A more readable directors' report please
India Inc. should urgently consider setting up a school to train copywriters who can edit content of annual reports in a cogent manner. More attention needs to be paid to the veracity, or otherwise of the contents of the directors' report. The need for doing so is assuming importance as India Inc is expanding at a fast clip and is also becoming MNCs of sorts-subsidiaries galore, both of the 'desi' and the 'videsi' flavor. At times, as in the case of EID Parry, the figures in the schedules to the accounts are in conflict with the content in the directors' report. And, the quantitative data given in one schedule does not quite link up with the data on the same matter in another schedule. Cross verification of stocks, production, and sales figures, in some instances simply does not add up.
Self aggrandizement is a part of corporate culture but at times it can have negative side effects. The company states in its report to the shareholders that it spent Rs 0.2 m towards capital expenditure in respect of approved in-house R&D units in Bangalore and Nellikuppam. For an entity which boast a turnover of over Rs 10 bn, and claims that it is the only sugar company in India with a comprehensive in-house breeding programme etc, why does it take such pride in prattling about such insignificant figures please?
Dialing the wrong number…
The directors' report states that it continues to make substantial revenues from co-products (bagasse driven power sales), with sharply higher alcohol sales, especially the sales of extra neutral alcohol (ENA) which is sold to the liquor industry. ENA sales rocketed to 11.7 m litres from 1 m litre in the preceding year. The change in the product mix the report adds, lends greater stability and predictability to the company's financial performance. Oh yeah? Says who? On the contrary the reverse appears to have happened. Sure, sales of power generated from bagasse etc went up 27% to Rs 1 bn, but the EBITDA on this count slid alarmingly by 67% to Rs 127 m. The report adds that with the completion of new investments in co-products, the share of the profitability from co-products will increase substantially in the coming years! Is this some sort of a joke?
Cut to the distillery unit as another example. Sales more than doubled to Rs 549 m but the EBITDA did a perfect 'ulta' and was splashed in red ink! A loss of Rs 14 m against a profit of Rs 71 m previously, or a turnaround of Rs 85 m was what it had to show for its efforts. Based on this performance, what financial stability is the report talking about please?
The sugar sales conundrum
Or what exactly is the total rupee realization from sugar sales? That depends on which page of the report one looks at. One schedule says it is Rs 9.8 bn, another schedule says it is Rs 9.3 bn and a third schedule says it is Rs 10.3 bn. The last mentioned figure includes amounts incorporated in the other income schedule. Also, try reconciling the figures of how much sugar it produced, consumed, bought, sold, and had in stock. It produced 2,89,283 MT of sugar, including raw sugar. It purchased 23,764 MT of sugar, including raw sugar. It consumed 67,705 MT of raw sugar as raw material. It sold 3,28,643 MT of sugar, and had 48,257 MT of sugar as stock at year end. From where did all the raw sugar materialize? The figures simply do not seem to add up at all.
The report extols at length on the strides that the company has taken in the sugar division (no quarrel here please). With 5 factories- 4 in Tamil Nadu and 1 in Puducherry, this division is its cash cow sales wise, and profit wise too. But the latter happens only when the open market price of sugar jumps over the moon. It also recently acquired a large sugar unit in Karnataka (which functions as a subsidiary), and has a large 50:50 joint venture with Cargill Seeds in the offing in Karnataka, which will process imported raw sugar and export the white sugar end product. Tamil Nadu, it informs has the best soil conditions for growing cane with the sugar cane yield being the highest across India. It adds that the sugar cane productivity in terms of sugar recovery per unit of land is the highest in India. And that EID is the only sugar company in India with a comprehensive in-house breeding programme and which gives the company the advantage of developing several new high yielding cane varieties. It also claims that it continues to be one of the low cost producers of international quality sugar through its farmer centric practices.
So, is the company's sugar division's performance all that superior to that of other large sugar companies in Tamil Nadu? The company makes no such claim. What we do know is that in the latest accounting year the company obtained a sugar yield from sugarcane crushed of 11.4% against 9.5% in the preceding year. What we also know for sure is that the fortunes of sugar companies in India is inextricably linked to the open market price of sugar, which once every few years rockets due to the aberration in the global sugar industry, precipitated mostly by a industry crisis in Brazil. This is precisely what happened in 2009-10 and enabled EID to record superior profits. It appears that the prowess of a sugar unit is peripheral.
The lure of sugar is a puzzle
What is it then that lures entrepreneurs into the manufacture of sugar, except that one gets to revel in the political gravy? The sugar industry in India functions under the most absurd maze of regulations. The political shenanigans are intricate as it supports more than 50 m farmers and their families. Add to it the point that sugar mills function only some 7-8 months in a year, given the sugarcane cycle and you have what looks like a no-win situation. But there are some 500 sugar mills in operation. EID for example has decided to go back to its roots and expand like hell in sugar. It apparently also spends large sums on the upkeep of its sugar and distillery units. In 2009-10 it spent Rs 920 m on capex, but with installed capacities remaining unaltered in almost all product lines, barring the distillery unit, quite some monies may have gone into housekeeping. Of the total expenditure, some Rs 450 m was spent on the expansion of its distillery unit.
What is equally noteworthy is that the operations of the sugar unit and its allied divisions is highly capital intensive. The turnover of the sugar division was a mere 2.2 times the capital employed (sales getting liberal help from record sugar prices).The power division could manage only 0.33 times the capital employed, while the distillery unit fared even worse at 0.32 times. A gross block of Rs 12.3 bn at year end could produce a gross turnover of only Rs 11.9 bn, including other products.
The diversification effort
As a flanking move it is into the manufacture of bio-pesticides and nutraceuticals (formed from a combination of the words nutrition and pharmaceutical), and has an India based subsidiary called Parry Phytoremedies (a technical term for natural health foods), and an US based subsidiary called US Nutraceuticals. The management appears gung ho on the future prospects of these entities, but for the present these units are mere straws in the wind.
The complexity of its operations does not end here. The company has assorted subsidiaries including Coromandel International which dwarfs the parent in sales. Its Rs 1 bn equity investment in this subsidiary brought it dividends of Rs 882 m in FY10. Almost all the other subsidiaries can be classified as nonperforming assets, and they also subsist on dollops of credit from the parent. The only subsidiary with any promise appears to be Parry Infrastructure which will be developing the extensive real estate holdings of the parent. It has assorted investments in other entities and any extra cash flow is parked in liquid mutual fund schemes, regardless of the size of the outstanding borrowings.
It has subsidiaries, affiliates, and joint ventures in the US, Brazil, Mauritius and Tunisia - some of these are indirectly held by the parent as they were promoted by Coromandel International (CFL). The only mention of the Tunisian fertilizer JV is in the auditor's report, in the consolidated statement of accounts. The Brazilian venture is some sort of a partnership and no further details are available. But the subsidiary which stands out is CFL Mauritius Limited. It is a miracle baby of sorts. It equity capital has fallen to Rs 814 m in end Dec 2009 from Rs 873 m previously. But the reserves and surplus has managed an incredible pole-vault. From a negative Rs 55 m to a positive Rs 622 m-that is a turnaround of Rs 677 m . It has total assets of Rs 1.8 bn in end 2009. But the real catch is that the company had no revenue in 2008 and an income of only Rs 7 m in 2009. And surprise of surprises, it recorded an after tax P&L loss of Rs 3 m in 2009 against a loss Rs 18 m in 2008. This is akin to a magician pulling a rabbit out of a hat.
An offspring of the East India Company
The very fact that EID Parry is still around is in itself a miracle of sorts. An offspring of the East India Company, it was originally known as East India Distillers and Sugar Factories Ltd, till its merger with Parry and Company. It is also one of the oldest business entities in India, though it is only 35 years old as an Indian entity. Till the 1970s the company's accounts were prepared under the English Companies Act as it was incorporated in England, and the face value of the equity share was 1 pound sterling.
Disclosure: Please note that I am 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.
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