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Birla Corp.: Heading in the right direction - Outside View by Luke Verghese
 
 
Birla Corp.: Heading in the right direction

The trials of the company

Birla Corporation, in corporate folklore, will be remembered less for what it is, and a lot much more for the epoch making legal tussle between the Birlas and the Lodhas, for control of the company. It started life in 1919 as Birla Jute Manufacturing Company and was a part of the RD Birla Group. In due course his son MP Birla assumed control of the company. The tussle for control and the colorful courtroom drama that accompanied the deft moves commenced after the demise, in 2004 of Mrs. Priyamvada Birla, wife of the late M P Birla. (The couple had no progeny). The MP Birla group which also includes in the main, Universal Cables and the companies spun off by Universal Cables, is currently under the control of the Lodhas. The Birlas are still making a fight of what appears to be a losing battle, as the Lodhas apparently firmly control an unassailable 63% of the outstanding equity, as a proxy to the MP Birla legacy.

Its bread and butter products

For long the company specialized in the manufacture of jute and jute fabrics, and vinoleum (linoleum) based PVC products. Over time the company branched out into the manufacture and sale of cement, which also turned out to be its life saver, as events ran their course. A seemingly thoughtless diversification into auto trims parts (upholstery and such like) also appears to be singing its swan song. Desperate to eradicate the jute tag from its name, the company which today is almost a pure play cement manufacturer, affected a name change to Birla Corp. in 1998. The only other revenue sourcing business is the generation and sale of power - much of it consumed by its cement units. For the matter of record, on a gross turnover of Rs 23.7 bn in FY10, the contribution of jute and PVC goods collectively totaled a princely 5.5%! (Jute still rings in a positive gross margin though). Cement on the other hand logged in 93.5% of gross sales.

Seeing the writing on the wall

The allegiance of the Lodhas to the late MP Birla is still very binding. The annual report very prominently still refers to the company as the MP Birla Group. Not that it adds any one bit to the company's brand equity. For much of the years that the Birlas ran the company it was a no brainer in stock market parlance. The market following that it had, if any, was strictly limited to the punters of the Calcutta Stock Exchange. To the credit of the Birlas however, it is the only prominent erstwhile jute manufacturer that comes to mind that diversified out of jute, and is still standing tall, as it apparently saw the writing on the wall long before the eventual happened. The other jute companies have bitten the dust, so to speak.

The cement Industry factor

The cement business has had a magnetic attraction to the several divisions of the Birla group, most notably the AV Birla group. This is just as well. Though cement is a manufactured product, it is an important cog in the infrastructure wheel. It is also anointed by analysts as a local commodity sector player. That is to say cement prices in our very own Bharat still gyrate to the tune of both 'local' politics and price fixing. This is unlike other commodity players such as the Indian sugar industry, or even aluminium or steel for that matter, which have to foxtrot to the tune of 'glocal' shenanigans. And our cement manufacturers are a crafty lot for sure. Capacity addition in the industry is invariably a follow up factor of demand pull. So the industry is able to manage cement prices to their benefit. In other words, it is difficult for even a modestly run cement company to be out of pocket.

Birla Corporation is one of the bigger players in the industry and it seven units spread across the 4 states of West Bengal, Madhya Pradesh, Uttar Pradesh and Rajasthan have a capacity to make 6 m tonnes a year. It produced 5.6 m tonnes in FY10. The directors' report claims that it will up capacity to 9 m tonnes in the near future by modernizing its dilapidated plants and through brownfield expansion. Plans are also apparently on the anvil to set up two new plants, one in Assam, and the other in Madhya Pradesh (the latter possibly through its wholly owned subsidiary Talavadi Cements) with a capacity of 1 m tonnes and 3 m tonnes respectively. For the present Talavadi Cements functions purely as some sort of an investment outfit of the group, recording no revenues whatsoever, but still posting a profit before tax of Rs 5 m. Miracles happen you know.

The company is stacking up on the finances for the big spending to come. In the last 2 years, gross block addition has been to the tune of Rs 3.1 bn. Borrowings have rocketed from Rs 2.7 bn to Rs 7.1 bn. For the present, the increased borrowings have been profitably parked in liquid investment schemes. Investments in mutual funds and such like have risen phenomenally to Rs 11.2 bn.

The doings of the management

The management in a determined effort to show that Birla Corp. is in good hands have given the brief financial highlights of the company's working for 8 years. The catch here is that the figures of the first of the 8 years pertain to FY99, and the results for this year is particularly depressing. It is immediately followed by the working of the year FY04 (the year Priyamvada passed on) and then sequentially on for the next 6 years. In FY99 on a turnover of Rs 873 m it recorded a pretax loss of Rs 536 m. In FY04 it was a wholly different story. On a gross turnover of Rs 11.7 bn it recorded a pretax profit of Rs 416 m. What exactly was the objective of this morbid display of affection is not quite fathomable.

It has been brought to our notice that the company is following a rather unique protocol. Since the year 1996-97, it has been covering the Financial Highlights of eight years, i.e. the current year, the immediately preceding six years and the figures of the 11th year from the year under review. Now, that does help shed some light on the matter, doesn’t it.

The management is also silent on the future prospects of the 9 subsidiary companies. All of them appear to be coasting only for pure cosmetic purposes, as it is de-rigueur for business houses to host several subsidiaries merely as a matter of right. Fully 7 of the 9 do not even register any turnover, and of the 2 which do, one registered a turnover of less than Rs 100,000! Talavadi Cements appears to be the only one with any future prospects. What the management has in store for these tiny pinpricks will be a matter of interest?

Asset rich

The company is a lot 'asset' richer than the books reveal. The freehold land that it owns is valued in its books at a mere Rs 200 m which is a historical valuation. Ditto with the buildings, valued at another Rs 731 m. In all probability the market value of these landed properties may well be worth in the region of several thousand million rupees, even on a very conservative reckoning. Further, the market value of its holding in Century Textiles is worth a cool Rs 1 bn against a book value of a mere Rs 94 m.

Segment reporting

The interesting feature of the company's accounting for sales, in its segment reporting, is that the power division is treated as a profit centre. This division (it is the most profitable division by far as a percentage of sales), generated a gross profit margin of over 50%, on a revenue generation of Rs 1.8 bn! The vast bulk of the revenues, 95% to be precise were generated on the inter-segmental account. In other words the price charged for power to the cement division becomes the revenue driver of the power division. The sales affected to the cement division gets 'netted out' in the final sales figure configuration, but the profit that this division clocks remains prominently on display. This makes little sense overall, unless power generation and sales is entitled to tax incentives on the profits that it generates, which is not available to the other divisions. And, coming to think of it, if the power division is so profitable, why then the singular emphasis on setting up so much of additional cement capacity?

The Birla trait

Like all Birla Group companies it is also very niggardly when it comes to enriching its non-management shareholders either through dividends or by the issue of bonus shares. Its dividend payout for the year was a mere 8% of post tax profits of Rs 5.6 bn. The paid up equity in turn, is a mere Rs 770 m against free reserves and surplus of Rs 17 bn.

Disclosure: Please note that I am not a shareholder of this company

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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1 Responses to "Birla Corp.: Heading in the right direction"

Dhruva Rana

Sep 17, 2010

Luke:

It has been great to read your views about Birla Corp..

I was interested in a small cap company Gujarat Ambuja Exports
Current Market Price: 29.55
MArket Cap: 408.14Cr
Sales: 1416Cr (March 2010)
Gross Profit: 117.50Cr (March 2010)
Net Profit: 60Cr (March 2010)
ROCE: 14.94%
Reserves: 392.57Cr

Company has 18Cr of long term loans, 40Cr of listed Stock and mutual fund investment and 28Cr of cash in hand.

promoters had done a stock buyback in 2008 with buyback price of 38/= only 9.66 lakh shares were available for buyback.. in 2008 (stock shot up to 100+)

Since 2008 Promoters have bought more than 4+ lakh shares from the market in creeping acquisition and in August 2010 53,506 shares from the market avg price: 28.31

On Sept 15 2010 promoters have bought additional 3786 shares at avg price of 28.05

Thank you for all the good work in providing critical review and looking forward to get your point of view. I do have holdings in GAEL and hope people get a chance to get in at these lower levels.. your review will be of great help..

With Best Regards
-Dhruva Rana

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