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Piramal Glass: Not quite moulded to perfection - Outside View

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Piramal Glass: Not quite moulded to perfection
Jul 13, 2010

Vision Vs Reality
The company’s vision is to be amongst the top three speciality glass manufacturers in the world. It does not say by when though! A global market size that it estimates is currently in the region of US$ 5.6 bn or Rs 252 bn approx. Its growth drivers are in the industry segments of cosmetics and perfumery business, pharmaceuticals, and speciality food & beverages. It’s catchword, to go with the times is: Fired by Imagination - Moulded to Perfection.

In 2009-10, Piramal Glass (PG) along with its wholly owned subsidiaries, Piramal Glass USA and Piramal Glass Ceylon, ratcheted up a consolidated turnover of Rs 11 bn or US$ 245 m, but barely squeezed out a profit before tax of Rs 87 m. This net profit has to be juxtaposed with the preceding year’s loss of Rs 1.2 bn. Two other American subsidiaries and an English subsidiary also exist, but for some unknown cosmetic purpose. Subsidiaries also come at some cost. The Indian parent at year end had given corporate guarantees to banks worth Rs 2.9 bn, on behalf of loans availed of by Piramal Glass USA.

Colourful Past
PG has had a long and convoluted history. The company has convened its 12th AGM in June 2010 - but the new avatar is nothing more than old wine in a new bottle. Originally christened as Gujarat Glass, it was acquired by Ajay Gopikisan Piramal of Nicholas Piramal in 1984, from its shortsighted promoters, as a neat fit, to his mainline pharma business. From then on, it was apparently shortchanged time and again, before being relisted for trading once more in 2008, as Piramal Glass. The company was briefly in the news on market rumors that Piramal is seeking to exit from his rejuvenated glass business, in tune with his recent big ticket pharma deal with Abbott Labs.

The Present Is Almost As Colourful
In a manner of speaking, our industrialists never fail to amuse. In August 2009, PG made a rights issue of 62.94 m equity shares of Rs 10 each in the ratio of 7 shares for 2 shares, just as the company appeared to be operationally coming out of a prolonged rut. In that month the share price touched a high of Rs 95 on the NSE, which also coincided with the rights issue price of Rs 30 per share. The promoters hold 77% of the equity. The issue was to reduce its high gearing, which was impairing the company’s ability to service its debt. The rights issue, on paper, was thus made at a significant discount to the open market price of the share on a cum rights basis. But the proceeds of the issue amounting to Rs 1.8 bn chipped in to repay debt of a whopping Rs 3.4 bn. Also giving a generous helping hand in achieving this landmark it seems, was the decision of PG to extend less financial leeway to other group companies. One may add here that the share price movement in the run up to the rights issue and, the post issue price movement too, add to the ‘aura’ of the management.

Some forward planning
The directors’ were however also thinking out of the box, long before the parent was able to hobble along on its own. It acquired a glass making unit in Sri Lanka in 1999, and followed it up by acquiring an American glass unit in 2005, and so on. The parent is streets ahead of the rat pack on the profitability front, while the others are still haemorrhaging, but appear to be on the mend. The primary emphasis is on generating overseas sales. Consequently 74% of the consolidated turnover of Rs 11 bn for the latest year was export generated, and the concentration is on generating income from the big international brands. The kingmaker, PG, generated close to 60% of its gross sales of Rs 6.8 bn from exports.

But generating export sales also puts an unnecessary burden on companies who hallucinate that they can outsmart the forex market by taking forward and option contracts on currency fluctuations - which really is a mugs game. PG lost a more than cool Rs 540 m during the year when the market went in the opposite direction. In this specific case the company may have well taken a position on raw material imports too - imports came to a shade over Rs 400 m.

Future Imperfect?
How the company or the PG group plans to move forward and generate additional sales (and help in achieving its vision statement) in the coming years has not been spelt out. Will it go in for more value added products or, an increase in capacity addition, or some such combo? There is also, for example, no way of knowing the installed capacity utilisation of the parent. The installed capacity is given in metric tonnes , the production is given in million pieces (lakh pieces in the preceding year) while the quantity sales figure is given in some other unknown denomination! So much for the efforts made in preparing the audited accounts. The management also says that the glass industry is both highly capital and energy intensive, but there is not much of an effort in revving up its fixed assets. The effort presently is only on getting its finances in order. Incidentally energy costs in the glass industry are more than the cost of salaries, going by PG’s annual report.

As things stand today it is not exactly the best of companies for investors to sink their funds into, but the moot point is what plans Piramal has for with PG in the new scenario. Will he sink a teeny weeny morsel of the lucre that he got from Abbott, into PG, and then do a makeover on PG, in which event one has to reassess ones investment options, or will he take it private, or perhaps even jettison his stake if he gets the right price? Questions that do not readily beget straight answers. 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.

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.
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