As a consolidated entity the company is large in terms of top-line generation, but the bottom-line is a dampener
A group survivor
JK Tyres is one of the few survivors of the eponymous JK group that engineered a large collective market capitalisation decades ago. The star performers of the JK group were the now defunct JK Synthetics then under the tutelage of the late Sir Padampat Singhania, and the still muddling along Raymond Ltd then under the iron grip of his son the late Gopalkrishna Singhania. Since their time the group has both splintered and floundered.
This company is a member of another branch of the family - Lala Lakshmipat Singhania--and was till recently under the command of the late Hari Shankar Singhania. Fortunately this is a company that has 'prospered' under the long reign of Hari Shankar- but its financials are not exactly what one could infer to as heart warming. At some point in time the company also successfully acquired the operations of Vikrant Tyres and merged this Mysore based company with the parent. The other lateral acquisition was Fenner India now known as JK Fenner - the maker primarily of fan belts--and which was originally known as Fenner Cockill and is of British parentage. JK Tyres does not directly hold any shares in JK Fenner. On the contrary Fenner India (I presume that JK Fenner and Fenner India are one and the same) holds 8.76% of the outstanding capital of JK Tyres. The promoters through four closely held group companies hold 52.8% of the outstanding capital of Rs 410 m.
The directors' report states that the all radial new tyre plant at Chennai has gone on stream and that production was ramped up at the plant during the year. The capacity of the small commercial vehicles tyres is also being added to enhance its presence in this growing segment. The Company makes do with plants in the four states of Rajasthan, Madhya Pradesh, Tamil Nadu and Karnataka, including three in Mysore. Presumably, then, the directors see a silver lining looking ahead. But the net rupee sales of the company dipped marginally by 0.9% during the year to Rs 54.3 bn from Rs 54.8 bn previously. The revenues include export sales of Rs 8.5 bn against Rs 5.9 bn previously. The revenues also include some 'exceptional' items like royalty and management fees of Rs 172 m and miscellaneous income of Rs 239 m - or a total of Rs 411 m.Quite obviously there was a dip in volume production during the year, though this cannot be verified, as production and sales figures do not have to be furnished. The top-line also gets buttressed with 'other income' of Rs 130m. This other income is inclusive of 'interest income' of Rs 5.8 m, sand 'other interest income' of Rs 124 m against Rs 29 m previously. Such extraneous incomes add up to a collective total of Rs 541 m or a little over half a billion bucks through such add ons.
Generating higher margins
The other interesting aspect of the working is that the company was able to generate a substantial increase in the profit before interest, depreciation and taxes during the year (PBIDT). That is to say the PBIDT rose to Rs 5 bn from Rs 2.83 bn previously. This was made possible by reducing the 'cost of materials consumed' during the year to Rs 38.6 bn from Rs42.5 bn previously. The consumption cost also includes the value of imported raw materials of Rs 15.7 bn against Rs 14 bn previously. This is a remarkable achievement. (If it continues with this practise in the current year too, the company may be in for a severe bruising, given the sharp drop in the rupee value). The lower consumption cost also led to an increase in the value of inventories at year end to Rs 8.1 bn from Rs 6.6 bn previously.
But the company also had to contend with interest and depreciation charges and this is where it lost considerable ground. It is unable to generate adequate cash from operations and hence has to borrow dough for other requirements. The debt at year end rose to Rs23.5 bn from Rs 17.7 bn previously and the additional funds that it acquired were partly used to pay for capex expenses of Rs 2.2 bn. The additional borrowings were also utilsed to pay the dividend of Rs 2.58 bn for the year!
With depreciation charges of Rs 1.1 bn also to be accommodated, the company was scraping the bottom of the barrel in the preceding year while it managed a pre-tax profit of Rs 1.8 bn for the current year. With exceptional expenses of Rs 310 m also to be provided for, and corporate tax and deferred tax to be accounted for too, the company ended up with a post tax profit of Rs 1 bn. But as I stated earlier it was not quite enough to pay shareholders their tithes- the principal beneficiaries being the promoter shareholders. This payout is also called the simple trick of borrowing on capital account to pay on revenue account- an expenditure it could well have avoided. The company has a middling paid up capital of Rs 410 m. It is small comfort that the reserves and surplus top Rs 7 bn.
The exceptional net expenses of Rs 310 m is the end product of a concoction of debits and credits. The debits include a whopping forex loss of Rs 521 m, VRS expenses of Rs 37 m, and the credit is made up of profit on sale of fixed assets of Rs 248 m. The company sold fixed assets with a net book value of Rs 147 m for Rs 395 m to earn the badly needed cash flow.
Negative cash flow from operating activities
In a year in which the company was able to squirrel out an increase in pre-tax profits, the company actually generated a loss from operating activities - proving yet again that the profit generation and the cash flow generation do not necessarily go hand in hand. And often the two go in opposite directions. In 2011-12, when the company was haemorrhaging it realised a positive cash flow of Rs 3.46 bn. In the latter year when the pre-tax profit rocketed manifold the company was out of pocket to the tune of Rs 1 bn. Where it got jacked in the latter year was in the negative swing in trade payables and in inventories --which depleted the cash flow. With capital assets to be purchased the company had perforce to go hat in hand to its lenders.
The other point to note about its operations is that the company appears to be the mother hen to investments of sundry group companies - some of whom are incorporated in more exotic locales. The company has direct equity investments in five siblings with a book value of Rs 280 m. There are in all 13 siblings including the step down variety. It also has equity investments in affiliates valued at Rs 375 m. Then there are preference shares investments in 'other associates' valued at Rs 251 m. Its largest investment per- se of Rs 325 m is in the equity of a company marked under the head 'Others'- an investment company going by the name Florence Investech Ltd. This is without doubt a group parking space.
The five direct siblings have foreign moorings in Switzerland, Cyprus, Mexico, Hongkong, UK -- the works. The 13 siblings in toto are all incorporated in foreign shores with eight of the entities incorporated in Mexico. It would appear that the company has all the markings of an international conglomerate in the making. But it will have to work a lot harder if it wishes to get there. There is also an associate company based in the UAE - Valiant Pacific LLC-- in which the parent has a 49% stake. It also boasts of two more enterprises in India ---JK Lakshmi Cement and Fenner India --- over which key management personnel are able to exercise significant influence.
Now, the equity and preference investments do not yield more than a dime but that should come as no surprise to any observer. It is surprising to note that even the preference share investments appear to be under performing. None of the 13 siblings have paid out any dividend during the year. What the 'other interest income' refers to is not very clear. But the parent has advanced quite some dosh to group companies under the head of 'loans and advances'. For, example, it has outstanding loans due at year end from group company Fenner India amounting to Rs 1.1 bn. It has other loans outstanding from group companies to the tune of Rs 76 m.
The company with the largest paid up capital is the Mexico based step down sibling Campania Hulera Tornel which manufactures tyres. It has a paid up capital of Rs 819 m and ponied up revenues of Rs 14.8 bn. It posted a post tax profit of Rs 547 m. The return on investment to the parent is not known due to the lack of the relevant data. The only other sibling of any import is another Mexico based double step down offspring, JK Tornel S.A. de C.V. With a paid up capital of Rs 258 m it rustled up revenues of Rs 7.7 bn and posted a post tax profit of Rs 306 m. However it has a negative reserves and surplus of Rs 1.7 bn. What the other siblings with unpronounceable names do for a living is not known but they generate puny revenues and non-existent profits in any case. Some of them are 'investment' outfits too -- judging from their name plates. What exactly was the thought process of the management when parenting these companies is not known- but altruism was definitely NOT one of the reasons.
From the looks of it this is definitely not a company which exudes any warmth to a prospective investor.
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 Verghese. 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.