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Mohan Meakin: Suffering from acute cirrhosis - Outside View by Luke Verghese

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Mohan Meakin: Suffering from acute cirrhosis
Oct 16, 2012

This company appears to be a lot more intoxicated than its tipplers

Coming to a sorry pass

To think that this iconic brand of yesteryears has come to such a sorry pass. And, you would imagine that liquor is one business that can never go out of business - all religious texts castigating it as an evil temptation - notwithstanding. The biz is also a lot older than the texts you see! The cover of the Mohan Meakin annual report also proudly advertises the fact that it has been around since 1855!

There is this thing about certain 'vices'. People will continue to drink, they will continue to smoke, and continue to fornicate irrespective of the roadblocks erected in their uncharted functioning, is the wise old saying. And how true a saying it is. And, indeed, liquor companies worldwide are evermore gearing up for a further slice of the evolving action by wedging new alliances by the score. The late Vittal Mallya for example made his fortune by very tactfully buying up liquor companies for a song during the drought years when the ageing and cantankerous Morarjee Desai was at the helm of affairs on the national stage.

The company represents a very sorry spectacle today, and it is not due to lack of trying, so to speak. Its financials remind one of the adage about democracy. It is a company of the management, by the management, and for the management is the quick impression one gets. It currently boasts of five manufacturing facilities - one of which located in Lucknow has been shuttered. The operating units are located in Himachal Pradesh, Punjab, and Uttar Pradesh. It has two breweries, two distilleries, bottling plants, malt extraction units, manufacture of breakfast cereals, fruit products, glass factories, engineering works units and foundries. A disjointed potpourri of businesses under one roof if one may add. But its non alcoholic products are a strict also ran affair.

Wayward profit margins

The directors' report does not put a finger on why the company is unable to come up trumps on the bottom-line front. The indirect taxation of liquor is a state subject and the report complains of the many impediments being imposed by state governments to deter the flow of liquor from one state to another through restrictions and imposing exorbitant import fees. The result is that a liquor industry established outside a state cannot compete with a unit operating within a state. Excise duty policies are being framed to favour manufacturers within the state. Furthermore, certain states have devised a system of buying beer and IMFL (Indian Made Foreign Liquor) products through their own undertakings specifically established for this purpose, and supplies of liquor are affected via tendering.

Fair enough, but that still does not explain why the company should be haemorrhaging. The trajectory of the post tax profits each year in the last 10 years is about as tipsy as it can get. Furthermore, it has omitted dividend payment in the last four accounting years. And, the company may also like to explain why it has beer and distillery units in only two states, and why there is no effort by the mother unit to set up new units in other states to overcome one of the major impediments to growth (The company has however devised a way of getting round this situation, but more on this aspect later on in this copy). The company makes all the IMFL brands from rum, gin, malt whiskies, brandy and vodka. It claims that its beer and IMFL are exported to 19 countries across the globe, and the exports scan continents at that. The forex earnings during the year amounted to Rs 103 m during the year. Going by this figure the company must be exporting peanuts or something to each country. It also claims that its Old Monk Rum as per certain World publications is rated as the largest selling brand of Rum. It will be interesting to know the names of these publications and their standing in the booze biz.

Its revenue streams

The company earns its bread through several revenue streams-manufacture and sale of alcoholic beverages (accounting for 93% of gross revenues) and the manufacture and sale of non alcoholic beverages (accounting for 7% of gross revenues), and Royalty and technical know-how fees. The company drummed up gross revenues of Rs 4.8 bn - up 15.8% and after deducting excise taxes the net revenues were Rs 3.9 bn - up 20.6%. (The gross revenue accruals each year also underwent a rollercoaster ride of sorts in the last decade.) One reason for this could be that it sells both the manufactured variety and the outsourced concoction. Gross sales of manufactured goods accounted for 61% of all such sales, while the balance 39% was accounted for by the sales of traded goods. At the net level (excluding excise taxes) the revenues from manufactured goods accounted for 51% of all sales, while traded goods accounted for the balance 49%. (It is presumed here that traded goods do not suffer any excise taxes).The net revenues include 'other operating revenues' of Rs 63 m -which includes royalty income of Rs 52 m. The revenues were also buttressed with 'other income' of Rs 79 m against Rs 49 m previously. Other income includes a liberal concoction in the form of profit on sale of assets, write back of provisions, and other mishmash too.

But with revenue expenditure cantering away at a furious pace - cost of material inputs, the largest item of expenditure by far rising 30.7%, the company registered a pre-tax loss of Rs 23 m against a loss of Rs 55 m previously. The company also had to suffer an exceptional expense of Rs 86 m (excise disputes) in the latest accounting year against an exceptional income of Rs 160 m (profit on sale of land) previously. Thus the pre-tax loss was Rs 109 m against a pre-tax profit of Rs 105 m. But such exceptional entries do not really mask or unmask the reality of the matter.

The dependence on group companies

But it is the manner in which it squirrels its revenues and expenses that makes it an interesting read. For starters it has three 'associate' enterprises, and several which are characterised as 'others'. The associates are National Cereals Products Ltd, Mohan Closures Ltd, and Himalayan Breweries Ltd. The latter is based out of Nepal. The non associates who sport the Mohan brand in its nameplate number six. Several of these belong to the category called 'naam ke vaaste' entities and are non-existent for all practical purposes. Fortunately the book value of its investment in all these companies put together is a mere Rs 4.0 m! This is what is called as getting more bang for fewer bucks.

The company sources some of its raw materials through its associates and some of its finished goods too. It purchased Rs 28.5 m worth of barley malt during the year from its associate National Cereal Products Ltd. Mohan Meakin holds 26% of the equity of this company while the Mohan family holds a further 28% equity. That makes for a controlling interest alright. The vendor has been selling barley malt to the parent for more than five decades says the report. What is perplexing in this arrangement is that the schedule which gives the detailed breakup of raw materials consumed shows a significantly lower consumption of barley malt by Mohan Meakin. Probably the balance consumption of barley malt is grouped under some other item of material consumed.

The company also purchases finished products from group companies which are not assigned any particular classification. It purchased finished goods worth Rs 1.56 bn (Rs 934 m previously) from Mohan Rocky Springwater Breweries. Mohan Meakin in turn affected sales of Rs 25 m to the Mohan Rocky Springwater Breweries and a further RS 252 m in sales to the group holding company Trade Links Pvt. Ltd. One would imagine that Mohan Meakin bought only beer from Mohan Rocky given the nomenclature of the latter. But that is not to be. And what Mohan Meakin sells to the latter is not very clear either. The year end balances on capital account for inter-se revenue transactions is a bit on the foxy side. The company has paid for all its revenue purchases from group companies, but the group companies owe money to it at year end for purchases affected by them. Mohan Rocky Springwater owes Mohan Meakin Rs 63 m at year end which is far higher than the sales affected to it by Mohan Meakin. Trade Links owes Mohan Meakin Rs 96 m which is 38% of the value of sales affected by Mohan Meakin. The latter percentage figure is a lot more than the total year-end debtor dues on a percentage basis as one will see further on in the copy.

Mohan Meakin bought beer valued at Rs 293 m and IMFL value at Rs 1.46 bn during the year or a collective purchase of Rs 1.75 bn. That is a lot more than its total purchases from Mohan Rocky. It also implies that it bought both beer and IMFL from the latter. The balance booze was bought from other sources. Assuming that it sold all the booze that it outsourced during the year itself, then the company would have earned a gross margin of Rs 109 m against Rs 169 m previously on the purchase / sale exercise. This is a pitiful return for all the effort expended and in all probability after deducting other costs including selling, administrative, and interest charges the bottom-line would have been seeped in red ink. And mind you, as stated earlier, some 49% of all net revenues accrued from traded goods in 2011-12.

A depreciated gross block

Another reason for its dependence on traded sales is possibly because of the fact that it boasts a totally depreciated gross block and is therefore unable to flog its plants more profoundly. Just look at the statistics. The gross plant and machinery of Rs 649 m is depreciated to the extent of 77%. The buildings are written down by 82%. The office furniture is 90% depreciated, and the office equipment is almost completely written off! How's that for style? How can any company operate in any sane manner under such circumstances? It belatedly appears to be making some attempt at sprucing up its plant facilities or some such. In the last two years it has spent Rs 132 m in gross block addition. But such expenditure is unlikely to bring about any succour.

For sure the company is generating positive cash from operations - though just about. This is partly because of favourable working capital management. The trade debts at year end amounted to only 18% of gross sales for the year, and the inventories on hand at year end amounted to only 11.5% of gross sales. Also, the trade payables at year end were only a shade less than the trade receivables. There was still a year-end dent in its debt burden and this was due to two factors. On the one hand there was an addition of sorts to gross block, and on the other it was the higher interest bill. It generated cash of Rs 127 m on gross sales including other income of Rs 4.9 bn. But the pitiful gross block addition ate it all up. Since there were finance costs of Rs 90 m to be paid too, it had to borrow moneys. One could aver in a manner of speaking that it may have borrowed moneys to pay its interest bill. Or, was it to fund the gross block addition?

The company makes do with fairly large sized borrowings given that its operations are almost self sustaining. The year-end borrowings topped Rs 650 m against Rs 594 m at the preceding year end. The company on a rough basis would have paid out a percentage interest of 13.4% against 12.6% previously.

The Management stranglehold

There is really very little in this company barring what the management has to enjoy. And furthermore, the management has an iron tight grip on the company as it owns some 65.89 % of the total outstanding equity of Rs 42.5 m. According to one schedule there are only three shareholders who hold more than 5% of the outstanding equity each. Trade Wings holds 24.09%, and Vinay Mohan owns another 5.72%. Thus two group shareholders own a combined 29.81% of the equity capital. Surprisingly LIC owns another 8.38% and LIC is known to churn its portfolio. This situation would amount to some churning alright! But the interesting point here is that the management still owns another 36.08% of the stock which is not accounted for in this schedule. Is one to understand that the balance 36% odd percentage holding by the management is held by entities that control less than 5% each of the total equity?

Anything is possible it appears.

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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