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Britannia Industries: Hard to digest - Outside View
 
 
Britannia Industries: Hard to digest

The cracks are beginning to show

The 91 year old biscuit icon can hardly be accused of any geriatric shortcomings. The directors' report gleefully chortles that the Britannia brand has been voted by consumers as the 2nd most trusted food brand and the 9th most trusted across all categories in 2009. But recent media reports aver that the closely held Mumbai based Parle Products has pipped Britannia to become the largest selling biscuit company in India. So what's mis-snacking at Britannia?

Plenty actually. The company's first real brush with trouble, trouble, trouble, happened back in the late 1980's during the ill-fated tenureship of the late Mr. Rajan Pillai, the comitragic and pretender biscuit 'king'. Since then, Britannia has been endlessly bedeviled with ownership and management troubles. And, now the warts are beginning to show. There has been gross misdirection of company funds, either intended or otherwise, into questionable business ventures for one. Endless disputes with retrenched labor which seems to defy any solution, all of which have led to abnormalities in its cash flow, on the other. Those with a longer memory may also like to recall how the new owner team of Danone and Wadia had used company funds to hike their combined holding in Britannia to over 50% by orchestrating a buyback of shares on a few occasions. Legally very tenable, but such subterfuge also constitutes an act which is detrimental to the larger interests of the company, and also to the minority shareholders. In a sense, it is a further breach of faith in a system which is already suspect.

Needs to get a hang of the problem

Today one can even venture to say that Britannia is a fit case study for management institutes on how NOT to run a company. The directors' report does not even put its finger on the pulse. How then can one address the situation? The report rails at the inexorable increase in commodity input prices, coupled with a fierce competitive environment. Fierce environment yes, (so what is new here), but unprecedented increase in input costs? Oh really? Net sales grew a little over 9% during the year, while input cost of raw materials and packing materials grew a mere 6%. There was however a much greater resort to the purchase of finished goods which soared 92% to Rs 3 bn. Even the expense under conversion charges which presumably refers to giving final touches to the commodities that it sells, grew only 8%, as did carriage and freight, which grew by a like amount.

With mounting pressure on the bottom-line, the company had to take recourse to 'other income' to give some color to pretax profit. Other income including write backs of prior year provisions constituted close to 33% of pre-tax profits in the latest year. The other income also includes a sizable sum constituting long term profit on sale of shares. There is no of clear indication of which shares were sold to generate these long term profits.

Double edged sword of advertising

The nub of the matter lies elsewhere. Lackadaisical husbanding of resources for one, as stated earlier. And, a sharp increase in other significant expense items like advertising expenditure which rose 27% to Rs 2.7 bn. Such advertising expenditure also denotes a double edged sword. On the one hand it presents an entry barrier to a competitor, and on the other it could be to counter more competition, or even greater spend due to new product launches. What is quite apparent though is that it still has a very firm grip on the market. It sells cash down, which shows its clout in the marketplace - so its brand equity is still firmly in place. Its manufacturing capacities are declining by the year and the current installed capacity includes that of it defunct Mumbai plant, so we really have no clue what its true installed capacity is. However, on a supposed installed capacity base of 148,800 tonnes it sold 477,728 tonnes of biscuits and high protein food-which is fractionally higher than in the preceding year. Biscuit sales account for over 85% of all product sales, with bread and cakes ringing in the balance.

Outsourcing and mis-investments

The new mantra is to outsource, which it does from the several biscuit and bakery units that it owns. These units are a part of the 17 fully subsidiary companies of assorted hues (7 of which are incorporated abroad), along with 5 fellow subsidiary companies (whatever that means), all of which are located out of Singapore, and 3 associate companies.

Where it has goofed up and goofed up badly at that, is in its choice of investment channels to outsource its product lines. The management does not seem to learn either, and blunders on to the next investment. Consequently its balance sheet is peppered with assorted large provisions - provision for diminution in value of its investments in its subsidiaries, complete write offs in investments of some subsidiaries like Britannia Lanka, provisions for doubtful loans and advances to subsidiaries, and, provisions for corporate guarantees and claims. It had to give 'corporate guarantees' worth Rs 1.4 bn on behalf of its subsidiaries, and also gave letters of 'awareness and comfort' (what in heaven's name is this) of Rs 594 m. Then, there are direct and indirect tax disputes amounting to Rs 1.3 bn, including income tax disputes dating back to 1981 (that would imply unresolved disputes going back 29 years!). Then there are large claims on the company not acknowledged as debts by the company.

The inter-se shenanigans between the parent and its subsidiaries are so complex it will tax the mindset of a Vishvanathan Anand. It is show time folks! The parent purchased finished goods and consumables from its subsidiaries, it received royalty payments of sorts from its mortally bleeding Dubai based subsidiary, it paid conversion charges to a host of subsidiaries, and purchased shares in its subsidiaries, it gave loans to them, it sold goods worth Rs 214 m to them during the year and had net receivables at year end of Rs 246 m (now, how do you like that?), and, several other unmentionables.

Weak kneed subsidiaries

The total book value of its equity investment in its subsidiaries at year end was a neat Rs 2.1 bn on which it earned nary a dime as dividend. (But at least its biscuit subsidiaries appear to be chipping in to help the parent weather the market storm). It also has outstanding loans to subsidiaries of Rs 121 m (intra year loans were substantially larger), on which it may not be earning any interest. It has 3 investment subsidiaries, 2 of which have made a loss. One of these subsidiaries, Boribunder Investments, appears to be gone literally belly up. One of its bigger investments assets wise, Britannia Dairy, appears to be a total gone case. And another big ticket investment, Daily Bread Gourmet, appears to be in no better shape. Ditto for its Oman and its 2 Dubai based entities - the latter 2 having the biggest asset base combined. Its biggest single investment, asset wise, is its Mauritian subsidiary which also appears to be out of breath. This subsidiary could well be some sort of an investment beneficiary. Britannia Lanka with negative reserves of Rs 152 m, appears to have breathed its last. R.I.P. And finally, there does not appear to be any information on the doings or otherwise of its 5 Singapore based fellow subsidiaries.

Not quite perturbed over the turn of events, the directors in their wisdom decided to invest Rs 1.3 bn during the year in the equity capital of 6 of its subsidiaries. Of course there is no word of why this additional investment was effected, and whether it will bear any fruit in the distant future. With the company also concurrently stocking up on liquid debt instruments, the finance department had its hands full trying to manage the cash flow. Consequently the company's borrowings rocketed from Rs 251 m at end March 2009 to Rs 4.2 bn at end March 2010. The situation then, is about as comic as it can get.

Malfunctioning board

It would appear that the independent directors have little say in the goings on, or are reluctant to offer any opinion. One wonders for what purpose they are on board. The company paid out Rs 13.9 m to them as remuneration in FY10, though close to 38% of this sum was paid to Nusli Wadia. These directors include such illustrious personalities as K.K Dadiseth, Nimesh Kampani, Nasser Munjee, Pratap Khanna, and Dr Ajay Puri. As a matter of fact it was during the tenure of Mr. Pratap C Khanna's late brother, K.C. Khanna, in the 1960s, that the company scaled heights of glory.

One fondly hopes that there will be a change of heart in the mindsets of the management or it may well cross the Rubicon.

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.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
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