Atul Ltd: Leveraging latent potential? Maybe not. - Outside View by Luke Verghese

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Atul Ltd: Leveraging latent potential? Maybe not.
Oct 5, 2010

Visionaries and conservatism

The 'rahu kalam' that has overtaken Atul Ltd. , is reminiscent of what happens to corporates that continue to have their 'fortunes told' by the scions of the founder, for no better reason than that they are born into the 'khandaan' (family). Atul was founded in 1947, as Atul Products, by the late visionary, Kasturbhai Lalbhai, who in his heydays, as the cotton textile king of Western India, was considered one of India's richest industrialists. There is of course very little left of his legacy, stock market goodwill wise. The company as it is known today is some 33 years old, having been given its present corporate identity in 1977. Atul was never a stock market darling even in its heydays, thanks to its ultra conservative dividend and bonus issue policy. (Ruinous wealth taxes were one of the major grounds for corporate parsimony to its shareholders, during the writ of Mrs. Indira Gandhi's regime. But Atul in any event sparkled like a gem, despite these strictures). Its dividends never exceeded what the company itself got as dividends from its subsidiaries and associates!

Promoters' Brand Equity

The original promoters, even in the days of yore, (the 1950's), had the brand equity to attract such international brands as American Cyanamid, Imperial Chemical Industries, and Ciba Geigy to partner it in setting up joint ventures in India. Through ICI and Ciba Geigy it set up Atic Industries and Cibatul, both of which manufactured intermediates for the textile industry. Cyanamid was the pharma and chemical offshoot. With both ICI and Ciba having subsequently exited, these two JVs were merged with Atul sometime in the latter half of the 1990's.The only textile company of the group in which this company has an equity investment in today, Arvind Ltd, (yesterday's star in the making, and the biggest denim maker in the country at one time) appears presently to be a clear cut basket case! Atul has its goose royally cooked here too. The book value of its equity stake in Arvind is valued at Rs 470 m (at an average price of Rs 113 per share), and the company has also advanced a loan of Rs 213 m to this affiliate. Atul has not yet deemed it opportune to provide fully for these 'write offs'. Arvind incidentally was founded by Kasturbhai Lalbhai himself!

Losing the plot

Today the company chugs along with the help of celestial power and glib talk. The management makes up for its non performance by harping on banalities - it was set up to create wealth in rural India, it was the first private sector company to be inaugurated by a Prime Minister, it is a part of the Lalbhai Group, one of the oldest and most reputed business houses in India, it caters to the varied needs of 11 industries, it operates 6 divisions, it has set up bases in Europe, North America and China, and it is increasing its presence in Africa, Europe and, North and South America. Big Deal!

The fact of the matter is that the management lost the plot eons ago. But with an acknowledged equity stake of 42%, and probably some more, they can rest easy, irrespective of the direction that the company is moving in. Take a look at the reality of the matter. It can on paper manufacture some 45 product lines. But it makes do with 34 items of production and when it comes to the sales bit, it groups them under 22 items, including traded commodities. Here again, some 7 items account for over 80% of rupee turnover, and the rest chip in with small change including such ridiculously small turnover figures as Rs 0.6 m, Rs 7.8 m, Rs 1.4 m, Rs 2.1 m and so on, which should be deemed most unbecoming of such an entity.Progress at snails pace

Over the decade, between FY01 and FY10, the company just about made do with doubling its gross turnover to Rs 12 bn. (But for the mergers that it engineered in the 1990s, the company would have been a much smaller wimp). The profit before tax however moved more in keeping with the performance of the Sensex when the latter is hit by volatility. The dividend payment varied from Rs 30 m to Rs 140 m. To add to its woes, the company apparently operates in a highly capital intensive sector. The gross block moved up from Rs 5.6 bn to Rs.9.9 bn over the decade, but the turnover to gross block averaged only 1.2 times. Since the company is simply not generating sufficient resources from operations, the borrowings too at each year end, keeps fluctuating like the Sensex gone nuts. The paid up equity has remained static at Rs 300 m for long enough.

For reasons best known to itself it exported Rs 5.1 bn out of a turnover of Rs 11.8 bn in FY10, or close to 44% of turnover. The six divisions which generate this turnover, Colors, Aromatics, Bulk Chemicals, Crop Protection, Pharma and intermediates, and, Polymers cannot each be considered as anything more than pygmies for starters. (For segment information purposes though, the sales are very neatly classified under just two heads - Colors and, Speciality Chemicals and Others. This way we will never get to know which of the six divisions are actually making money. Both the Colors division and the Speciality Chemicals division generate positive margins though.) Then we are informed by its Chairman, Mr. Sunil Lalbhai that the overall performance of the Chemical industry deteriorated during the year, due in part to the fundamental changes taking place in the structure of the industry. Now that is a very leading statement.

Changes in the making? No way

So what does the company plan to do to cope with the changes in the making? It intends to improve efficiencies and productivity, expand existing products, and, introduce new value added products by bringing down liquid and solid pollutants, and making businesses more systems driven. Towards achieving these goals, the company has made an admirable start by drastically reducing capex in FY10 to Rs 210 m from Rs 720 m in the preceding year.

In between the efforts that it is making at improvements in efficiency and productivity, the company is busy expanding its horizons by setting up foreign subsidiaries. In addition to the footprint that it already has in Europe, North America, and China, it is contemplating opening offices in Malaysia and Brazil, as Asia and South America are growing rapidly. Wow! And, how are the subsidiaries that are in operation, functioning? Atrociously, if that is the right cliché. The company routed some 23% of all exports, or Rs 1.2 bn, through Atul Europe and Atul Americas in FY10. It equity investment of Rs 69 m in Atul Europe is almost fully provided for (depreciated) in its books, and its equity investment of Rs 5.5 m (or is it Rs 6.1 m?) in Atul Deutschland is partly provided for. (Why in the first place does it want to export to Atul Europe when this subsidiary is bankrupt for all practical purposes?)

Its equity stake of Rs 18.4 m (or is it Rs 22 m?) in the China subsidiary is as yet not under siege. And, how is Atul Americas performing at the sweepstakes? We are informed that it generated a turnover of Rs 610 m in FY10, but the columns which denote the profit before tax, provision for tax and the profit after tax of this subsidiary are kept blank, for whatever reason. It is in all probability a printing error, perhaps. Its equity investment in two of its other subsidiaries, Amal Ltd and Gujarat Synthwood are also partly provided for. So that is the saga so far of the subsidiaries. But, wait, there is more masala yet to come.Diversification Blues

As a part of the diversification effort to make it less dependent on its bread and butter business perhaps, the company is getting into the healthcare space in a focused way. Towards this end it has floated a new company, Atul Bioscience, and this new offspring's equity base is currently all of Rs 10. We are also informed that this company already has manufacturing facilities, acquired from an erstwhile pharma unit, (probably Cyanamid), and that this new entity will be investing Rs 150 m in its endeavor. Atul will benefit to the tune of dividends and royalty if any.

In tune with the diversification angle, shareholders will be pleased to note that the management has also cottoned on to a new a line of business, namely date palms. It has promoted a JV with the Rajasthan government to commission the largest facility to produce tissue culture date palms. This initiative will transform the ecology and the economy of the arid regions, the chairman adds. There is no mention of what the management of Atul is planning to do to resuscitate its own ailing spirits. But, hopefully, date palms will be able to provide the magic mantra.

Directors who are a board of cards

In keeping with the management's self perceived vision as belonging to one of India's most reputed business houses, the company has been able to attract a bevy of executive talent of yesteryears to its non executive board of directors. A bunch of has beens if one may say so. From the likes of Mr. Susim Datta, to R. A. Shah, Dr. S.S. Baijal, B.S. Mehta, G.S. Patel, Dr. K. Aparajithan. This brings us to the vexing question. What exactly is the function of independent directors on the boards of listed companies? Are they there to function merely as rubber stamps, or to give some purpose and direction to the future wellbeing of a company? Sadly the latter does not appear to be the case. Poor Baijal. This former CEO of ICI India is still saddled with 4137 shares of the company. RIP.

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 "Atul Ltd: Leveraging latent potential? Maybe not."

The Fixer - SaanpaurSeedi

Nov 4, 2010

Hi Luke,
Nice history on Atul and some very good details. But after reading it ,I was left confused. So what would be your one line summary of this article ? ATUL - useless stock.Ignore it ?
But I was checking some numbers ,in the last decade, from 2001 to 2010. And that provides big evidence that pokes some holes into your `bearish` thesis.
ATUL has had Zero equity dilution since 2001. Promoter holding increased from 33% in 2001 to 44 % in 2010. How many companies can you find with such stats ?
In the same period share price has gone up from 15 Rs to 195 or a 13x bagger. ATUL recently broke out and is at its lifetime high levels. So how come you missed this fact ?
I will be very interested to see your reply.;-)
The Fixer

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