KCP Ltd: No sign of progressive growth
What's in a name
The company was founded some 70 years ago, in 1941, by the late Mr Velagapudi Ramakrishna, I.C.S, and for some reason was named The KCP Ltd. It is not readily known what this acronym stands for. It initially commenced the manufacture of sugar by acquiring a sick sugar co-operative mill in Andhra Pradesh in 1941. (It is very educative to know that the concept of the co-operative sector was alive and flourishing as far back as the fourth decade of the 20th century). It then sallied forth into heavy engineering in 1955, and cement manufacture in 1958. There was a subsequent diversification into such exotica as education by setting up schools and polytechnics, electricity generation through different means, biotechnology, castings and forgings, cement and sugar machinery etc. Some of these diversions involved the setting up of a number of joint ventures in India and abroad - including a sugar unit in Vietnam. The latest unrelated diversification is into hospitality - a hotel in Hyderabad. As one can see it is a very disjointed hydra headed conglomerate, with little synergy among its many endeavors. Spread your wares is the motto of the management.
Sugar was its initial footprint
The company initially made its name as a sugar producer of some standing, but spun off the sugar operations in 1995. (The promoter family is today the owner of several sugar companies). The sugar operations of KCP were incorporated into a new venture called KCP Sugar and Industries Ltd. The parent has no shareholding interest in its initial footprint. It was a clean split - but this erstwhile operation is still apparently very firmly controlled by the descendants of the founding family. The puzzle here then is why the sugar unit in Vietnam still continues to operate under the umbrella of the parent? Or for that matter why it continues to have a shareholding in Prudential Mouli Sugars, however depleted the value of the investment may be? (Has the latter gone totally belly up or what?) There appears to be rock solid consistency in its inconsistency. The family owns yet another sugar unit sporting the name Jeypore Sugars, with which KCP had revenue transactions in the preceding year. But KCP has no direct equity stake in this company. One must confess however that KCP has had a glorious past - eons ago that is, when the management was a little more level headed. Consider this statistic. Over 98% of the paid up equity of Rs 128 m is made up of bonus shares.
What KCP is today
Today KCP earns its daily bread from the manufacture and sale of Cement, Heavy engineering products, Electrical energy, Service receipts, and an item called 'Others'. The latter apparently comprises income from sales of bio-products. Why the company chooses to categorize it under 'Others' is not known. But let that be.
According to the breakup of sales in one of the schedules, the cement operations is the top dog in top-line realizations - accounting for close to 62% of all gross sales of Rs 3.6 bn 2010-11. This is followed by Heavy Engineering with around 32% or Rs 1.2 bn, Service receipts accounting for another 3.3%, (this income is a part and parcel of the heavy engineering division). The rear guard brings in piddling sums through the modicum of Others and Electrical energy. One can count on the hotels division to contribute its dribblings when it goes on stream too. The company recorded far less sales of cement and heavy engineering products in the latter year. The gross sales for the preceding year were Rs 4.1 bn.
The Lord of the Manor Dr V.L. Dutt, his wife, Indira, and daughter, Kavita Dutt Chitturi, smile serenely at the hoi polloi from one of the glossier pages of annual report. They have every reason to smile. For one, the promoter family has a more than 46% stake in the voting stock of the company, and are thus firmly ensconced in the 'drivers' seat. For another, they are very well remunerated for the services that they render to their inheritance. From the available data, the three family whole time directors together with the technical director Mr Gandhi drew a consolidated remuneration of Rs 43 m against Rs 68 m previously. In percentage terms that works out to 11 % of all employee remuneration against 16% previously! Wow, this is really swell! That is not all. The company also had several inter-se dealings with the three family whole time directors including short term deposits of Rs 64 m availed of from them and not including repayment of a part of the deposits to them during the year. This excludes other Loans/Advances of Rs 177 m availed of from them. There are of course, still other deposits received from them. Why are there so many classifications?
No definite direction
This is not a company which appears to be run with any definite purpose or direction. It operates more as a 'has been' entity in the businesses that it currently pursues. It is a bit player as yet in the cement sector registering a volume turnover of 720,000 tonnes, and in rupee terms at Rs 2.2 bn. Its second biggest product line - the engineering division mustered up sales of Rs 1.3 bn, which includes in-house sales of Rs 84 m. The makeup of sales of this item is quite quirky. One schedule says that it is made up of two sums - sales of engineering products of the value of Rs 1.2 bn and service receipts of Rs 119 m. The segment wise breakup says that it is made up of domestic turnover of Rs 1.2 bn and export sales of Rs 106 m. Atleast the final figures tally! The other very interesting fact about the machinery division is the warranty claims on the company and debited to the Profit & Loss account. It has booked an expense item of Rs 14.5 m during the year for claims, against Rs 17 m previously. What is this all about?
Then there is the question of another income agglomeration. The division wise sales breakup of sales of power generated from hydel, thermal, and wind power adds up to Rs 175 m. The balance sheet schedule however accounts for an income of only Rs 5.2 m from electricity sales. Possibly then, the difference is accounted for by in-house consumption or some such. (The expense schedule has a write down in power consumption cost to the tune of Rs 170 m, being self consumption of power generated internally). Separately there is the income from Biotech operations. The division wise breakup shows a top-line of Rs 5.5 m; while the balance sheet schedule shows income from 'Others' at Rs 68 m. It is all a bit bizarre, but there is no use talking about it I guess.
The other income potpourri
What is very clear is that the 15% fall in net sales to Rs 3.2 bn from Rs 3.7 bn previously was accompanied by a 48% fall in the pretax profit at Rs 414 m. (Contributing to the fall in overall sales was the fall in export sales which declined to Rs 68 m from Rs 438 m previously.) Other income which has been quite craftily engineered brought in Rs 145 m against Rs 111 m previously. But even after accounting for such manna, the pre-tax profit fell 38% to Rs 560 m. And, this is before adding up other fortuitous entries which helped cushion the impact of the fall in profit by quite some.
The other income schedule is an interesting potpourri. There was a massive dividend inflow of Rs 52 m against NIL receipt in the preceding year from its sugar manufacturing subsidiary, KCP Vietnam Industries - was this purposely timed? (This income receipt was simultaneously timed with the repayment of an advance of Rs 28 m by the subsidiary.) There is of course the usual write back of provisions no longer required, and sundry other book entries like unclaimed balances written back etc. This 'write back' of provisions is an ingenious creation of India Inc and qualifies for a special Nobel award. The company fortunately took the right call on the exchange rate front, and made a few pennies here. In the preceding year it took a rap to the knuckles and booked an exchange rate loss of Rs 14 m, which is accounted for in a separate expense schedule. But this expense item was compensated by a large receipt representing bad debts recovered. The timing of these entries calls for quite some dexterity.
The expenditure side
Whatever the reasons the company may have advanced for the fall in profits, the big ticket expense items that added to the debacle were employee costs which did not budge, the sharply higher interest charged debited to the profit and loss account, and the hike in depreciation provision. The high inventory levels - almost 30% of the value of gross sales would have also added to establishment costs. Also playing spoilsport was an omnibus expenditure item going by the nomenclature of 'manufacturing, selling and administrative expenses' which declined only marginally. The input cost of materials actually declined 23%, far more than the fall in rupee sales. What the management has to say on such matters of import should always be taken with a large pinch of salt.
What has also not been explained is the manner in which the company went about managing its funds flow. It had a surfeit of cash of Rs 715 m at year end. The point is that it spent Rs 1.9 bn on gross block addition and it simultaneously borrowed loot to the tune of Rs 1.5 bn. There was simply no need to turn on the spigot especially since the new cement plant is now fully operational, unless this excess cash represents the initial outlay on its hotel project or to fund the proposed expansion of the foundry unit. It can't be that it requires additional working capital of such a large sum of money. The reason for the sharp rise in the interest costs was also due to this exigency. It was however a similar mishmash in the preceding year when the company spent over Rs 2.1 bn on gross block expansion which saw a massive increase in borrowings along with a rise of Rs 200 m in the paid up capital.
The cement expansion
For the matter of record the new cement plant will add substantially to capacity. It presently has an installed capacity of 0.7 m tons, which is being flogged beyond its rated levels. The new unit with an installed capacity of 1.5 m tons will substantially alter capacity. Simultaneously, the engineering unit has apparently been modernized and expanded at a cost of Rs 160 m, and a new foundry unit at an estimated cost of Rs 600 m is expected to go on stream in 2012-13. Hopefully, this should lead to a turnaround in its operations over the next two years.
There are other pulls and pressures also on the company. It has a 40% stake in a sugar machinery manufacturing unit with French collaboration called Fives Cail KCP Ltd. The parent has during 2010-11 sold goods worth Rs 249 m to this company, and in turn received services worth Rs 11 m, and bought goods worth Rs 1 m from it. At year end, the affiliate owed the parent Rs 156 m in the form of trade dues. In other words the outstanding dues at year end were as high as 63% of the sales recorded. What are the terms and conditions for sales to its affiliates please? Besides, since the affiliate is a capital goods manufacturer in its own right, what material goods is KCP selling to Fives Cail please?
Difficult to understand
The wholly owned sugar subsidiary in Vietnam is turning out to be a winner at last. On a turnover of Rs 2.7 bn, it recorded a pre-tax profit of Rs 537 m, and according to the results of the subsidiary did not declare any dividend. But according to the Other Income schedule of the parent - and as reported earlier in this copy the parent received a dividend income of Rs 52 m from this subsidiary! That is a fairly decent return on a capital base of Rs 237 m. One must confess here however that the left hand does not 'knoweth' what the right hand 'doeth'. But this is entirely in keeping with the manner in which this company is sailing.
This is only one of the nutty mannerisms of this company. In the schedule giving particulars of the Capacity and Production details, the company has not furnished the 'licensed capacity' and 'installed capacity' figures of the preceding year of any of the items that it produces. Thus the change in capacities over the two years is not quantifiable.
The current year should hopefully bring about a more than marginal rise in the turnover and profits too, as the company puts its expanded capacities to the test in the market place. It has to do something fast as the debt burden has risen to Rs 3.5 bn and the interest burden will also be piling up. But the results are unlikely to create any spark in the secondary markets.
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.
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