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Nirma: Illusory soap bubbles? - Outside View
 
 
Nirma: Illusory soap bubbles?

A confused organization

The company is not the powerhouse that it used to be, in the soaps and surfactants market that is. It earned its name decades ago, by marketing cheap and affordable soaps and detergents with a catchy advertising jingle to boot. The company now appears to be a most confused organization, having diversified into such non related exotica as pharmaceuticals, diagnostics, and cement. Not including the spate of subsidiaries that it has germinated, whose very purpose of being is difficult to comprehend. And, a moot point is whether, the numerous backward integration schemes that it undertook to take care of the raw material requirements for its soaps and detergents manufacture has generated the value addition that it prognosticated. Caustic soda, soda ash, and linear alkyl benzene units are highly power intensive, and furthermore, are continuous process industries. Look at the evidence. On a gross block of Rs 38.7 bn at end FY10 (excluding trademarks), the company was able to generate a gross turnover of only Rs 33.3 bn. That is less than even a 1:1 ratio.

Its bread and butter market

Nirma appears to be losing out in its bread and butter market, the very factor that anointed the company with a halo decades ago. It was the first home grown unit to successfully take on the FMCG behemoth Hindustan Unilever, and deliver a knockout punch of sorts to its adversary. But cut to the present. Production of toilet soaps at 58,600 tonnes in FY10 was a mere 35% of installed capacity! This production was even marginally lower than in the preceding year. Volume production of detergents too is down 12% over that of the preceding year. Successful marketing of soaps and detergents requires a sustained high decibel advertising stream, as they are basically high volume, low margin products. But the total advertising expenditure for the year past was a laughable Rs 540 m!

The picture is all the more confusing, as detergent and soaps sales still account for 54% of total sales of Rs 33.3 bn, though down from 63% (total sales of Rs 33.5 bn) in the previous year. In percentage terms the advertising expenditure works out to 1.6% of gross sales! The company appears to have lost the will to fight long ago. It may interest the reader to know that on paper the company has the capacity to produce and sell 18 commodities. The list also includes toothpaste, salt, and shampoo. But it produced a mere 4 individual commodities of any significance. That infers idle installed capacity that it created. And since the company does not provide segment reporting of sales and profits, one has no clue on which product lines are bringing home the bacon.

The siblings issue

Like any number of Indian corporates, Nirma too has fathered a number of offspring. It has 2 wholly owned subsidiaries, who in turn have given birth to 7 other subsidiaries, etc. These subsidiaries of subsidiaries operate out of Europe and America. Some of them have extremely weird sounding names, including one called Trona Railway Company. Barring 2 subsidiaries, the rest appear to be there for pure cosmetic purposes. Two of the US subsidiaries are in business, and they collectively drummed up a combined turnover of Rs 23.4 bn. That is to say they registered a turnover which is 70% of the gross income that the parent generated. The bottom-line registered by either of them is well another story. The US duo sells processed minerals which apparently find application in the manufacture of container and flat glass, detergents, and the agricultural sectors.

Both the subsidiaries are standalone units, in the sense that they have no inter-se dealings with the parent. What is also very clear is that, there does not appear to be any immediate apparent synergy in such a convoluted maze of operations. Nirma’s investments in its subsidiaries are routed through its wholly owned subsidiary called Karnavati Holdings in which Nirma has invested Rs 5.3 bn. It is not known when this investment last yielded any return. And since these subsidiaries also carry debt in their books, the parent has very dutifully stood guarantees for loans payable by them to the tune of Rs 3.8 bn. Now you know where the money is going.

Squeaky clean accounts?

At first sight the accounts look fairly squeaky clean compared to the low standards that Indian corporates have set for themselves. No inter-se dealings with its siblings for example. Neither does it openly splurge on pecuniary benefits to its top management. Sitting fees to non executive directors per year does not exceed Rs 60,000 per director. The top guns on the executive board make do with salaries and perks which are way below what is paid by comparable corporates. The company did avail of large borrowings of Rs 3.5 bn during the year from 3 ‘parties’ and, borrowed further sums from 2 ‘corporates’, but the auditors state that the loans/interest have been obtained on terms and conditions which are not prejudicial to the company.

But, then, looks can also be deceiving. The company has large out standings on direct and indirect tax claims by the ‘Sarkar’. There are income tax disputes in excess of Rs 3.4 bn. And a whopping wealth tax claim of over Rs 50 bn! It has obtained a stay order on the latter from the Supreme Court. The wealth tax claim is interesting as it is levied on assets what are termed by the Department as ‘non productive’ assets. The company has not provided any footnote on this rather extra-ordinary claim on it. Then there are other direct and indirect tax claims of over Rs 15 bn on the company, which are not acknowledged by it as debts.

Non investor friendly

The management does not appear to be focused even on rewarding its shareholders. The company does not have even a dividend or bonus issue policy in place. It has not issued even its maiden bonus offering since its listing in the bourses nearly 2 decades ago. Against a paid up equity capital of Rs 800 m, it has reserves and surplus of Rs 26.8 bn. That is to say reserves and surplus which were 33 times in excess of its paid up equity! Given this lackadaisical attitude, why the management even so much as bothered to take the company public is the question that the management may like to answer.

There is really very little to commend this share as an investment proposition.

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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