United Breweries (Holdings) appears to be totally devoid of any corporate governance.
Flagship company of the UB Group
As the management discussion and analysis report informs, 'United Breweries Holdings is the flagship holding company of the UB group, through which the promoters and the promoter group own a controlling interest in a number of companies collectively forming the UB group. The company is primarily the investment arm of the UB group, which is in the business of investing and funding various group companies. The company derives income mainly from export sales, lease rentals, property development, dividend from investee companies, licensing fees, interest and guarantee commissions from investee companies. It also owns several trademarks such as Pegasus and Kingfisher'.
The shareholding pattern
The shareholding pattern in this 95 year old company is in keeping with the mellifluous contents of the earlier paragraph. The chairman of the board, Vijay Mallya, personally holds 7.9% of the outstanding equity of 66.8 m shares of Rs 10 each (another schedule says this holding is by Dr Vijay Mallya and his relatives). His son, Sidhartha, who is also a director of the holding company, has to merely make do with his 'flea bite' board meeting fees for the time being. Assorted companies etc floated by the Mallya family hold another 18.2% of the capital, making a total of 26.1%. But it also boasts two foreign promoters going by the name of Watson Limited and Firstart Inc who between them hold another 25.4% - thus collectively pushing the holding of the promoter group to the very crucial mark of 51.5%. It will be interesting to know just who constitute the shareholding base of these foreign promoters, or, what necessitated the need to have 'foreign' promoters in the first place.
The company is a meandering avenue of income streams and investment holdings. As the directors' report states, it has 12 Indian subsidiary companies and 10 overseas subsidiaries or a total of 22 such siblings. (Separately it has varying investments in other big ticket group companies). Of the above list, 7 are 100% owned by the parent company, while another 8 are 100% owned by the parent but with the help of other subsidiaries. In the case of 3 companies the holding exceeds 90%. The rest are a little over 51% owned. Then there are its varying holdings (but below 50%) in the big ticket enterprises, including United Spirits, United Breweries, Kingfisher Airlines, Mangalore Fertilizers, UB Engineering and its subsidiary, UB Infrastructure, and a joint venture sporting the name UB (Ostan) Private Ltd (For the matter of record, the parent company on a standalone basis rang up gross revenues of Rs 5.1 bn, while the consolidated entity mustered up revenues of Rs 70 bn).
The investment schedule lists the investments in group companies under two broad heads. Trade Investments - Long Term in listed companies and investments in unquoted companies. It is further divided into subsidiary companies and 'Others'. The investment portfolio also includes investments in the preference capital of subsidiary companies. The total book value of the investments totes up to Rs 18.6 bn. Of this, the preference share portfolio amounts to Rs 5.82 bn. Then, separately, it has investments in mutual funds valued at Rs 431 m. (During the year the company added to the equity/ preference share investment portfolio of Kingfisher Airlines and UB Overseas Ltd respectively to the tune of Rs 10.6 bn. The addition was partly achieved by the conversion of preference shares worth Rs 970 m of Rs 100 each in Kingfisher Airlines for additional equity worth Rs 7.3 bn at a price of Rs 64.5 per share. The average acquisition price of the share now works out to Rs 46.7 against Rs 23.3 previously).
Its single biggest investment is in Kingfisher Airlines with a book value of Rs 9.3 bn in equity, at an average price of 46.7 per share. This investment accounts for 50% of all investment in group companies, and as matters stand currently, this investment is a millstone round its neck - with no plausible solution in sight. The next biggest outlay is in the preference capital of UB Overseas Ltd valued at Rs 3.3 bn of USD 1 each, or at an average price of Rs 46 per share. (These preference shares pay a dividend of 0.001%!). Next in line is its investment in the preference capital of Kingfisher Finvest India Ltd valued at Rs 2.5 bn or Rs 250 per share but having a face value of Re 1 per share. What dividend this investment is slated to pay is not known. (The two Kingfisher investments account for Rs 11.8 bn or 63% of all group company investments). The only other billion rupee investment is in United Breweries Ltd valued at Rs 1.2 bn at Rs 38.5 per share. Another 'interesting' and 'sizeable' investment is in a dollar denominated company called Rigby International Corp with an investment book value of Rs 660 m.
The investment portfolio of United Breweries (Holdings) Ltd lists the names of 12 subsidiaries, including 4 of videsi origin. In reality the portfolio holding should only be listing the names of 10 subsidiaries, as UB Overseas Ltd is an indirect subsidiary. The parent has only a 5% stake or 50 shares in its equity capital. How they got it all wrong is not known. As the scene is played out today, the promoter group holds 51.82% in United Breweries (Holdings) Ltd according to parent company website, but 51.5% according to the annual report. The latter in turn also holds a 12.6% stake in United Breweries Ltd, a 24.5% stake in Mangalore Chemicals and Fertilizers Ltd, a 34.1% stake in United Spirits Ltd, a 36.2% stake in McDowell Holdings Ltd, a 60.6% stake in Kingfisher Airlines Ltd, and a 37.2% stake in UB Engineering Ltd (according to the website).
Income generation from a medley of activities
As one can see this company is primarily an investment vehicle, even though it indulges in bought out sales too. It generates income from a medley of activities. The company rustled up sales of Rs 3.4 bn and other income of Rs 1.3 bn during the latest accounting year. That is to say it generated total revenues of Rs 4.8 bn. This is marginally higher than the Rs 4.1 bn it recorded previously. This revenue calculation excludes income from property development of Rs 361 m, and sundry other items like profit on sale of investments etc. These incomes are however extraordinary, in the sense that it they are indeterminate and not of a recurring nature. Factoring in such other incomes, the total revenue accretion amounted to Rs 5.12 bn, against Rs 4.5 bn previously.
These incomes can be further broken down. The company buys and sells alcobev products, leather products, and processed foods. Such bought out sales brought in revenues of Rs 2.0 bn, and was the biggest individual contributor to overall revenues. Next in the pecking order is 'Interest Income' with Rs 1.2 bn, followed by 'guarantee commission' of Rs 608 m, with 'Lease rent' bringing in another Rs 409 m. There are several other income generators, such as income from property management, license fees, duty drawback and such like. But significantly enough, the dividend income brought in mere droppings of Rs 100 m - period. As things stand today, barring the sales income, and the interest income, it cannot willy-nilly tinker with the other contributors to the top-line, and jack up their individual contribution in any significant measure on a year to year basis. But to the management's credit, it is able to drum up income from very extraneous avenues.
The 'sales revenue' is derived by the bought out sales of alcobev products, leather goods, and processed foods. It bought alcoholic beverages worth Rs 806 m, and flogged them at a mark-up of Rs 1.3 bn. It bought leather products for Rs 254 m and then unloaded them for Rs 263 m. Similarly it bought processed foods for Rs 89 m and then downloaded it for Rs 131 m. The company bought readymade garments worth Rs 264 m and sold it for Rs 271 m. It also bought pharmaceutical items for Rs 9.4 m and sold it for Rs 10.5 m. On a cumulative basis, the purchases were valued at Rs 1.4 bn. Of this, the cumulative purchase of goods for sale, from subsidiaries and associate companies, was Rs 724 m - or 50% of all purchases. The parent incidentally has assorted inter-se dealings on both revenue and capital account with 13 subsidiaries and 4 associates.
Even given the manner in which the revenues are derived the margins are very unbecoming. The reason for that lies elsewhere. It should be a matter of concern that its major investments in group companies do not yield even a farthing. Such as the zilch return on its investments in Kingfisher Airlines, or Kingfisher Finvest India, or the piddling dividend it makes do with from the preference shares held in UB Overseas. For example, on an average book value of its investments of Rs 14.5 bn in group companies etc, the dividend return was a measly 0.7%. But then, the promoter family who has the majority vote is not complaining. So let this be. It has also loaned out large sums to its subsidiaries. At year end the loans so advanced amounted to Rs 19.2 bn. It received interest income of Rs 1.2 bn from these advances. That would work out to an interest rate of 7% on the average of the loans for the two years. (In a foot note, the company adds that of the amount of Rs 19.2 bn loans advanced to its subsidiaries, interest has not been charged on loans aggregating to Rs 10.4 bn. Besides, considering the income stream of these companies the repayment of the loans could possibly take a protracted period of time beyond those stipulated in the loan agreements. However, it sees no reason to provide for any bad and doubtful debts barring a minor provision of Rs 20 m).
Funding the extravaganza
But to fund this extravaganza, the company also borrowed large sums. At year end the debt amounted to a cool Rs 23.3 bn. This is after it resorted to such tricks as getting the siblings to pay their tithes to the parent in the form of Trademark security deposits and Lease security deposits to the tune of Rs 2.9 bn. The interest paid out on the borrowings toted up to Rs 2.0 bn. That would work to an interest payout of 12.4% on the average of the borrowings for the two years amounting to Rs 16.2 bn. So there appears to be an inbuilt subsidy at play here too. How the auditors have come to the conclusion, given the circumstances, that the interest charged on the loans is not prima facie not prejudicial to the interest of the company is a bit unclear. It is all part of the game you see. Consequently, the net pre-tax profit averaged only 12% of the gross revenues compared to 28% previously.
If these goings on appear to be colourful, take a look at the performance statistics of the subsidiaries. It has appended the summarised financials of 12 Indian subsidiaries and 10 overseas subsidiaries. The high flier, or is it the low flier, in this entire list is Kingfisher Airlines. It makes for startling reading. On a capital base of Rs 10.5 bn, it had negative reserves amounting to a humungous Rs 41.3 bn. On the total revenues of Rs 65 bn, it posted a net loss of Rs 10.2 bn. Or take the case of Kingfisher Finvest India. It is an investment company of sorts, whose investment portfolio is sour to say the least. It too has negative reserves of Rs 170 m on a capital base of Rs 10.5 m. The book value of its investments is a considerable Rs 11.1 bn, it toted up revenues of Rs 93 m, and horror of horrors, posted a pre-tax loss of Rs 605 m. What in heaven's name is this please? One plausible reason could be the interest on the debts it has to service, and besides, how could a non entity company with negative profits of Rs 605 m have negative reserves of only Rs 171 m? What is even more interesting here is that none of the India based subsidiaries make any profit.
The offshore subsidiaries
If this is getting serious take a dekko at the performance results of the foreign subsidiaries. One does not know where to begin. But let's give it a go anyways. The big gun here with the highest capital base of Rs 3.2 bn is UB Overseas. It has negative reserves of Rs 494 m, and investments valued at Rs 3 bn. With no revenues whatsoever, it still managed a loss of Rs 45 m. How much more titillating can the results get? Next in line is United Breweries of America with a capital base of Rs 702 m, negative reserves of Rs 183 m, an investment portfolio of Rs 452 m, a miniscule turnover of Rs 4 m, and not surprisingly reported a loss. Then there is Rigby International, which is another tantalising sibling. A capital base of Rs 675 m, negative reserves, an investment portfolio of Rs 675 m, and nil turnover, it recorded a loss. Needless to add the entire lot seek to excel one another in absurdity. Two other companies having investments are Inversions Mirabel SA and Mendicino Brewing Company USA. But sad to say neither have any contributions to make to the bottom-line. Mendicino made a minor incursion into the bottom-line.
But it is UBHL (BVI) which takes the cake here. The acronym BVI incidentally stands for the British Virgin Islands or simply known as the Virgin Islands, a British protectorate located in the balmy Caribbean. Its chief claim to fame is that it is a tax haven - which has a zany meaning to high net worth investors. This company has a capital base of Rs 10.6 m, negative reserves of Rs 45 m, zilch investments, no revenues, but still managed to rustle up a pre-tax loss of 45m. Now how's that for creativity? Its biggest offshore manufacturing unit is Kingfisher Beer Europe Ltd. This too suffers from acute cirrhosis or some such. It recorded a turnover of Rs 930 m, but poor toots could only make do with a pre-tax loss of Rs 52 m. It must be operating in a very competitive market or some such. Besides, on a capital base of Rs 7 m, it had negative reserves of 123 m. Coming to think of it, the company managed the exemplary feat of generating such large revenues on such a miniscule capital base. Anything is possible if the mind wills it. Now it should try and do a similar on the bottom-line front too.
It may interest readers to know that the total value of investments in the books of the offshore subsidiaries added up to a neat Rs 4.7 bn at year end. The bet is that they yield no dividend return whatsoever. One is also not privy to a breakdown of these portfolio investments either.
The out of pocket managing director
With results like this is it any wonder that the Managing Director of the company Mr A Harish Bhat has to make do without any salary. Wonder what he does to make ends meet though. While he is on the dole, the President of the company, Mr Deepak Anand, gets to take home a handsome compensation package of Rs 28.3 m. This is truly nuts in every sense of the word!
I have prattled enough and it is time to sign off. R.I.P.
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.