful lot by and large. It has investments in five subsidiaries and investments in a further three affiliates. The total book value outlay on these investments at year end was Rs 111 m. Barring Triveni Turbine in which it has an investment of Rs 100 m the rest are what we call colloquially as 'naam ke vaaste' outfits. The subsidiaries have been incorporated with high sounding names and apparently with some intent but have little as yet to show for it. The company has furnished the brief financials of four subsidiaries. Only Triveni Turbines has recorded any revenues in the year past. It has shown a turnover of Rs 15 m, and a loss before tax of Rs 45 m. It has accumulated losses of Rs 259 m on a paid up equity of Rs 100 m. Not a bad start at all. What plan it has for the other siblings is not known. Its piddly investments in its three associate companies also appear to be moribund. But then these are mere trifling matters.
It will help if the management is able to get a hold of itself and divest the non sugar and its allied operations into a separate company as it has done with the turbine division. All in all it is a very unimpressive state of affairs.
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.