Asahi Glass has been rapidly ramping up capacity to remain at the top of the heap, but it is not being matched by an equally adept management of its funds flow. Net margins are razor thin as a result.
Standing tall in the component segment
This company was incorporated some 26 years ago as an ancillary unit to the then Maruti Ltd. Setting up such ancillary vendors was one way for Maruti to overcome the shortfall of quality parts that went into the overall makeup of its plain Jane Maruti 800. It was also another way of reducing the exchange burden on Maruti who initially had to import all its components from Japan, and the progressively deteriorating rupee yen parity would have added to the hiccups of Maruti's cost accountants. The flip side of the coin was that the component units' got to be tagged with the forex differentials and had to absorb the cost increases, and besides, Maruti's books showed that the parts had been sourced domestically, entailing no forex outflow! Maruti got to kill several birds with one stone by resorting to this clever strategy.
Asahi India Glass is one of the first component units, and it was jointly promoted by the Delhi based Labroo family, Asahi Glass Co, Japan and Maruti Ltd. According to the latest annual report the Indian promoters hold 30.3% of the outstanding equity, while the foreign promoters hold another 24.8%. Whether Maruti Suzuki is still classified as an Indian promoter and whether the 30% domestic promoter stake includes the holding of Maruti is not readily known. However the company chairman Mr BM Labroo personally holds 8.6% of the outstanding equity of 159.9 m shares of Re 1 each.
The company today makes and sells auto glass, float glass, and glass solutions, under the symbol AIS. It has a 77% market share in auto glass in the domestic original equipment manufacturing (OEM) segment of the passenger car industry, and a 'remarkable' share (whatever that means) in the aftermarket segment. It is increasingly reaching out to the commercial vehicles segment. It also has a 26% share in the domestic float glass market. The products are churned out from its four factories located at Haryana, Uttarakhand, Chennai, and at Taloja near Mumbai. It also boasts three mini manufacturing units at Bangalore, Gujarat and Pune.
Ramping up capacity
The company has over the years been furiously ramping up, all ends up, by setting up new units and expanding capacity. From the ten year snap shot that it has provided, the net fixed assets (net of depreciation that is) have zoomed to Rs 12.2 bn in 2010-11 from Rs 893 m in 2001-02. That is a fab increase of Rs 11.3 bn over the time span. The problem here is that the debt has also accelerated at an equally astounding pace during this period. The total debt rose from Rs 1.2 bn to Rs 15.3 bn, or an increase of Rs 14.1 bn. Okay the gross debt includes working capital borrowings too, but it still gives an indication of the modus operandi of the management, and the fact that the company is just not raising sufficient cash from operations. Interestingly enough the paid up capital base rose a mere Rs 86 m - from Rs 74 m to Rs 159 m during this period. The increase in paid up capital was mostly through the modicum of the issue of bonus shares in the ratio of 1:1 in 2005-06.
The gross revenues during this period including other income, accelerated from Rs 2.3 bn to Rs 17.3 bn. What is important to note here is that the revenues have moved up consistently each year over the ten year period. The profitability factor however was another matter. The pretax profit rose from Rs 173 m in 2001-02 to a high of Rs 912 m in 2005-06 (the year in which in a flush of mistaken excitement the company issued free shares) and then see-sawed to record a loss in 2008-09, and in the succeeding year, before recording a marginal pre-tax profit of Rs 263 m in 2010-11.
The travails of component manufacturers
Component units have a very real problem. They have to very necessarily play 'footsie' to the demands and other eccentricities of the mother unit. In other words the junior sibling has to abide by strict quality control and firm delivery schedules on the one hand, while not having the upper hand in demanding and getting price increases to compensate even for genuine increase in costs. (The only auto ancillary unit in the Indian troposphere which has the wind blowing in its direction in this matter if my memory serves me right, is MICO, the manufacturer of fuel injection equipment, spark plugs and auto electricals-now known as Bosch India). But this company is fairly unique.
Such demands by the end users put enough strain on its cash resources. It is therefore all the more mindboggling that the management has gone about funding its 'capex' through a heavy dosage of additional debt. It is not as if the three promoters are cash strapped to bring in their share of additional moolah in the event of a further issue of equity capital, and maintain their percentage stake in the post issue scenario. The fact of the matter is that funding capital expenditure expansion through additional equity is the cheapest mode of raising long term capital in the first place. This is because equity capital is permanent capital, the dividend if any is paid on the face value while shares can be issued at a premium to the face value, and the management can omit dividend payment in the event of any exigency - as the management of Asahi India Glass has very wisely opted to do over the last four accounting years.
Not exactly what the doctor ordered
But for some absurd reason the management has chosen the debt route and in the process the minority shareholder had to face the ignominy of having to forgo dividend, as the company was out of pocket at the end of the day. The minority shareholders are the ultimate suckers at the end of the day. None of the three promoters are out of pocket however. Asahi Glass gets its royalty payment come what may - it took home Rs 244 m in 2010-11, which is higher by 17% over the preceding year, excluding any other freebies not easily detectable, while Maruti got its share of spoils through a dedicated supplier. The Labroos' too appear to be winners. Asahi India Glass has three subsidiaries and three associates, in which it has a combined equity stake of the book value of Rs 839 m. (The subsidiaries etc are spared the task of giving any dividend return to the parent). Of the three subsidiaries, two - GX Glass Sales and Integrated Glass Materials are wholly owned subsidiaries, while AIS Glass Solutions the largest of the three by far (book value of equity holding of Rs 328 m by the parent) is a partly owned subsidiary, or some such.
The associates tangle
In 2010-11 the parent sold goods worth Rs 277 m to its subsidiaries, another Rs 420 m to its associates and a further Rs 311 m to a category called 'Others'. That is a sum total of Rs 1 bn in sales to the three categories. What the 'others' category pertains to is not clear. The debtors outstanding of Rs 297 m at year end attributable to the subsidiaries is as much as the total combined transactions on both revenue and capital account that the parent had with the subsidiaries! That is a long credit line alright! The subsidiaries were also beneficiaries to the tune of Rs 413 m in terms of outstanding loans. The parent also purchased assorted revenue goods worth Rs 732 m during the year from 'others', as also capital goods worth Rs 230 m from them, or a total of Rs 962 m. The creditors' payable due at year end is Rs 319 m, and the debtor dues of Rs 53 m. It also advanced foreign currency loans of Rs 2.1 bn to 'Others'.
As I stated earlier the company appears to have difficulty in getting the end buyer to part with an increase in rates. Atleast this is what the figures tell. Also, the exact gross sales income that the company generated depends on which schedule one is looking at. The segment information schedule which gives a breakup of sales, product category wise, has such concoctions as 'Unallocable' and 'Eliminations' and arrives at one consolidated figure. The schedule giving the breakup of sales, purchases, opening stock and closing stock arrives at another figure.
What the unit price realizations tell
Assuming that the latter figure is the more authentic one, the price that the company obtained per unit sold reveals an interesting picture. The single biggest item of sales is 'flat' glass. This item brought in almost 38% of all sales. It managed to eke out a marginal increase in the gross sales value at Rs 109 per square meter against Rs 92 in the previous year. The price realized is including the indirect taxes levied. Next in line is 'laminated' glass which accounted for 31% of gross revenues. Here the company realized an average price of Rs 1,298 per piece against Rs 1,382 previously. That is to say it obtained an average price realization which is lower than in the preceding year. Third in line is 'toughened' glass which brought in another 23% of the top-line. In the latter year it obtained an average price of Rs 584 per square meter against Rs 591 previously. As in the previous instance, the average price realized dipped. Whether the lower realization infers that a wider variety of products was sold and hence a lower average realization or whether it implies lower realizations per-se is not known. These three items of sale however brought in close to 92% of all revenues.
Whatever may be the reality on unit price realizations, the turnover net of excise rose 20.2% during the year to Rs 15.2 bn. Material and manufacturing costs, the largest cumulative item of expenditure by far at Rs 9.3 bn, was well in line averaging an increase of only 18.5%.The mood spoilers were 'Personnel' expenses which rose 27%, and 'Selling and administration' tithes which rose by a similar percentage figure. In the latter subhead, the principal culprits besides royalty payments are 'packing and forwarding' expenses which advanced 36% to 1.3 bn, as also a 'cash discount' of Rs 101 m which clocked a phenomenal rise of 69%. What does this expenditure represent please? Are component manufacturers squeezed every which way? Or is there something else at play here? The other big expenditure items weighing down on profits were the interest outgo (on which the company has a considerable say) and depreciation (on which it does not).
At the end of the day the saving grace was the fact that the company was able to sell much larger volumes of its products and register significantly higher rupee sales. In this manner it was able to get the better of relentless cost increases. It is also ramping up the capacity levels of its 'Toughened' glass and 'Laminated' glass production lines at a much faster pace than it is able to make use of. It however makes poor use of its 'Architectural' glass capacity.
This is not a company which excites the imagination of a would be investor, and it is partly the doing of the management. Given the manner in which it is run it is more of a touch and go operation in its present avatar.
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.