The government sector wonder
Along with Gujarat State Fertilizers Company, Gujarat Alkalies forms the other part of the duo of the most successful listed state government commercial ventures ever promoted in India. After 37 years of existence the company continues to grow and prosper on the sales front. This is all the more remarkable as the IAS lobby has increased its stranglehold on the board to the very hilt. Fully 7 out of the 10 directors of the board are from this fraternity, including the Chief Executive himself. It goes to show that companies can also prosper inspite of being run by executives who have no fixed tenures in a particular job while in Government service.
A multiproduct entity
The management is sure as hell ever on the lookout for opportunities to expand and grow and in the process keep ahead of the pack. Though it started out initially to make caustic soda, it is today a multiproduct company, having according to the directors' report, 27 different product items in its portfolio. The list of products includes captive power generation given that the chlor-alkali industry is power intensive to the extreme. Most of the plants, the directors' state, are integrated in such a way that a part of the finished product of one plant is consumed as a raw material for another plant. The company thus enjoys some leverage over its competitors due to its integration policy the report adds. It derives around 65% of its revenues from the Chlor-alkali business, and 35% of its revenues from other value added products.
Focused on sales, but not on profits
Looking ahead and keeping the unfolding global scenario in mind the directors' state, the company is upping the stakes, and planning new projects and expanding existing capacities, involving an investment of over Rs 26 bn over the next 3 to 4 years. The financing will be tricky given its cash flow. Such proactive thinking is all very well, but what the directors are not explaining is why the bottom-line of the company is showing such an erratic pattern over the decade. The bottom-line is after all the ultimate arbiter of any successful business. Consider the following. In the last decade the company made a pre-tax loss in two consecutive years FY01 and FY02. Further, it omitted dividend payment in three consecutive years. Finally, the pretax profits have shown no definite upward trend, even though the revenue growth registered a positive trend right through the decade, barring the latest financial year. Gross Income rose from Rs 6.2 bn in FY01, to Rs 14.5 bn in FY09 before dipping in FY10. In FY03 it logged a pretax profit of Rs 533 m, which rose sharply in FY05 to Rs 2.7 bn. Thereafter the pre-profit plateaued, before falling to Rs 1.5 bn in the latest financial year. (The bottom-line in FY10 was administered a massive boost to the tune of Rs 1 bn at least, with the help of some large write backs, and neatly timed income credits). In this year the company was hit by poor realizations on sales of chlor alkali products, due to intensive domestic competition on the one hand, and due to cheaper imports leading to a fall in revenues. This, despite the fact, that some of its plants hit all-time record production highs during the year.
Unable to face the heat of the competition
It is difficult to understand how the country's largest producer of chlor alkali chemicals (and it has 18% overall market share) and is constantly expanding capacity of its major product lines, and employs the latest membrane cell technology in producing these power intensive products, and generates captive power, is unable to face the heat of the competition. Or whether the branching out into all the
backward and forward integration projects was well thought out in the first place. How else does one explain its inability to realize adequate margins? Or is it that the company is so stretched that it lacks the financial leverage to tackle market forces when the situation demands it? Or to plan production schedules in keeping with price realizations? One has to also bear in mind that the company basically produces intermediate products which are used as inputs in making final products, and thus the value addition can only be limited, as there is no unique selling proposition (USP).
Government holding hinders financial planning
Its finances were also in sixes and sevens during the earlier part of the decade. Its borrowings were in excess of Rs 10 bn in FY02, and the interest payout debited to profit and loss account was gobbling up 76% of the pre interest, pre depreciation profit! Miraculously enough in spite of a sharp rise in the gross block in the subsequent years, the management was able to prune debt to a shade over Rs 3 bn. The biggest problem that the company faces in tabulating the debt equity ratio, when planning expansion schemes, is that the principal shareholder is the state government, with a 37% holding, and the government will be unwilling to chip in its share in the expanded equity. So any expansion has to be financed through internal resources or through additional debt. This could also explain why inspite of being in harness for over 37 years, the company could muster up a turnover of only Rs 13.3 bn.
The travails of being capital intensive in a competitive market
There is also another reason why the company is not able to drum up the margins. The chlor alkali industry is not only capital intensive but requires extensive back up power support which adds to capex costs while not adding a penny bit to revenue realizations. In the latest accounting year, on a gross block of Rs 28.7 bn, the company was able to ratchet up a gross revenue of only Rs 13.3 bn or a ratio of only 1:0.5. This is almost on par with the ratio for the preceding years too. Even if one takes the gross block average of two years and sets it against the turnover of the latter year, the picture alters only a wee bit. The
fixed asset turnover ratio is totally skewed in favor of the revenue generator. Then there is the interest and depreciation charges to be factored in.
The piggy bank account
And then, there are other dark clouds hovering in the horizon. The company for example is treated by its bureaucratic brigade as the private piggy bank account of state government ventures in the offing. It has a string of investments, most of which is locked into companies promoted by the Gujarat government. The total book value of its investments is Rs 1.5 bn. Barring an investment of Rs 26 m, the rest of the moneys have been plonked down in state government ventures. These investments appear to be tied investments with no opportunity for the company to opt out without an official government mandate. That however does not seem to trouble the management one bit however.
What exactly will be the outcome of the expansions and diversifications that the company is planning; only time will tell. But, given its past performance there is really very little in this share for a discerning investor.
Please note that I am not a shareholder of this company
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.