Two observations clearly stand out on a perusal of the latest annual report of BOC India. One, the company is unlikely to remain in the public domain much longer, given the manner in which the company is funding its mega expansion programme. The ultimate aim of the parent, Linde Group, appears to be to delist the company from the Indian bourses. It sure as hell is getting there. Linde's holding in its Indian subsidiary is just shy of the 90% mark. If it inches any higher, it will have to do the inevitable.
Two, it is engaged in a frenetic race to get to somewhere, and make a point in the process, just in time to coincide with its platinum jubilee celebrations in the offing--which comes but once in a lifetime. The company is 74 years old as of now. Unfortunately, there will be lesser number of Indian shareholders sharing in the good tidings when the eventful day arrives. The overall shareholder base has fallen to 26,700 at end 2009 from a high of over 32,000 less than 4 years ago. And in what manner BOC intends to humor its shareholders is debatable.
Much like the mythical Rip Van Winkle, the company after some deep slumber, suddenly woke up a couple of years ago to the fact that India is indeed top dog for its products and services. In its armory is a variety of industrial and medical gases on offer-ranging from oxygen, nitrogen, argon and hydrogen--- and which caters to a plethora of industrial segments ranging from metals, glass, automotives, petrochemicals, pharmaceuticals, medical healthcare and refrigeration and food preservation. Not including such emerging exotica as electronic gases for the solar photovoltaic industry. Complementing this effort is its project engineering division.The margins earned by this division are less than half that of its main line business.
Rushing pell-mell into the emerging sweepstakes in an effort to cotton on to a large slice of the unfolding market and realizing that approaching banks to fund its capex may be time consuming, it was left to its German parent to do the honours. What hastened its decision, the management complains, are the determined efforts being made by other MNCs to muscle into the market in a hurry. The changing scenario of large captive consumers like steel and refinery sectors increasingly outsourcing their gas requirements to gas specialists, suddenly added exponentially to the financial demands on the company, which the cash generated from operations was simply unable to service.
To make the expansion as financially painless as possible, it then issued shares at a considerable premium--- from the company's point of view--- to the parent (the securities premium reserve currently stands at a most respectable Rs 7 bn in an overall reserves and surplus scenario of Rs 9.7 bn) and availed of a large bridge loan from the same source. It simultaneously said ta-ta to the desi loan providers. Following the fixed asset expansion, the gross block rocketed from Rs 5.9 bn in end 2006 to Rs 14.9 bn in end 2009.
This capex is bearing fruit at the topline (sales rising to Rs 8.2 bn in 2009 from Rs 5.7 bn previously), but is not extending its way down to the bottomline-even after discounting the play that 'other income'and 'interest income' has on its bottomline. With the increasing competition that it has to deal with, margins are under pressure. An increase in the provision for depreciation will also weigh in, in the future, on the expenditure side. Creditably, the number of employees has actually declined to 666 numbers in end 2009 from 722 numbers in the preceding year. It very wisely got rid of some of its highly paid older staff and introduced fresh, young blood at a much lower outgo. Probably in anticipation of tougher times to come, on the bottomline with each passing year, the management very thoughtfully sets aside a large part of its post tax profits each year as ' Profit and Loss Account carried forward' .
The company, like all subsidiaries of MNCs has to parcel out its 'revenue income' and 'expenditure' to a spate of other subsidiaries of the parent (32 according to the annual report). Capital goods and component supplies also flow in merrily from the parent or some such. The accounting then is as complex as it can get. Adding to the accounting complexity in 2009 is the finance lease agreement that it signed with one of its clients for the capital goods that BOC supplied.
For the present, the company continues to think ahead in a supercharged mode.The Notice to the Annual General Meeting states that the Board intends to seek an increase in its borrowing powers to Rs 15 bn to part take care of its future financial needs as it intends to bid for mega projects for the supply of gas on a 'Bid, Own, Operate' programme. Given the current level of cash generation from operations it would be wise on the part of the management to carefully plan its debt: equity gearing.
Disclosure: Please note that I am not a shareholder of this company
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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