To start at the very beginning-65% of the equity capital of Binani Cement is held Binani Industries. The latter is apparently the holding company of the Group, whose other main manufacturing subsidiaries include Binani Zinc, Goa Glass Fibre and BT Composites. But according to the latest annual report of Binani Cement, the total number of group companies is far more extensive and totals 31 entities (as required under the regulations prescribed by SEBI). These include an assorted maze of grotesquely named investment companies, which in reality are nothing more than legal conduits to help shore up the shareholding of the group, with the help of funds advanced by cash rich group companies. Included in this list are 2 companies which are incorporated in Cyprus of all places. With the group seeking to expand, the mantra is to keep shareholders as off balance as is possible.
This list of 31 affiliates for some reason does not include the names of yet other subsidiaries which are very briefly detailed in the notes to the consolidated working results. Binani Cement has 6 subsidiaries of its own, including a cement manufacturing unit each, in China and in Dubai, and 2 investment companies each in the British Virgin Islands (a tax haven), and Singapore respectively. These subsidiaries in turn are busy spinning out yet other subsidiaries in countries as far apart as South Africa, Mauritius and Indonesia among others, with the one in Indonesia apparently created to acquire a coal mine or some such. This in short is the company's practical definition of its catch line-Building Global Landscapes. How clever on the part of the management, and, needless to add, their 'tax' consultant must be one 'hellava whizzkid'.
A web of interlocking companies
The trick here is also that the 6 subsidiaries have December year ending for accounting purposes (fiscal year) and in all possibility so do the subsidiaries of these subsidiaries. The 2 foreign cement subsidiaries are of recent vintage and have small manufacturing capacities to boot (capacity of 0.5 m tonnes and 1.5 m tonnes respectively), and thus have little impact on the overall results as yet. Both capacities are currently being upgraded.
This gang of 6 however, has total assets of Rs 14.9 bn as on December 2009 and a combined turnover of Rs 4.7 bn for FY09. The total equity stake of Binani Cement in all its subsidiaries at year end was a not inconsiderable Rs 3.7 bn, on which the parent earned hardly a dime. Loans and advances due from the holding company and from its subsidiaries total Rs 1.8 bn, on which it earned a marginal interest. Besides, there are the outstanding corporate guarantees given by Binani Cement to banks on behalf of some subsidiaries which have availed of loans, with the guarantees amounting to a sizeable Rs 4.8 bn at year end. The guarantee commission payable may be fairly considerable. But then it is all in the family you see, and who is there to question any of this anyway please? There is no mention whatsoever on the need to create such a web of interlocking companies.
Vintage directors and other shenanigans
Equally fascinating is the vintage of some of the company's directors - Mr S Padmakumar is 76 years young, Dr V C Shah is only 82 and, Mr V Subramaniam is a youngish 79. The trio holds important non executive portfolios too: from audit committee to investor relations committee. All three incidentally were initially appointed to the board over the last 6 years.
Like most the companies analyzed of late, Binani Cement too has developed a fascination to churn funds through the mutual funds route. It has rolled over what looks like several hundred crores of rupees worth of units, and if it has turned a profit from this exercise, there is no immediate proof of it in the profit and loss account. There is obviously something happening here which is not readily visible to the naked eye.
While considerable attention is focused on creating more and more group companies, the directors are also giving Binani Cements its due. The company was busy expanding its cement manufacturing capacity of its 2 plants in Rajasthan, and at year end had an installed capacity of 6.3 m tonnes per annum, with a capacity utilisation of 85% during the year. There are plans in the anvil to set up a greenfield cement unit with a capacity of 2.5 m tonnes per annum in Gujarat. Considerable sums also seem to have been expended on creating captive power capacity. Captive power consumption during the year accounted for a cool 64% of all power consumed of 384 m KWh against 53% or 354 m KWh in the preceding year.
Controlling power costs
The reduction in the cost of captive power consumed to Rs 3.1 per unit from Rs 4.8 in the preceding year helped the company reduce production costs. Power is by far the biggest item of consumption in cement units, and Binani Cement spent Rs 4.3 bn during the year on power as against Rs 5.4 bn in the preceding year. Cement production in this period had increased from 4.3 m tonnes to 5.3 m tonnes. The next two biggest items are outward freight and, salaries and benefits to employees. Expenditure on raw materials and royalty on mining rights together (the latter expense is very subjective) is way down below.
An uncertain future
Fund requirements will accelerate over the years to come, as the company juggles its wits to manage the twin demands of funding its own expansion schemes on the one hand, and on the other to meet the demands of its myriad subsidiaries if it decides to go ahead and make sense of its investment plans across the seven seas. The company at present is simply not generating the resources that it will require to implement plans of a higher magnitude. What these plans are, have as yet not been spelt out in any specific terms, but nevertheless, it will be interesting to see how it all pans out over time.
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.