Lotte India: Needs to work on a win-win formula - Outside View by Luke Verghese

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Lotte India: Needs to work on a win-win formula
Jun 30, 2011

Selling a basic FMCG concoction

Lotte India Corporation is selling a basic FMCG concoction - sweets and toffees, but something is not quite right in this company. More to the point, the company is unable to come to grips on generating a steady cash flow at the all important bottom-line level. But, more on that further on in this diatribe. For eons it was known as Parry's Confectionery, till the Murugappa family in January 2004 hocked the family stake in this homespun top of the mind recall brand to Lotte, as a part of the consolidation of its group operations. (The Murugappas acquired control of the EID Parry group in the early 1980's, care of the then finance minister R Venkataraman). The family had a little over 60% stake in Parry's Confectionery. The company is now a 98.4% subsidiary of The Lotte Confectionery Company of South Korea, which claims it has overall group revenues of US$ 1.5 bn. Needless to add, given the stranglehold shareholding of the parent, the company also figures in the delisted category for trading in the Indian bourses. But there are still some 2,787 oddball domesticated shareholders, including banks, institutions, private corporate bodies and individuals, who still own a piddling slice of the voting stock.

Merger with Lotte Foods

During the latest truncated accounting period of 9 months, this lilliput of a company for some reason merged the operations of Lotte Foods India Pvt. Ltd with it. This merger also led to the company reporting a post-tax loss of Rs 62 m, after providing for a deferred tax provision of Rs 66 m. The due process of 'Mergers and Acquisitions' invariably leads to bewilderingly weird accounting entries, and can have the effect of changing water into wine, or vice versa. During the year the company also issued 5.8 m shares to two holding companies of the parent as a part of the merger deal perhaps. The shares were apparently issued at Rs 70 per share, or at a premium of Rs 60 per share on a face value of Rs 10 each. The total funds inflow on this count was Rs 405 m. This was a very well timed receipt. It also led to an accretion in the paid up equity to Rs 96 m from Rs 38 m previously, and as stated earlier it increased the holding of the parent many fold. And through a rather convoluted route, as is the case with any merger, the general reserves rose by close to Rs 4 bn!

This merger, on the face of it, does not appear to have led to any increase in the number of products that it puts out in the market. That is to say the number of items that it is licensed to make, and their licensed capacities remain static (of the items where capacities are mentioned) over the two years. But the merger resulted in an addition to gross block by a 'gargantuan' Rs 2.6 bn. I use this word specifically as the company boasted a gross block of only Rs 1.3 bn prior to the merger. The directors' report however states that as a consequence to the merger, the company now has the facility to manufacture 'Choco Pie' in India. But this facility to manufacture it in India was there even before the merger, right? Besides there is no mention of how this item will contribute to the overall health of this company. Hopefully however it will be a game changer. Pictures of the Choco Pie are liberally splashed on the front cover of the annual report.

Revaluation of real estate

The company also decided to revalue it landed assets during the year which resulted in an increased valuation by Rs 933 m to Rs 1.3 bn. What purpose is served by this exercise and at this point in time is however not known, as the viability of the company does not go northwards as a result of such accounting entries. The point is also that the company is debt free and has been so for the last three years to boot.

What is definitely known is that the company is simply unable to manage the bottom-line. A look at the snapshot figures of its financials over the last ten years is a pointer here. In four out of the ten accounting years it dunked, recording a loss after tax. One good reason for this could be the fact that it apparently forced to give large discounts to retailers, perhaps for effecting sales. In 2010 it gave discounts to the tune of Rs 1 bn against Rs 1.3 bn previously. This is not small change by any yardstick. Why the company is forced to do so inspite of its branding, or whether this is the industry market practice has not been explained. What is illuminating here is that it grew its top-line steadily in each of these years. The top-line grew from Rs 996 m in 2001-02 to Rs 2.3 bn (on a rough annualized basis) in 2010. But the post tax profits took a diversionary see-saw route. For whatever reasons, the company has also not ingratiated the shareholders dividend wise in the last decade- skipping dividend payment ten years in succession. Thus the company is in 'default' on dividend account both under the tutelage of the Murugappas, and now under the Lotte management. It is therefore all the more incredulous that among its shareholders are those classified as banks, institutions and bodies corporate.

A genuine problem

The company does have a very genuine problem on hand. It is able to exercise little control over the cost of raw material inputs. Surprisingly however, the cost of sugar, its second biggest individual input item cost , went up by only 8% per quintal over that of the preceding year. The biggest cost increase was recorded in an item called 'Others'- which incidentally is the single biggest input cost. One cannot put an exact finger on the unit cost increase, as the quantity consumed is not mentioned, but still the increase is dramatic, a 45% escalation. Perhaps the management would like to shed some more light on this aspect. Input costs of both glucose and processed milk also went up sharply.

Juxtapose this with the 'gross' price increase that it realized on unit sales. The item classified as Toffees accounted for 78% of all sales rupees wise, with Confectionary items bringing in another 18.6%. Traded goods brought in the balance trifling. In an apparent effort to reduce costs, some part of the toffees and confectionary items are processed outside- the exact extent is unknown. The company could only eke out a marginal increase of 4% per quintal on the toffee sales. It is another matter that it could record much higher margins on the sales of confectionery items. A big player here inspite of its relative insignificance is Traded Goods. In the preceding 12 month accounting year it would have realized a gross margin of Rs 122 m. In 2010 it added only Rs 28 m to the bottom-line. But that was because there was a drastic reduction in the quantum sales of this item- no explanation is forthcoming for this anomaly in the Directors' report.

Debt free

Probably realizing the difficulties that it will have to put up with in the Indian market, due to the acute competition emanating from others, including two bit players, or perhaps as a part of the group policy, the management has very sensibly decided to free the company of all debt. The other bigger issue is the low value addition that its products offer, the fairly simple technology that its manufacture entails, and the lack of any clear Unique Selling Proposition (USP). What the company has going for it at the same time is that it is able to almost sell its products cash down, while being able to negotiate credit terms for what it buys. This helps to contain working capital costs, and is in all probability a positive follow through of its branding.

What the merged entity will throw up in the New Year will be of interest. Obviously the parent had positive plans of its own when it affected the big merger in 2010. We will know soon enough how events pan out.

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 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.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Lotte India: Needs to work on a win-win formula". Click here!

  

More Views on News

Adani Wilmar IPO to Hit the Market Soon. Should you Apply? (Views On News)

Nov 29, 2021

The parent company of the brand Fortune is set to raise Rs 45 bn from the market.

What Happens if ITC Hives off ITC Infotech? (Views On News)

Nov 20, 2021

The cigarette to hotel conglomerate is reportedly mulling the demerger of its software business at a valuation of around Rs 250 bn.

What Sparked an 8% Rally in ITC Shares Today? (Views On News)

Sep 16, 2021

ITC did not participate in the rally after the second wave and continued to underperform its peers. Is this about to change?

HUL's Marketcap Tops Rs 6 Tn. Key Factors Driving the Stock (Views On News)

Aug 21, 2021

HUL became the fifth Indian company to achieve the milestone of a Rs 6-tn market capitalisation.

Godrej Consumer Products Shares Decline Post June Quarter Results (Views On News)

Aug 5, 2021

Adi Godrej, the Chairman of the Godrej Group, has decided to step down from the board of directors of the company.

More Views on News

Most Popular

These 5 Penny Stocks are Held by Rakesh Jhunjhunwala. Worth a Look? (Views On News)

Jan 18, 2022

Rakesh Jhunjhunwala is holding these penny stocks in his portfolio for several years now.

4 'Digital India' Stocks to Add to Your 2022 Watchlist (Views On News)

Jan 28, 2022

Digitisation is touching every aspect of our lives. As this megatrend picks up pace, there will be companies benefitting from it for years to come.

Tech Mahindra's CTC Acquisition: Too Expensive? (Views On News)

Jan 18, 2022

Tech Mahindra's acquisition of European IT-company fails to excite investors.

5 Hidden Tata Group Companies to Add to Your Watchlist (Views On News)

Jan 18, 2022

Here's all you need to know about these five Tata group stocks that aren't as popular as the others.

Insiders are Buying into these 6 Stocks Aggressively. More Details here... (Views On News)

Jan 19, 2022

While promoter holding is an important parameter, it should not be the sole reason for buying a stock.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

LOTTE INDIA CORP SHARE PRICE


Jul 23, 2009 (Close)

TRACK LOTTE INDIA CORP

  • Track your investment in LOTTE INDIA CORP with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

MARKET STATS