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Ingersoll Rand: Merely coasting along - Outside View by Luke Verghese
 
 
Ingersoll Rand: Merely coasting along

The operations of the Indian off- spring has lost steam and the company is now muddling along. But, hopefully, the new planned capex will add to the goodwill that it has generated over the years

A pale version of the original

The present avatar of the Indian sibling is more of a pale face version of the red hot original that opened its doors to the Indian investing public way back in the late 1970s. It was forced by government diktat and the strict enforcement of the dreaded Foreign Exchange Regulation Act, 1973 which literally forced foreign companies into diluting their shareholding in their 100% Indian subsidiaries by offering a part of their permanent capital to the Indian public. The parent was somehow able to convince the then government that it manufactured high tech products (compressors, drilling equipment, road rollers etc) and could thus get away by offering only 26% of its outstanding equity to the Indian public , with the parent holding the balance 74%. This shareholding pattern has not altered since, though there have been timeless rumours of Headquarters wanting to recapture the entire outstanding Indian public shareholding, and then delisting from the bourses.

Ingersoll Rand has of course had a superb innings in India, and this can be judged from the constitution of its paid up equity. Bonus shares make up over 99% of its middling paid up equity of Rs 316 m and it will also rank as one of the oldest American companies operating in India with a vintage of 90 years at that, having initially opened its doors in 1920.Inspite of the low capital base relative to the scale of its operations, the consequent low floating stock, and the general lack of interest in the share, the stock did gyrate quite some in the last financial year with its price oscillating from a high of Rs 558.50 in July 2011 to a low of Rs 355.20 in December 2011. It also celebrated its 90th year in style, from the shareholder point of view, but more on that later.

Along the way, and in the interim, the parent Ingersoll Rand of the US itself (the ultimate holding company is currently based out of Ireland) went through convulsions of its own as it sliced and spiced its own operations, which in turn had a down the line effect on its Indian operations. The Indian operations became truncated and it has since lost steam. A look at the roller coaster revenues that it rigged up each year in the last decade is a sign of the uncertain times that the company is going through. It posted its highest sales of Rs 6.5 bn for the last decade in 2006-07, and its lowest sales of Rs 3.8 bn in 2009-10. It ended the year 2011-12 with sales of Rs 6 bn. It must be noted that separately it also generates sizeable other income (comprising of sales related income and other income) which like the main course beats its own bizarre path. In 2011-12 for example it generated other income to the tune of Rs 1 bn, while in 2006-07 it was a mere Rs 327 m.

Its product line

Today its sales mix is a small potpourri - in the main it is air compressors - and includes complete machines and accessories, air conditioner bus package, and a judicious amount of spare parts and components to go with the main course. The air compressors in turn are apparently made up of - reciprocal air cooled, reciprocal water cooled, rotary screw compressors, and centrifugal compressors. The principal industries to which they cater to are the automotive sector, metals, pharmaceutical, and textiles, amongst others. The overall revenues in turn include large dollops of sales to its holding company and to its fellow subsidiaries. In 2011-12 for example, sales to group companies amounted to Rs 1.3 bn. That accounts for a slice over 23% of net finished goods sales for the year - and excluding other operating income. It also affected purchases worth Rs 750 m from group companies. So in effect the two way transactions are a very material affair. There are other minor infractions too but they are not very germane. For the matter of record Ingersoll Rand has five fellow subsidiaries in India - and they are all closely held companies. The five-some are - Ingersoll Rand Industrial Products, Ingersoll Rand International (India), Service First Aircon, Thermo King India and, Trane India. What exactly they do to keep their head above water is not known. But some of these fellow subsidiaries are recipients of inter-corporate deposits to the tune of Rs 1.5 bn at year end from Ingersoll Rand India. Ingersoll boasts of no debt, and is cash rich and like hell at that.

As stated earlier the company trumpeted up gross finished goods sales of Rs 6 bn in 2011-12. Other sales related services added up another Rs 316 m and comprises installation and commissioning, and, business support and auxiliary services. Sales of finished goods in turn in the main comprise of the following - air compressors accounting for close to 54% of finished goods sales, followed by spare parts and components accounting for another 37%, and bringing up the rear is air conditioner bus package accounting for 2.6%. Excise duties ring in the balance. In other words the pricing of spare parts has a very significant play in how it functions. It is also principally a producer of compressors. Turnover wise Ingersoll is the second biggest of the four companies listed by Capital Market magazine. Topping the list is Elgi Equipment, followed by Ingersoll, with Kirloskar Pneumatic and Revathi Equipment taking the third and fourth places.

The cost of sales

From the expenses schedule it appears that the rise in the cost of material inputs was marginally higher than the increase in sales. While rupee sales rose 20%, the cost of inputs rose a little over 23%.The other significant item of expenditure - employee compensation -also rose 22%. There are several points that come into play here. The fact is that the company generates its revenues on what appears to be an almost totally depreciated plant and machinery. In any event the gross block does not add up to much. During 2011-12 the gross block grew by Rs 241 m to Rs 856 m but that was essentially because of addition of leasehold land during the year. The point is that the tangible gross block at year end of Rs 856 m jogged in manufactured sales of Rs 6 bn. But more importantly, the gross plant and machinery amounted to Rs 372 m and the accumulated depreciation on this amounted to Rs 266 m - leaving very little to write off any further. One is reduced to wondering how high tech the product lines that it puts into the market are.

The other important characteristic that comes to mind is the time taken to receive its trade dues for goods sold under various heads. It has different yardsticks for different customers. Overall, the average trade dues amounted to 21% of sales for the year. But, separately speaking, trade dues from the parent amounted to 48% of the total sales affected to the parent, while trade dues from its fellow subsidiaries amounted to only 18% of sales to them. In similar vein trade payables to the parent for goods purchased amounted to 42% of purchases, while trade dues to fellow subsidiaries amounted to 15% of purchases. Why is the company offering differential time spans to group affiliates? Where the margins kick in from, is also a moot point as companies are not required to provide the financials of their export income.

Heavy dependence on group companies

In grinding out the revenues there is also heavy dependence on import of materials. Imported raw materials, spare parts and components accounted for almost 46% of all material consumption. Quite some sums of these imports were care of group companies including from the ultimate holding company based out of Ireland. It appears that all multinational companies enforce a circuitous route when dealing with the operations of their far flung siblings. One gets the impression that by resorting to keeping a tight rein on almost every aspect of the functioning of the group, the parent is also able to adjust the margin contribution of each group company. Though the company exports a large slice of what it produces, it may interest readers to know that it is actually foreign exchange negative at the end of the day. The value of imports at Rs 1.5 bn exceeded the value of exports by a sizeable amount. And, if one factors in the large forex outgo on account of dividend etc, then the gap becomes that much wider. Strangely, the parent has not yet wised up to the idea of squirreling some money out through the modicum of royalty fees, though there is a payment of Rs 69 m on account of Management fees.

The other income factor

Whatever, the fact of the matter is also that the contribution of non sales related other income is a very vital factor in the wellbeing of the business. Other income at Rs 690 m amounted to 56% of the pre-tax profit in 2011-12, against a lower 49% previously. Other income in the main consists of interest income-interest income from banks amounting to Rs 357 m, and interest income on its inter-corporate deposits of Rs 172 m. The inter-corporate deposits on an average earned an interest rate of 11.4%. There are also sundry other receipts from export incentives, lease rentals, and provisions written back etc in the other income basket. As I said earlier the company is also cash rich and how! At year end it boasted cash hoard of Rs 4.5 bn-this was marginally lower than the cash excess of Rs 5.4 bn in the preceding year, but again this depletion is due to a quirk. It paid out a sumptuous dividend of Rs 880.5 m (Rs 220.5 m previously) to celebrate its 90th founding. Just about any trumped up reason is enough to get rid of excess cash. The reason for this excess of cash in hand is not just the fallout of judicious management of its resources, but also due to the ineptness of the management in using the cash pile more productively. However, the company has suddenly decided to shift a few gears on this score and that is an encouraging sign of the times.

Not sufficient cash flow

The miracle about accounting is that even if a company is a market leader, is generating margins, and is on the upswing, it need not necessarily generate any positive cash flow from operations. This is precisely what Ingersoll achieved in 2011-12, and also almost achieved in the preceding year too. But then it does not really have to pay much attention to cash flow generation as it is sitting on a mountain of cash riches which plays the role of rainmaker in times of need. Whatever, it generated negative cash flows of Rs 163 m during the year. This was principally occasioned by two market related events. There was the dual play of trade debtor receivables accelerating by Rs 346 m, and trade creditor payables falling by Rs 94 m. There are other bit players too adding to the confusion but they not very germane in the overall scheme of things.

The future

The silver lining however is in terms of the company management finally getting its act together and going ahead with a greenfield project in Kancheepuram district in Tamil Nadu. The copy does not mention what exactly the new plant will manufacture or the capacity of the plant for that matter. But one can infer it is only an extension of its air compressor manufacturing facilities presently working out of its plant at Bangalore. This would amount to an inadequate level of disclosure in the annual report. However we are informed that the total capital cost will amount to Rs 1.35 bn-which is loose cash sort of for Ingersoll Rand. The plant is expected to go on stream in the first quarter of 2013.That implies that the revenues should see a spurt in the financial results for the year 2013-14. That is sort of round the corner in a manner of speaking.

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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