Carborundum Universal (CUMI) is a well managed company, with a conservative investment policy to boot, but suffers from lack of any investor interest in the secondary markets.
Fifty seven years old and growing younger in years
Incorporated some 57 years ago, and with the help of two foreign equity tie-ups to boot, the company has today metamorphosed into a giant networking operation of sorts. (The promoter group today holds a little over 42% of the voting stock in the company). There is the domestic operation which spews out its products with the help of 19 factories spread out over the seven states of Tamil Nadu, West Bengal, Karnataka, Kerala, Madhya Pradesh, Gujarat, and Maharashtra. A very diverse spread of regions alright. The products that it manufactures and sells through these production facilities are categorized into three divisions: the Abrasives division which makes Bonded and Coated abrasives and Industrial cloth, the Ceramics division which makes industrial ceramics and refractories, and the Electrominerals division which makes Grains.
A large product portfolio
The portfolio of products find an outlet in a wide swath of industries ranging from the automobile, engineering, metallurgical, fabrication, stone, wood and marble cutting, construction and infrastructure sectors, sanitary tiles, insulators, glass, furnace building, electro plating, and yet others. The list is a rather exhaustive one. The domestic operations rustled up a net turnover of Rs 9.2 bn for the latest period while recording a profit before interest, depreciation and taxes of Rs 2 bn. The abrasives division brought in 55.7% of the turnover, followed by the ceramics division with 26%, with the rear end brought in by Electrominerals with 17.2%. There was also sundry contribution from 'Others'. (In this overall concoction, exports brought in Rs 1.9 bn or 20.6% of the total net turnover). The top-line was achieved on a year-end gross block of Rs 6.3 bn. The company's operations are apparently of a very capital intensive nature.
The consolidated operations
Then there is the consolidated operation. These operations are taking on a distinct hue of their own. It has operations emanating out of Russia, South Africa and North America. Then there are the operations in Australia, the Middle East, and China. During the year the company consolidated its investments of its subsidiaries in the USA, Canada, South Africa, Russia and the Middle East into a holding company called CUMI International Ltd, Cyprus. Significantly its holdings in its subsidiaries in Australia and China are held by Carborundum Universal India, the parent. The parent has another 7 direct subsidiaries, making in all 12 subsidiaries. Separately, it has an investment in a company called Laserwords Pvt Ltd - and which is referred to as an associate - in which it has a 44.5% stake.
Then there are three other companies - Murugappa Thermal Ceramics, Wendt India and Ciria India - and these are categorized as joint ventures, in which it has a stake of less than 50% each. It also appears to have a joint venture going by the name of Jingri, but this company does not feature in the joint venture investment schedule! Laserwords appears to be a mere dummy investment company or some such. The consolidated statements include the turnover of the Power division and the IT Services division in addition to Abrasives, Ceramics, and Electrominerals. But power and IT services are mere pinpricks yet in the overall scheme of things.
On a consolidated basis, the group recorded a total turnover of Rs 16 bn while the profit before interest, depreciation, and taxes, toted up to Rs 3.1 bn. In other words the sales contribution of the international division amounted to Rs 6.8 bn, while the semi-bottom line contribution was Rs 1.1 bn. Put in percentage terms, the turnover contribution of the international division was 43%, while the PBIDT contribution was 35%. The contribution by the subsidiaries is increasing in stature. Needless to add running a company with such far spread tentacles calls for logistics management of the highest order.
What the subsidiaries reveal
A look at the performance results of the 12 subsidiaries is interesting in what they reveal. The top dog by far in terms of turnover is the Russian sibling clocking in revenues of Rs 4.2 bn, and a profit before tax of Rs 636 m for the latest accounting year. From the brief details made available, the company achieved this feat on a paid up capital of a mere Rs 5.3 m, along with a total asset base of Rs 2.3 bn. It also boasted an abundant reserves and surplus of Rs 2 bn. It has paid out a dividend of Rs 244 m for the year. This is quite some return on investment on the base capital! This company has hit pay dirt and appears to be brilliantly conceived to boot, and the parent should definitely think of moving more of its productive assets to the Russian work site, to get in on a piece of the action.
Next in line in the sweepstakes is the South African company with a turnover of Rs 1 bn and a profit before tax of Rs 82 m. This company too did the magic mantra of recording its sales and profits, through the modicum of an almost non-existent share capital base of Rs 0.01 m. It also boasted reserves of Rs 455 m. Generating such a large top line on a wisp of a capital base is simply stretching the limits of the implausible, and its working should rightly be the subject of an in-depth case study in management schools on how to get infinitely more bang for the buck! It also boasted of a total asset base of Rs 670 m. Which begets the logical question of why the parent cannot do a similar with its Indian business?
There are five other companies in the subsidiary list which boast of turnovers of some magnitude and vastly differing profit margins. They are CUMI Australia with a top line of Rs 560 m, Sterling Abrasives with a top line of Rs 418 m, CUMI Canada with a top line of Rs 144 m, Net Access with a top line of Rs 122m, and Southern Energy Development with a top line of Rs 156 m. The very distinguishing feature of all these companies appears to be their very low share capital bases relative to their turnover. (The parent appears to have mastered the art of ramping up the businesses of its siblings with low outlays of permanent seed capital). Three other subsidiaries appear to be mere hangers on. But that is inevitable situation in every company. Some of these subsidiaries may be mere trading companies and hence the need to have a very low capital base. It is not readily known how many of these international subsidiaries are into manufacturing, and which are merely trading operations, or some such.
The company with the biggest share capital base quite naturally is CUMI International, the holding company of some of the subsidiaries. It has a share capital base of Rs 1.1 bn comprising of both equity and preference. This capital base is at some variance with thecapital outlay of the parent in its subsidiary. The parent holds 100% of the capital in its subsidiary. CUMI International is revenue richer by Rs 101 m due to the inflow of dividends, but wisely decided not to part with a dime to the parent.
Its investment portfolio
The total book value of CUMI's investment in its subsidiaries etc amounted to Rs 1.6 bn at year end. Inspite of its international holding company subsidiary not quite massaging the parent's ego by forking over some of the dividend that it received, the latter was still able to obtain tithes of Rs 110 m from its other subsidiaries. Some return on investment is better than nothing I guess. Its direct return from its joint ventures, if any, is patchy at best. The company also bought debt investments of the value of Rs 2.5 bn and then resold it as a part of some portfolio churning. But if it made even a morsel from this transaction it is not stated upfront. Why India Inc resorts to such gimmickry beats me all ends up.
Inter-se dealings with its subsidiaries
Its inter-se dealings with its subsidiaries also appear to be patchy. It sold revenue goods worth Rs 513 m to its subsidiaries and in turn purchased revenue goods worth Rs 524 m from them. These individual companies appear to operate an at an arm's length distance from each other. The only other significant item of big brotherly behavior is the letter of comfort of Rs 1.5 bn that the parent issued on their behalf. It will also help if the management could spell out to its shareholders how the many subsidiaries, joint ventures, affiliates and other piddling investments pan out to the overall benefit of the parent. More to the point, how the jigsaw puzzle melds in.
The production statistics of the subsidiaries is unknown, but by and large the parent is able to flog its plants to get maximum mileage. During 2010-11 it raised the installed capacity of two of its units - Refractories and Electrominerals. It also appears to have made haste in hiking the installed capacity of its refractories unit. Its production capacity was raised by 7% to 39,150 tonnes. Inspite of an 18% hike in the production of refractories to 30,727 tonnes during the year, the production was still far less than the old installed capacity of 36,450 tonnes! The capacity addition in the Electrominerals was more sanely thought out. The production in the latest year was way higher than the old installed capacity. The only unit which is not being flogged to its potential level is the coated abrasives unit .The production hovered at a poor 52% of installed capacity.
A final opinion
Suffice to say that Carborundum appears to be a well managed company, with a conservative management style as quite simply revealed by its funds flow statement. The funds generated from its operational cash flow more than suffices to meet its investments needs in its gross block and then some more. The company also repaid over Rs 550 m debt during the year leaving a balance debt of Rs 2.3 bn to be serviced. The company appears to be firing on all cylinders with a bouquet of products which cater to industries which are witnessing an upswing.
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.