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Mohan Meakin: Wallowing in a drunken stupor - Outside View by Luke Verghese
 
 
Mohan Meakin: Wallowing in a drunken stupor

The superstar of yesteryears

It is indeed a pity that this superstar of yesteryears - most famous for its iconic Old Monk rum and its Diplomat and Black Knight whisky is today suffering from self induced acute cirrhosis of the liver. (The company has a portfolio of 20 alcoholic product lines, excluding beer that is). What makes it even more unfathomable, is the plain fact that the liquor industry is the one sector, which is 'all weather' friendly' - it never suffers adversely due to economic uncertainty. As a matter of fact people also hit the bottle during a depression. Mohan Meakin was initially established some 155 years ago in 1855 as E. Dyer and Co, and after a partnership metamorphosed into Dyer Meakin and Co at some point of time. Its parentage is also often mistakenly linked to the immediate family of the late Brigadier General Reginald Edward Harry Dyer of Jallianwala Bagh fame.

Shines under N.N. Mohan

In the 1960's the management control passed on to the family of the late N.N. Mohan, under whose short lived stewardship, the company prospered like never before. It was became a market leader in the IMFL (Indian Made Foreign Liquor) and beer segments. It was at this point that it affected name change to Mohan Meakin Breweries. During this period too, the company was apparently primarily a brewer rather than a distiller. The company continued to shine after the baton passed on to his son, the later Lt. Col. V.R. Mohan. The decline in its fortunes commenced after the passing on of the latter.

First book loss in a decade

The company as it is known today is some 76 years young. Incorporated in 1934, it is showing signs of advanced age, and acute wear and tear. So much so that it even managed to show a book loss after interest and depreciation of Rs 45 m, for the first time in the last decade. This show stopper was accompanied by a sharp decline in turnover to Rs 3.8 bn from Rs 4.2 bn recorded in the preceding year. (Admittedly it was the profit of a little over Rs 120 m, on the sale of fixed assets, in the preceding year that converted a loss into a profit. But another schedule however says that the company sold land for Rs 120 m to the (group patriarch) Narinder Mohan Foundation. Apparently there is some serious discrepancy here, as it cannot make a profit in excess of the sale price). The management appears more concerned over erecting a 'tomb' to commemorate its late chairman than in turning round the company. Not the best way of paying homage though.

Dismal state of affairs

There are several reasons for the rather dismal state of affairs. Paradoxically enough the company makes a leading statement that the loss making Lucknow distillery, which is a millstone round its neck, and which not only eroded the company's finances, but also exhausted its borrowing capacity, has been iced since April 1, 2009. In effect, this infers that the company made do without this loss making unit in the latest financial year. How then did it make a book loss in this year? What indeed is the voodoo mantra here please? The ill thought out statement on its borrowing capacity is even more unfounded. The management controls over 65% of the voting power of the company on paper. What prevents the company from issuing more stock or even converting some of the outstanding debt into equity? The advanced age of the board members has simply diminished the power of positive thinking within the company. Not only that, what makes it so easy for the management to deflect criticism is that the total shareholding population is below 6600 in number.

Geriatric board

This is surely the case. The board also consists of people who can be construed as a bunch of geriatrics. The finance director is pushing 84 and his name is proposed for a further tenure of 2 years. Two other members of the board, Mr. Swaraj Suri and Mr. Yadava, who are pushing 80 and 79 respectively, are also being proposed for re-appointment. The company should really focus on building old age homes as a profitable means of diversification. In some sort of gallows humor, the annual report states that more than 50% of the composition of the board consists of independent directors! So what?

There are problems galore that effect the smooth functioning of the company. For starters the management does not appear to be one bit concerned that the company is passing through difficult times. Take a look at the salary and perks that the company continues to dole out to its top management. The total remuneration to Brig. Kapil Mohan, Hemant Mohan, and Mr. P.D Goswami toted up to a humungous Rs 163.4 m - sanctioned of course by the independent remuneration committee. There is no thought of downsizing in one's own backyard. So who cares anyway?

No head, nor tail

The economics of the functioning of this company makes no sense whatsoever. It can on paper produce 18.2 m LPL of spirit annually. This production capacity is the same as in the preceding year, inspite of the company having mothballed its Lucknow distillery unit. How the auditors gave such a certification on its installed capacity is not known. The capacity utilization of the spirits unit was a next to nothing 3% of the installed capacity, compared to 7.4% in the preceding year. It looks like the company is progressively moving away from the manufacture of spirits to outsourcing what it sells. Why in heavens name does the company keep such a large idle capacity in the first place?

The capacity of the beer unit is utilsed to the extent of 50%. Not that there is a lack of demand. Okay, the company sold only 12 m London Proof Litre (LPL) of spirits in FY10 compared to 15 m LPL in the preceding year. But it made up for this deficit by selling 30,000 kilolitres (KL) of beer against 24,800 KLs in the preceding year. It appears to have made a shift dictated by a change in emphasis rather than a change in demand. This shift also happened in the very year that the company reported its first book loss for the decade. In other words the shift in emphasis has done nothing to turn around the economics of its working.

The company totally outsourced finished beer and spirits worth Rs 980 m during the year against Rs 880 m in the preceding year. Of this amount, finished goods worth Rs. 690 m were sourced from its associate company Mohan Rocky Springwater Breweries, which is a privately held family enterprise. This apparently included in large part IMFL products, and to a much smaller extent beer. (This also begets the question as to why Mohan Rocky is called a brewery and not a distillery). It is possible that a part of the company's production capacity is leased to this affiliate. Why the company chooses to use this backdoor method of generating sales has not been adequately explained. It had also transferred a part of its production capacity amounting to 1.7 m LPL to another JV going by the name of Macdonald Mohan Distillers, which is under liquidation!

The outsourcing story

The outsourcing story however continues. There is another family owned company called National Cereal Products Ltd, which manufactures the bulk requirements of barley malt required by the mother unit. The family holds a 54% stake in this venture. The company made purchases aggregating to Rs 75 m during the year from this venture. Then there are assorted other concerns which in part bear the family name. The list in the main includes Mohan Goldwater Breweries, Mohan Closures, Mohan Carpets, and, John Oakey and Mohan. What other inter-se deals there are if any is not known. Interestingly the company also made large sales of Rs 183 m (Rs 176 m) to another group affiliate called Trade Links Pvt. Ltd. But it does not hold any shares in this affiliate. The latter is apparently some sort of a selling agency.

The mess that the company is in brings one to the larger question. Why does the company continue to make and sell spirits and beer? The plain vanilla fact is that it is the non alcoholic division that brings home the bacon in the first place. The company makes and sells juices and canned products, corn flakes and wheat porridge, and an item called 'miscellaneous'. The latter's contribution to revenues was a rather hefty Rs 234 m (Rs 246 m). Sales on non alcoholic items account for less than 10% of gross turnover. But the company realized 14% margins from the sale of these items against a loss recorded on the sale of alcoholic products.

Not too late to act

It is indeed a pity that this management has completely run out of ideas and that too at a time when other big competitors are upping it and moving on and competition is moving into the country from foreign shores. The company says there is a market for its products outside the country - as far afield as North America, the Far East, the Pacific Rim, and even the Middle East. But the present value of exports is a piddling Rs 78 m. It is not too late to put a professional management in place and revive the fortunes of this beacon of yesteryears.

Please note that I am 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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