After sailing in deep waters for close to 50 years, Chowgule Steamship is still navigating like a pup, with no apparent purpose or direction. A bare and iffy directors' report only adds to the sickening feeling that it is merely a rudderless company in murky waters, and, that the management likes it the way it is. Take a look at the facts. The sale of just one ship during the latest financial year reduced the operating earnings by more than 73% to Rs 321 m from Rs 1.2 bn in the preceding year. This loss of earnings was too much for the company to bear at one go. It promptly registered an operational loss of Rs 142 m against an operational profit of Rs 581 m in the preceding year. The loss was made good by the tidy profit that it logged in, on the sale of the ship, and this book entry helped to turn red ink into blue ink. Its gross block at year end is a mere Rs 2 bn, with 4 ships with a dead weight tonnage of a mere 56,500 tonnes.
Other income factor
The other material factor that helped reduce operational losses was 'other income' which tossed in a very generous Rs 109 m. Interest on bank deposits and debentures, rental income, and other book entries helped in no small measure in drumming up this figure. But the purchase/sale of Rs 1.4 bn worth of debentures brought in only a few dimes as treasury income-a no brainer which appears to have been repeated even by its wholly owned subsidiaries! In spite of the below par working results, the directors’ report goes on to add ‘that due to the satisfactory financial results, the directors have the pleasure of recommending a dividend of Rs 1.5 per share. Playing with words appears to be the mantra of Indian Inc.
The management appears to have a greater propensity to navigating in international waters than operating in ‘treacherous’ Indian reefs. So the parent floated a 100% subsidiary called Chowgule Steamship Overseas Ltd in Guernsey (a British Union dependency in the English channel), and plonked down Rs 420 m into its equity base. This subsidiary in turn floated 6 wholly owned subsidiaries, all of which are incorporated in the Marshall Islands (a tiny speck of an island in the Pacific Ocean). From the available information only 1 of the 6 companies incorporated in the Marshall Islands has operational activity of any significance. Three of them have no activity at all, though they cumulatively have assets of Rs 404 m (what a waste of scarce resources, but who cares anyway). Another 2 such subsidiaries have assets of Rs 1.3 bn but are not into anything serious either. The 2 companies which are in business, Chowgule Steamship Overseas Limited, the subsidiary of the parent, and Sunshine LLC, the subsidiary of Chowgule Steamship Overseas, totted up a combined turnover of Rs 1.2 m and combined profits of Rs 747 m.
High equity returns of its subsidiaries
Both these companies are very profitable too, with similar pretax and after tax margins of 61% and 68% respectively. That is a profit margin of a very high order indeed. They have both also reported almost identical revenues and profits, though the asset base of Chowgule Steamship Overseas is twice that of Sunshine LLC. The difference is also in the paid up equity capital. Sunshine LLC makes do with a paid up equity of only Rs 45,000! Thus the net profit of Rs 383 m that it earned will rank as among the highest returns on equity anywhere, anytime.
In all possibility both these companies are also in the shipping business. At least Chowgule Steamship Overseas has 1 ship with a deadweight capacity of 73,000 tonnes (which is more than the capacity of the parent), and will add to its capacity this year. There is no information on the latter company. Given their profit margins, they could as well give the parent company a lesson or two on how to run a shipping business. These two subsidiaries together also totted up higher sales than the parent. The sad news is that the profits made by these subsidiaries are not shared with the parent as they apparently do not declare any dividends or pay any royalties or any such to the mother unit. For the matter of record the cumulative after tax profits of Sunshine LLC is Rs 1.1 bn.
There are a few puzzling aspects of the accounting of the profits of one of the subsidiaries. In the 'Details of the Subsidiary Companies' schedule the profit after tax of Chowgule Steamship Overseas is given as Rs 364 m but in the 'Statement Pursuant to section 212' schedule it is shown as a net after tax loss of Rs 28 m. The company however seems to have got the reporting right for its other subsidiaries.
The other puzzle is in the accounting for revenues etc in the consolidated accounts.The total income should add up to Rs 1.6 bn (parent and subsidiaries together) against Rs 1.1 bn shown in the report and so on.
With the parent having no specific plans of its own, the directors have sought to diversify via the subsidiary route. Accordingly it has promoted 2 wholly owned subsidiaries to implement port and ship repair projects in Ratnagiri. It appears to have got off to a poor start though. Each of these 2 companies have a paid up equity base of a mere Rs 50,000.
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.