Right occasion for bonus shares
Kansai Nerolac Paints has chosen the 90th anniversary of its incorporation to propose 1:1 bonus shares, and made quite a noise about it in the process. Just about any cock and bull occasion it appears, goes to make for such an announcement. Why even grope for a silly occasion to issue bonus shares, please? The company also, in a manner of speaking, almost flogged itself silly in the market place in an effort to log record sales and profits to commemorate this 'eventful' year of its life. Which also begets the question, as to why it does not instead do an encore in the marketplace every other year perhaps?
The old and the new
Goodlass Nerolac, it may be recalled had changed its name to Kansai Nerloac in 2006, a good 7 years after the Japanese collaborators came to acquire a majority stake in the company in 1999. Their current equity holding in the company stands at 69.3%. The new owners, even today continue to retain the Nerolac name in the new equation, showing how little the Kansai brand is worth in the Indian market, even though Kansai has been associated with the Indian unit since 1983, initially as a technical collaborator. For the matter of record the company also has two 'technical assistance agreements', one with a Japanese company and another with an American company for the manufacture of special purpose paints.
The directors' estimate
The directors state that the total size of the paint industry in end March 2010 is estimated at Rs 210 bn. They also add that they are the 2nd largest paint company and a leader in the industrial coating segment, with 5 state of the art manufacturing plants, 70 sales depots, and with a cutting edge research centre at Mumbai. The company's gross turnover for the latest accounting year is Rs 18.6 bn (before giving allowance for discounts, rebates etc). That will give Kansai a market share of 9% in rupee terms. It is a bit difficult to stomach the conclusion, that the second largest paint company has a market share of just 9% in the overall market.
Delving on the point on Research and Development (R&D), it is nice to know that there is one Indian company, which is a subsidiary of an MNC, and which actually spends in rupee terms what appears to be some pennies on this noble effort. The company spent Rs 122 m during year, which as a percentage of sales however, is a lot less than 1%. Some explanation on the direct benefits derived from this spending would have helped to put matters in a better perspective.
Some interesting facets
The other question begging is that on a much higher rupee turnover, the company has paid a substantially lower excise duty. Excise duty at Rs 1.5 bn charged to profit and loss account amounts to only 8.8% of gross turnover against 14% or Rs 1.9 bn in the preceding year. Gross turnover was higher by 18.3% at Rs 18.6 bn, unless of course the central government changed the rules of the game for paint companies.
The interesting aspect of the company's rupee turnover is that, its ability to generate sales is also a fallout of dishing out discounts, rebates, allowances (why so many terms to state the obvious please) and the like, in the market place. Such freebies totted up to Rs 1.6 bn against Rs 1.3 bn in the preceding year. As a matter of fact this expense item makes for the largest single expenditure in the 'operating and other expenses' schedule, though the company has deducted a part of this expense directly from the sales figure. This was probably to escape the embarrassment of showing it all under one composite.
Parent is a clear winner
Freebies or not, Kansai is a clear winner regardless. Besides dividends, it helps itself to royalty payments and technical fees, all of which add up to a tidy sum at year end. But, since Kansai also continues to use the top selling Nerolac name, why the need to pay so much royalty please? It is always nice to be in the driver's seat, what?
With the intention of making a splash, the company planned the commissioning of its new plant at Hosur, TamilNadu, along with an expansion scheme to boot, to coincide with its 90th birthday. The total capex may have cost the company some Rs 1.7 bn in the last two years. Installed capacity now stands at 208,000 MT. The euphoria to make a point also led to a 28% increase in production at 163,368 MT, and an unfathomable 72% increase in purchases at 20,407 MT of paints during the year. The wonder is that the company was able to pull off this Harry Houdini trick during the year, without adding to the debtors' outstanding. It was of course a little too much for the market to absorb in one go, and so at year end it was saddled with higher inventories. The inventory value at year end was Rs 2.5 bn against Rs 1.7 bn previously. The company also consumes a rather substantial Rs 10 bn worth of materials, and some 36% of this consumption is imported. This implies that it is susceptible to the vagaries of the currency markets. But the nice part is that these imports, etc. are not routed through the parent or through any of the parent's near and dear relatives, barring some miniscule transactions.
Never mind that the company went slightly overboard on the production front. Debt relative to its ability to service the borrowings is miniscule. In reality the company is almost debt free. The trick is that it also survives on what it calls sales tax deferrals, which came to a nice Rs 878 m at year end. Furthermore, it is also cash rich. The value of its investments at year end amounted to Rs 4 bn. The company generates quite some cash, as it has to dole out only minimum credit for sales, and with control over inventory management and manageable capex on the one hand, and being able to squeeze creditors on the other, it generates 'moolah' faster than it can spend it, in a normal year.
Not finding many avenues to invest its surplus cash, it decided to make a go of it in the secondary capital markets. So the company bought and sold in each direction, mutual fund units of around Rs 28 bn during the year. It generated returns of some Rs 130 m pre-tax for its efforts, almost the same as in the preceding year. The directors' report makes no mention of this 'diversification'. Less info is more info, is the mantra of India Inc.
Kansai Nerolac is a very well entrenched player in the Indian scheme of things. With the increasing effort in the housing front and with the increasing level of industrialization and the spread of prosperity, the company is more than well equipped to face the challenges of the future
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.
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