The company is operating in a very vital market segment but it is unable to gain any traction on the margin front
Among the biggies in the agrochemicals sector
Rallis India is a 64 year old Tata group owned company and it is in the business of marketing agrochemicals. The company is an outright subsidiary of Tata Chemicals, with the latter holding a shade more than 50% of its paid up equity of Rs 194 m. Tata Chemicals is also the ultimate holding company of Rallis India. Rallis is the third largest player revenue wise, in its chosen profession among the listed companies, according to the data culled from Capital Market magazine. The company markets pesticides, plant growth nutrients, and seeds, which it makes both in-house and also outsources to get more traction. The company also boasts of two subsidiaries whose collective value addition to the consolidated sales total adds up to very little. It is also a bit player in stock market parlance, evincing very little interest in the secondary markets. But to the company's credit, the current eminence grise of the stock markets, Rakesh Jhunjhunwala is a bulge bracket shareholder. Barring Tata Chemicals, he is the only other shareholder holding more than 5% of the outstanding share capital of Rs 194 m. Rakesh's holding in the company tunes in at 6.4%. Probably he is able to spot some critical aspect of its insides which the market is blind to.
Operating in a competitive sector
The company is also apparently operating in a very competitive market from what one can make of its operational statistics. In 2007-08 the company posted revenues of Rs 7.4 bn, excluding other income that is. In 2011-12 the revenues had grown to Rs 12.3 bn or an increase of 66% over that of the base year. The growth in profit has however not kept pace. That is to say the pre-tax profit laboured to grow from Rs 1.5 bn to Rs 1.7 bn over the same time span. The pre-tax profit in 2011-12 was actually lower at Rs 1.7 bn, against a pre-tax of Rs 1.8 bn in the preceding year. Other income which was a very significant player in the profit generation in the preceding years has lost quite some steam of late. In 2007-08 other income at Rs 1.1 bn accounted for a whopping 76% of the pre-tax profit. Since then other income has taken a back seat, as the company apparently rejigged its operational parameters. This appears to be a remarkable achievement, no less. In 2011-12 such other income) accounted for a far more sedate 22% of pre-tax profit. One must add here however that the company uses very different classifications in different schedules to quantify incomes.
Dependence on imports and exports
The way this company pans out its purchases and sales makes for a heavy dependence on import of raw materials and in the exports of finished goods. The vast bulk of its product sales are of the in-house variety, with outsourced goods accounting for only a trickle in a manner of speaking. Manufactured sales accounted for close to 90% of its gross revenues, while traded goods brought in another 8%. Sundry other operating incomes including scrap sales, export incentives, royalty income which is not there in the preceding year, and, a curious item called discounts earned, brought in the balance 2.3%. What in heaven's name is this income? This is the first company that I have surveyed which accounts for an income by this name. It has also given discounts to push sales.
In manufactured sales, it is pesticides - both of the solid and liquid variety which rolls in the bulk of the revenues. This is followed by a categorisation called plant growth nutrients. But the interesting bit here is that of all the raw materials consumed of Rs 5.7 bn, the cost of imported raw materials was Rs 3.5 bn. That is a considerable 62% of all raw material inputs. What exactly are these individual items of imports has not been specified. The pressing need to import such large quantities of raw materials has also not been specified. After adding value to the input cost, the company also exports quite some bit. Exports at Rs 3.8 bn accounted for a neat 31% of all manufactured and traded sales. A small percentage of its sales were to the holding company. One may add here that the company would have made a gross margin of Rs 247 m on traded sales of Rs 1 bn. But the bet is that at the end of the day it did not make very much on this exercise.
Pre-tax profits take a beating
As stated earlier, the pre-tax profits took a beating, but it is more due to extraneous circumstances. Such as the drop in other income to Rs 75 m from Rs 135 m previously, while finance costs rose some 240% to Rs 104 m, and the deprecation quantum accelerated by 58% to Rs 271 m. According to the fixed assets schedule, there was a massive addition to gross block of Rs 1.6 bn during the year. (In reality the addition to gross block including capital work in progress was lower at Rs 503 m against Rs 1.3 bn previously. The total gross block addition in the two years together amounted to Rs 1.81 bn). But the addition to gross block in 2011-12 appears to be skewed. Addition to buildings amounted to Rs 931 m, while the addition to plant and machinery was smaller at Rs 697 m. This addition to gross block led to a peculiar situation on the manufacturing front. The capacity to make solid pesticides rose 20%, while the capacity to make liquid pesticides fell 18%! In line with this the production of solid pesticides rose while that of liquid pesticides fell. The capacity of the plant growth nutrients facility is not shown, but the production fell during the year. A rather strange situation if one may say so. And, as to why the depreciation provision soared by 58% on the basis of the gross block addition is not readily known.
The borrowings at year end moved up by 25% to Rs 1.1 bn. But as stated earlier, the interest costs paid out and debited to the profit and loss account soared by 240% to Rs 104 m. This payout too is a bit of an oddball, as the company has a very unique way of financing its working capital costs. And besides, according to the cash flow statement, the company financed its gross block addition from the cash generated from operations. And, why do I state the word unique? Take a look at the statistics. The trade receivables at year end at Rs 821 m was infinitely lower than the trade payables of Rs 2.4 bn. The low level of trade receivables, amounting to just 6.5% of gross revenues from merchandise sales, also implies that the company is able to sell cash down, which for an agro chemical company is definitely a feather in the cap. Take a look at some of the other short term current liabilities that it has built up. Customer advances and deposits add up to Rs 321 m, while creditors for capital purchases brought in another Rs 101 m. It would appear that customers are lining up to buy what it has on offer. It is also a beneficiary of a sales tax deferral scheme amounting to Rs 63 m. Even the inventory levels are well managed at 18% of gross revenues, while the cash and cash equivalents at year end were only a measly Rs 105 m. The ultimate litmus test is that the current liabilities at year end were higher than the current assets. That is a sign of very astute working capital management for a dividend paying company.
Rise in borrowings
The reason for the rise in borrowings at year end appears to be because it had to finance its investments in group companies. It also took a shot at making some money by buying and selling gilt edged securities of the cumulative value of Rs 2.5 bn. If the company made any money from this exercise it is only a middling sum. It purchased non- current investments to the tune of Rs 319 m during the year. The entire sum was plonked down in its sibling Metahelix Life Sciences. At year end it had total investments in current and noncurrent investments of the value of Rs 1.8 bn. In the preceding year the investments were valued at Rs 1.5 bn. So what does it have to show for it? The total book value of its non current investments adds up to Rs 1.78 bn - almost all of it in Metahelix (Rs 1.58 bn) and in another company funded by it called Advinus Therapeutics (Rs 183 m). Advinus also benefits from debenture bond investments of Rs 10 m. Separately the parent has invested another Rs 30 m in the form of debentures in Advinus. This investment is shown under the heading current investments.
Its single biggest investment is in Metahelix Life Sciences-one of the two subsidiaries. The Rs 10 face value shares were acquired at Rs 19,778 per share, for a total consideration of Rs 1.58 bn. This company must be a pot of gold or something. The only other significant investment of sorts is in Advinus - thankfully this investment is at par value. The total dividend return on these long term investments is a princely Rs 0.2 m. This must rank as some sort of a feat in return on investment parameters.
The company has furnished the brief performance results of three subsidiaries, including one step down subsidiary. The latter goes by the name Dhaanya Seeds and it is a subsidiary of Metahelix. None of three have paid any dividend, but given their circumstances they would not have been able to part with much in any case. Metahelix is an oddball of sorts. It has a paid up capital of a mere Rs 1 m, but has built up reserves of Rs 589 m. These reserves must almost completely be in the form of share premium reserves that its benefactor paid upfront for reasons best known to it, or some such. It also boasted total assets of Rs 626 m. It laboured to crank up revenues of Rs 103 m - down from Rs 123 m previously - and posted a pre-tax profit of Rs 32 m. This begs the question as to why the parent paid a king's ransom to acquire its shares. But let that be. Metahelix's subsidiary, Dhaanya, is actually a bigger outfit than its parent, revenue wise. On a paid up capital of Rs 26 m it ponied up revenues of Rs 982 m, and posted a marginal pre-tax profit of Rs 12 m. In the preceding year it posted a pre-tax loss of Rs 134 m. It would appear from the bottom-line generation that marketing seeds is a mugs game or some such. The point is that this company also boasts of negative reserves of Rs 17 m. The other direct subsidiary, Rallis Chemistry Exports, is a no brainer. Though the parent is a large exporter in its own right, this sibling is waffling along. It has a paid up capital of Rs 0.5 m, negative reserves, and NIL revenues. Another sibling based out of Australia has been iced. As one can see, the investment in its siblings etc seems to be a totally wasted exercise.
In sum total, this is definitely not a company which will evince much interest in a discerning investor.
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.