Scottish Assam: Continuing to muddle along - Outside View by Luke Verghese

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Scottish Assam: Continuing to muddle along
Nov 17, 2011

Still extant but hardly raring to go

What's in a name

The name of this unlisted company gives no indication of what business it might be in. But, then, the name is also some sort of a give-away. In the sense that it is located in Assam it could as well be in the tea business - and so be it. Its origins however go back in time, more specifically to 1865 when it was originally incorporated to trade in tea. The corporate name prior to its Indianisation was apparently The Scottish Assam Tea Company Ltd. As an Indian entity though, it is a mere 34 years old - a 'victim' of The Foreign exchange Regulation Act (FERA). For whatever reason there is really very little data on its origins, or on the background on this company, that is available on the publicly available internet domain. The majority shareholding in this company appears to have long since passed on from the baton of its Scottish forbears to its present Indian owners. In its long history under British rule, the control of the company appears to have passed through such illustrious forbears as the Mackinnon family of Mackinnon Mackenzie, and the family of the Earl of Inchcape and so on.

Less is more is the dictum

The company presently has a small equity capital base of Rs 8 m, consisting of 800,000 equity shares of Rs 10 each. This capital base is completely at odds with its revenue streams and its gross working capital position, and the reserves and surplus of Rs 167 m at year end. Whether the company is still listed for trading or not is not readily available. In all likelihood the company has been delisted for trading in the Indian bourses but there are still several diehard small oddball shareholders outside the management orbit who are still hanging on for dear life for no particular reason. In any event the management has not furnished the shareholding pattern in the company as is statutorily required. The management obviously believes in the dictum of 'less is more'. The annual report and accounts does not even feature any details of the extent of the tea acreage holdings, or the number of tea estates that make up its tea holdings, the acreage of the plantations under production or under development, and so on and so forth.

But from the precious little details that are published it is quite obvious that it is being run for the sole pleasure of the present management. The husbanding of its resources and the cash generated from operations is not being utilised for ploughing back into its tea estate development. Instead the cash generated including the additional funds borrowed is being splurged into liquid debt assets. It is however quite adept at buying and selling debt securities and turning a profit on this exercise.

The contribution of other income

Consider the following data. In 2010-11 the company earned revenues of RS 212 m (Rs 175 m previously) from the sale of tea. It also earned Rs 15 m (Rs 17 m) in the form of other income. The other income in turn is made up of dividend income of Rs 7.6 m and profit on sale of long term investment of Rs 6.5 m. The company shuffled some of its debt investment portfolio during the year leading to the profit on sale. In the preceding year the two items collectively brought in Rs 15 m. The company recorded a pre-tax profit of Rs 40 m (Rs 44 m) on its operations. Significantly, other income constituted a healthy 37% of its pre-tax profit against a slightly higher 38% previously. The company plucked 6.2 m kgs of tea in the latter year against 5.8 m kgs in the preceding year. This was converted into 1.4 m kgs of made tea against 1.3 m kgs previously. That would imply a conversion factor of 0.23, the same as previously. That is to say for every unit of green leaf that it plucked, it made 0.23 units of made tea. Whether this conversion factor from plucked tea to made tea is on the right side of the text book industry norm, if any, is not readily known. The average price realised on sale of tea was Rs 156 per kg against Rs 134 per kg in the preceding year. The closing stock of made tea is valued at Rs 128 per kg against Rs 105 per kg previously. This implies a prospective average mark up of Rs 28 per kg against Rs 29 per kg on the sale price, relative to the closing stock inventory valuation.

The company generated a positive net cash flow of Rs 21 m from operations against Rs 23 m previously. So what did it do with the money? It bought debt securities for Rs 20 m (Rs 23 m) and also plonked down Rs 4 m (Rs 0.5 m) on the 'purchase' of fixed assets. What exactly is the purpose of this lopsided exercise is not known. For the matter of record the company at year end had investments in debt securities valued at Rs 183 m (Rs 149 m). This has to be juxtaposed against its year end borrowings of Rs 35 m (Rs 25m). The company actually borrowed Rs 11 m during the year for the express purpose of investing in debt securities of all things! Quite apparently the management is able to turn a profit on the difference between the cost price of the monies that it borrows and the income and appreciation that it realises from the debt securities. But this trick does not always work to its advantage. A foot note to the accounts adds that there has been a fall in the market value of its outstanding investments in mutual funds to the tune of Rs 19 m - which has not been provided for. Besides, the management has also invested Rs 9.3 m in the equity of a group company going by the name of Ganga Steels and Alloys. The not so good news here is that the company has fully provided for the depreciation of this investment in its books. The fate of this company is not known.

Spending on capital assets

Plantation companies as a rule spend large sums of moneys each year on estate development and up keep of facilities. It is not readily known what is the exact extent of the company's tea holdings, but considering that it plucks 6 m kgs of green leaf tea a year, the lands must be fairly extensive. And spending a pittance on capital account on their rejuvenation is not exactly what the doctor would have ordered. But this is where matters stand. However to be fair to the management, the company also plonked down Rs 23.7 m (Rs 10 m) on repairs and maintenance to buildings, machinery, vehicles, and others. The expenditure on this account rose by 135% over the preceding year. Whether this expenditure on revenue account compensates or not for the lack of spending on capital account, is not a call that I can take. Or, has the company chosen to charge all estate expenditure to revenue account given the obvious tax advantage?

Whatever, this is not a company that gives out any positive vibes.

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 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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