GHCL Ltd: What is the focus here, please? - Outside View by Luke Verghese

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GHCL Ltd: What is the focus here, please?
Nov 8, 2010

In search of Excellence!

This exalted company promoted by the Sanjay Dalmia group is in search of 'Excellence'. But more to the point, it is in the search for excellence of a different kind. Namely, in excelling in its capability to also confuse and confound. The company has heaps of subsidiaries and fellow subsidiaries whose very purpose of existence is difficult to comprehend. These include an equal share of companies of the desi and the 'videsi' variety. The videsi siblings sort of span the globe, and include companies based out of Cyprus and Romania. Not including 4 American and 2 UK based companies, which are under receivership. Some of the Videsi companies sport such unlikely names like Indian Britain BV, Indian England NV, and Indian Wales NV - which shows the callousness of it all. It also brings back memories of the times when the late Dhirubhai Ambani incorporated companies in the Isle of Mann which sported names like Crocodile Investments and Fiasco Investments.

Perforated notes to the accounts

That is only a part of the overall story. The notes to the accounts are perforated by the many qualifications, and write-offs of large dollops of dosh advanced to its subsidiaries. Not including corporate guarantees and letters of credit given on their behalf running into humungous sums of money. Then we are informed that the confirmation of the year end balances of sundry debtors, creditors, and loans and advances, (a basic requirement in any audit) is subject to confirmation and consequential adjustment if any! It's show time folks! The wonder of wonders is that the company has not skimped in its ability to declare a dividend to its shareholders even in a single year in the last decade. Originally christened as Gujarat Heavy Chemicals, with the limited purpose of producing soda ash, it now goes by the first letter acronyms of the previous avatar, after having metamorphosed into activities which do not even faintly complement the original idea. Soda ash to the uninitiated is mainly consumed by the glass, detergents, and chemical industries and the raw material is salt.

The Range of operations

As per the information provided by the company its range of operations span from soda ash (it has a subsidiary in Romania of all places which on paper makes soda ash), to the two salt refineries in Tamil Nadu, to three textile mills, (2 in Tamil Nadu and one in Gujarat), the ITeS division in Noida, and the power division in Tamil Nadu. A neat spread of operations. The salt works, the leased mines, and the power divisions complement the main operations of the company. Soda ash manufacture is basically very power intensive. However when one comes down to the brass tacks, the income generation is more plain vanilla. The schedule of the breakdown of sales shows income from sales of soda ash, as constituting 67% of all sales. This is followed by textile items of different hues, bringing in another 30%, and an omnibus item constituting the balance with a piddling 2%.

Based on the data provided by the company, its installed capacity to make soda ash , including that of its Romanian unit, adds up to 1.2 m tonnes, or 2% of the total worldwide capacity of 57 m tonnes. Now how is that for size? The Romanian unit has apparently been mothballed for other reasons, so the actual capacity available at its disposal is 0.9 m tonnes. The textile division appears to be some sort of a show stopper, and the company boasts of some top of the line stores in America and Europe as its clientele. The company makes the effort to inform its shareholders that this division rang up operating profits of Rs 180 m, against a loss of Rs 141 m in the preceding year, or a turnaround of Rs 322 m. The company apparently has great plans for its home textiles division, which is expected to achieve a significantly improved performance in the coming years.

The Roseby's enigma

Then there is the company's home and lifestyle textile retailing division coming under the Rosebys brand. The intellectual property rights to this brand were acquired from a defunct UK based group. The subsidiary has tied up with the National Textile Corporation to use their shops to promote new textile brands or some such. But the annual report also throws out an intriguing aside which is tucked away separately in the notes to the accounts. The notes state that the intention of the management is to divest this business at a future date and, with this in mind the company has signed an MoU post the balance sheet date to do so precisely. Why it has chosen to present such a vital bit of information, in small print at that, in the copious notes to the accounts, is not known. The company also appears to be applying the guillotine on its acquisition even before the child has learnt to walk.

Stranger than fiction?

This company, in a manner of putting it, is stranger than fiction. Well for starters the promoters, and Sanjay Dalmia at that, runs the company with a supposedly effective voting strength of a mere 18% of the outstanding equity. But bodies corporate, control another 36% while the Indian public make do with another 33.5%.Together these two combinations control a further 70% of the effective voting strength. That should give the management some solace. Or take for example the gross block, or gross fixed assets. The total value of gross block at year end was Rs 27 bn. But Rs 10 bn or 37% of this figure is made up of revalued assets (as per a scheme of arrangement sanctioned by the Gujarat High Court). There does not on paper appear to be an effective use of the gross block, even taken on the non revalued basis. The non revalued gross block of Rs 17 bn could only drum up a gross turnover of Rs 11.9 bn in the latest financial year. To be sure it has gross assets worth Rs 9.5 bn locked up in freehold and leasehold land, in leased mines and salt works, and in wind turbine generators whose contribution to the turnover is indirect.

The fascinating siblings

The most fascinating aspect of this company is its many subsidiaries (not forgetting its affiliate GTC Ltd in which it has an equity stake of Rs 50 m). To start with it is not easy to put a finger on the number of subsidiaries that it has. One schedule gives the list of six 'major' subsidiaries. Another schedule gives a more exhaustive list, of 27 companies, but this list deals with the subsidiaries that the parent has related party transactions with, including that of seven companies under receivership or which have ceased to be subsidiaries for whatever reason. It has however deigned to provide the brief working results of 15 companies, including direct and indirect subsidiaries, and include some, which are referred to as step down subsidiaries. It adds in the same breath that it is unable to provide any information on nine subsidiaries which are under receivership. The subsidiaries which are still extant collectively add up to nothing. The consolidated statement of accounts for the latest accounting year show that they have added Rs 1.3 bn to turnover, but profit before tax is down Rs 320 m. And, collectively, the reserves are down by Rs 2.2 bn, while the borrowings have accelerated by Rs 4.6 bn. The subsidiaries (and GTC together), appear to yield no Dividends, and pay no interest on the loans advanced to them.

Its total equity holding in its subsidiaries is a comparatively middling Rs 336 m. But as they say, 'the devil is in the details'. There are outstanding advances to the tune of Rs 1.2 bn, though down from Rs 2.5 bn in the preceding year. The company has very thoughtfully created a very large omnibus reserve from the profit and loss account, styled as Business Development Reserve. The objective of this reserve is to take the rap as and when the subsidiaries go belly up, and to provide the cushion for the excess depreciation on the revalued assets. This reserve is getting depleted by the year it appears. During the latest accounting year it has debited this reserve with Rs 424 m, for diminution of value of the investments in the loans and advances to and receivables from subsidiaries. Mark the all encompassing words please. Totally a sum of Rs 1.7 bn has been written off. But the auditors, in their report, state that a further sum of Rs 4.8 bn on revenue and capital account, which should have been provisioned for mandatorily, has not been provided for.

The many riddles

The brief working results of the 15 subsidiaries is eye-popping to boot. The results include the unaudited statements of certain subsidiaries (number of subsidiaries not disclosed), with net assets of Rs 2.1 bn, whose accounts have been certified by the management. This is about as preposterous as it can get. The revenue and expense figures that some of the subsidiaries have drummed up are prime candidates for inclusion in 'The Ripley's Believe it or Not' book. For example, Indian England NV (what does NV stand for by the way) generated a pretax profit of Rs 730 m on a zero turnover. It has capital base of Rs 2.7 m, reserves of Rs 863 m and total assets of Rs 2 bn. If only the parent could be run as profitably. The biggest subsidiary by far, in terms of paid up capital, is GHCL Inc USA.This is obviously a holding company of sorts, judging from its nomenclature. On a capital base of Rs 1.8 bn, it had negative reserves of Rs 1.8 bn, a zilch turnover, but drummed up a loss of Rs 145 m. None of these figures make any sense, but that is another matter. The figures of several of the other subsidiaries are no less comic. So who cares anyway?

That the company manages to put all this together, and continues to be in operational mode is in itself a very creditable achievement. The parent appears to be a giant sponge to be preyed on by its siblings. But the top management is well paid for its troubles. The payout to the directors, both executive and non executive, added up to a very impressive Rs 87 m. Look at it this way. This payout also accounts for close to 11% of the total payout to all employees. So the top management has atleast a very strong incentive to perform and keep the company going, any which way.

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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