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Excel Crop Care: Core biz. remains under cloud - Outside View by Luke Verghese

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Excel Crop Care: Core biz. remains under cloud
Aug 23, 2013

The agrochemical industry it would appear has to fight hard just to keep its head above water

Celebrating its golden jubilee

Excel Crop Care Ltd is celebrating its golden jubilee in the current year as a corporate entity. The company was formed out of Excel Industries, the parent, in 2003 - partly I believe to accommodate the extended family. The parent was begetted by the Shroff family and today there are three Shroff scions that hold the reins on the board of directors of the company. As the name suggests the company manufactures pesticides, buys out finished products, and in turn sells 'crop care' products under various brands. Another group company in the same mode is United Phosphorus.

The business of selling pesticides, pesticides intermediates and other crop care products is highly competitive with many combatants; hence companies do not have the freedom to leverage end product prices. Consequently, the gross margins take a hit. For example, the cost of materials consumed including that of traded goods amounted to 64.6% of net revenues from operations during the year- up from 59.5% previously. Traded finished goods per se account for a hefty sum in the total cost of materials consumed. The company generated revenues of Rs 1.57 bn from traded sales. Taking into account the cost of goods purchased of Rs 1.35 bn it would have on a rough basis (before setting off the value of inventories) netted a gross margin of Rs 219 m. The other costs associated with the sale of these goods are not separately known, but hopefully the company would have turned more than a dime on such purchase /sale of traded goods.

Revenues from operations

In reality the makeup of the net sales is in itself a complex affair. The revenues from operations net of excise of Rs 7.65 bn is made up of manufactured and traded goods sales of Rs 7.46 bn, export incentives of  Rs 127 m, manufacturing charges received of Rs 2 m, and an item called 'others' of Rs 55 m. The company's exports during the year amounted to Rs 3 bn. This figure roughly works out to 41% of all manufactured net sales. And, then there is 'other income' which is made up of extraneous items amounting to Rs 63 m. Together, the export incentives, others, and extraneous items amount to Rs 246 m in toto. Juxtapose this figure with the pre-tax profit of Rs 302 m - and it works out to about 82% of the profit figure. That is not saying much about the profitability aspect of the manufacturing operations.

The share price

Inspite of the trying circumstances under which the company is journeying, the share price (Rs 5 face value per share) still managed to do a jig of sorts oscillating between a high of Rs 242 and a low of Rs 85.30 at the BSE during the financial year. One reason for the ability of the share price to zig zag in this manner is the low paid up capital base of Rs 55 m, on a book enterprise value of Rs 4.95 bn. Besides the low capital base, there is the holding pattern of the shares, and this further depletes the stock available for free trade. Though the promoter holding is restricted to 22.5%, a foreign company called Nufarm Australia holds another 14.7%, and this holding is also presumably not up for free trade. Domestic companies hold another 16.4%. The names of these companies are not known but presumably this holding too is off limits. The three shareholder categories collectively hold 53.6% of the voting capital.

As I had stated earlier the company is having difficulty in posting positive margins from its mainline business, and what saved the blues during the year was its ability in reducing the expenditure on 'other expenses' from Rs 1.8 bn previously to Rs 1.71 bn. 'Other expenses' are the second largest item of revenue expenditure by far - after the input cost of materials. This expense item is the sum total of innumerable entries including discounts, doubtful debts, exchange loss/exchange gain and so on. So there is plenty of scope here. How it managed the reduction in this expenditure, and whether it will be able to perform an encore in the current year is purely in the realm of conjecture.

Working capital management

Unlike FMCG companies, agro chemical units do not have equally smooth sailing when it comes to realising sales dues, and in the area of inventory management. The value of inventories at year end amounted to 18% of 'net' sales of goods, while the trade receivables amounted to 19% of 'net' sales of goods. The total value of both holdings at year end amounted to a neat Rs 2.77 bn, and this adds to working capital costs. On the plus side though, the trade payables at year end was almost on par with that of the trade receivables. But, given the need to maintain higher levels of receivables and inventories, there is also a big mismatch between the current liabilities and current assets at year end. This mismatch too adds to working capital costs. And, unlike FMCG units, they need to maintain a much higher level of gross block to generate revenues. At year end Excel Crop Care possessed a gross block valued at Rs 2.2 bn. This helped generate net manufactured revenues of Rs 5.9 bn. That works out to a gross block to turnover ratio of 1: 2.70.

Though facilitating a positive makeup of the bottom-line takes some doing for the company, it does not face a simultaneous problem in generating cash from operations. The positive flow of year- end working capital balances by Rs 201 m helped the company to generate cash to the tune of Rs 719 m. With capex for the year pegged at Rs 129 m the company had plenty of moolah on hand to reduce debt burden by a commendable Rs 522 m to Rs 892 m. It would appear that there is little co-relation between cash flow on the one hand and profit margins on the other.   

The siblings

It is of course the shareholders' good fortune that the company has not over extended itself in other areas of its functioning. Indian companies wantonly procreate siblings for no rhyme or reason as they are outside the jurisdiction of the minority shareholders of the parent company. For example, the non - current investments at year end amounts to only Rs 53 m. This sum is made up of investments in five siblings (there is a sixth sibling based out of Brazil but no sums have been invested in it as yet) and one associate. The companies include entities based out of Australia, Europe and Tanzania. An investment of Rs 60 m in another associate, Aimco Pesticides, has been fully provided for. There is also a marginal investment in the original parent Excel Industries. But there are 20 other 'Enterprises' over which key management personnel and their relatives have significant influence, but where Excel Crop Care has no direct stake. This includes charitable trusts, research organisations and such like. And there are advances of Rs 25 m receivable from some group companies. Excel Crop Care earns only a small dime of Rs 0.3 m as dividend from its investments -- the entire amount emanating from Excel Industries.

But there are quite some inter-se transactions on capital and revenue account with siblings and other group enterprises. The transactions include sales of goods, sales of services, rent, reimbursements, purchase of goods, purchase of services and, charity and donation in the main. The company sold goods worth Rs 502 m to group outfits, and in turn purchased goods worth Rs 1.16 bn from group entities. The sales of goods in the main are to such group entities as Excel Europe and Excel Africa, and Rs 54 m to Agrocel Industries -- an outlier. The purchase of goods from group companies, however, amounts to 86% of all goods purchased by Excel Crop Care. The three leading purveyors of sale of goods to Excel Crop Care are Excel Industries with sales of Rs 494 m, and TML Industries & Agrocel Industries - two group outliers -- with sales of Rs 342 m and Rs 215 m respectively.  Presumably, these transactions were resorted to for the mutual wellbeing of both the purchaser and the seller. We are also seeing here the peculiar situation of Excel Crop Care buying finished goods from Agrocel Industries and in turn selling finished goods to Agrocel Industries. In all probability the operations of the two companies are so intertwined that they are both inter-dependant on one another to earn their succour.   

The financials of the siblings

The company has furnished the brief financials of five siblings that do business. Of the five entities- two units namely Excel Australia and ECCL Investments -- do not generate any revenues as they have yet to get off the ground. The company with the highest paid up capital of Rs 30 m is Excel Genetics.  But it has negative reserves of Rs 23 m.  It pulled in revenues of Rs 94 m but could barely squeeze out a very marginal positive bottom-line. The company announcing the largest revenues was Excel Crop Care Europe. It generated revenues of Rs 248 m and a pre-tax loss of Rs 2 m. The sibling based out of Africa was on a better wicket.  It toted up revenues of Rs 219 m and could boast of a pre-tax profit of Rs 6 m. In other words the siblings are in poor health to say the least, and may not be big players in the consolidated accounts for years to come - assuming that they get going in the first place.  Much however will depend on the goodwill of the parent for the siblings to make it on their own.    

This is definitely not a company which sends out any positive vibes, going by the financial health of both the parent and the siblings.     

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 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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