Thirumalai Chem.: New decade...New dynamism...Not really...
A one product wonder
Thirumalai Chemicals is a two product (on paper), 37 year old Mumbai based 'wonder', which has stuck to the knittings, all these many years, and has very little to show for it. Set up to make and sell Phthalic and Maleic anhydride, which are petro based offshoots, and which again are derived from petro based inputs, it has a tough call to act on. So much so, that with the
raw material price of benzene hitting the higher orbit, the company was forced to stop manufacture of maleic anhydride. A switch to butane as the input alternative the company adds, was not of much help following the worldwide economic meltdown in 2008. Though it has stopped the manufacture of maleic anhydride (its present installed capacity to make the product is a piddling 12,000 tonnes), it continues to outsource and then resell the product. As a matter of fact goods purchased for resale accounts for a little over 6% of net sales of Rs 6.2 bn in FY10. Fortunately the company appears to have the input cost of orthoxylene - the raw material for phthalic anhydride well within its control. Two petro based raw material inputs - one well within its control, and the other outside the purview of its control, or some such! Strange indeed are the ways of market forces. (It also has a curious offshoot, in the generation and sale of wind mill based electricity).
An intermediate product
If the input costs of its petro based raw materials is one of the cogs that it has to constantly battle, then the fact that its end product is only an intermediate product in the final output, rounds out the situation in its entirety. Being an intermediate product, and with competition to boot, means, that the company has little control over the price that it can extract from the end product user. Phthalic Anhydride is basically consumed by the paints industry, but significantly, the four user industries that buy its products are plasticizers, polyester resins, the pigment, and alkyl resin manufacturers. What is interesting is that, the company generated export revenues of Rs 1 bn on a net turnover of Rs 6.2 bn, implying perhaps the extent of the domestic competition. Export sales account for a neat 16% of net revenues generated. There is of course no clue on whether domestic sales, or exports, or the two combined, really bring home the bacon.
A chequered past
The company made a pre-tax profit of Rs 380 m in the latest year against a loss of Rs 699 m in the preceding year. But the primary cause for the loss in the preceding year appears to be the booking if a forex loss of Rs 345 m. The company booked a forex gain of Rs 90 m in the current year, which adds up to a turnaround in the bottomline of Rs 435 m. How the company managed to take such a whack, given the level of its forex
derivatives hedging, is difficult to understand. It could of course also partly flow from any forex loss arising from the write-down of its investment in its foreign subsidiary and the negative effect of other receivables.
Thirumalai has had a chequered past, on the profitability front, in the last decade. It skipped dividend in 2 of the 10 years for one. It had a particularly nasty year in FY09, when it was rapped on the knuckles with a loss of Rs 460 m. This loss also coincided with the expansion of its phthalic anhydride manufacturing capacity, and the icing of its Malaysian affiliate. The equity capital has remained unchanged, but what has grown is the percentage dividend offered to its shareholders.
Lilliputs in international terms
Indian companies rarely put up units of internationally competitive size, and Thirumalai is no exception in this respect. It presently has a capacity to manufacture 140,000 metric tonnes of phthalic anhydride, which was only recently expanded from 110,000 tonnes. It can produce 12,000 tonnes of maleic anhydride - which is used to make polyester resins and from which fiberglass reinforced plastics are made. It also makes Food Acids and Pthalate Esters (used in the manufacture of plastic resins). Presently the sales of phthalic anhydride accounts for close to 85% of all sales, with the other three product lines bringing in the balance pickings.
Though the management chortles that the company sees a very bright future in phthalic anhydride, the fact of the matter is that it was able to utilize only a little over 60% of this plant's expanded installed capacity during the year. (This production per se at 89,500 tonnes was however 42% higher than the production of 62,941 tonnes in the preceding year). The food acids plant too is grossly underutilized. The maleic anhydride plant limps on five legs or more. The higher production and sales of its main product line was also achieved at some cost. A 29% increase in gross sales came at the cost of trade debtors rocketing by over 62% at year end.
The many pitfalls of diversification
It has an affiliate company, Ultramarine and Pigments Ltd, and a Malaysia based wholly owned subsidiary, TCL Industries. The former makes ultramarine blue pigments, and surfactants (which are used in the detergents industry), while the latter which used to make maleic anhydride, appears to be well and truly sunk. The company has fully provided for its equity investment of Rs 182 m in this subsidiary, but is still owed large sums, both as trade debtors, and as loans and advances, which the parent has not provided for. Judging from the
dividend inflow realized by Thirumalai, Ultramarine appears to be a performing asset.
One of the major pitfalls of having affiliates and subsidiaries is the extent of the interse transactions that the group has. And, Thirumalai is not to be found wanting in this aspect. Whether these transactions are in the best interests of the company, and bring about the best efficiencies possible, or are merely resorted to, to further the interests of the management is the moot point. One schedule to the balance sheet says that the company is due outstanding receivables of Rs 338 m from companies in which it has a substantial interest. Another schedule however says that the company is due totally Rs 380 m on revenue and capital account from its Malaysian subsidiary. Thirumalai has also taken a loan of Rs 107 m from Ultramarine, and a further Rs 44 m from directors. It has outstanding deposits payable of another Rs 54 m from its directors, while it is due Rs 46 million from a group affiliate. These then are the figures which are readily accessible. Given the scale of operations of Thirumalai, such pending dues are not trifling by any yardstick, and will add to working capital costs.
Inadequate spending on capital assets
Another important feature of the company's working is that it has reduced its gross block during the year by an appreciable Rs 234 m. This reduction in revenue generating assets does not in any way seem to have impacted negatively on the installed capacities of what it makes and sells, barring the capacity of the maleic anhydride plant which dropped to 12,000 tonnes from 17,750 tonnes. The plant that it sold obviously belongs to this unit, but what is interesting here is that this plant is not only almost completely depreciated in its books (going by the fixed assets schedule). The company also lost Rs 12 m on its sale, even when compared to the piddling book value! Is it any wonder then that producing this product was a no win activity? The raw material conundrum appears to be only one reason.
The books are not in proper order
But a disturbing aspect of the company's working is also tucked away in the notes to the accounts. It has received a demand notice for Rs 100 m from the enforcement directorate for non submission of bills of entries for imports in earlier years. The case now lies in the Supreme Court with the company having lost its appeal all the way up to the High Court!
Given its ongoing troubles with its Malaysian subsidiary, which is unlikely to see a happy end any time soon, and the long way it has to go before it reaches optimum production levels of phthalic anhydride, expect the company to go slow on capital spends, till the management has it all worked out.
Disclosure: 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.