The path to progress
Garware Wall is one of the more prominent companies of the eponymous group. And well on track in what it is doing. Incorporated 33 years ago, during the heydays of B D Garware, the group's late founder, it today makes what it originally set out to do - synthetic nets of the petro byproducts variety --- but the portfolio of products and services on offer has expanded. Fishing nets, nets for a variety of sports, and heavy duty ropes for mooring and towing, these laid the initial foundation. The new applications are industrial in nature and cater to the needs of the infrastructure sector - for agricultural applications (nets for sericulture and floriculture for example), geo systems as in coastal soil protection, the railway sector, and in securing landfills. Industrial applications involve turnkey contracts. It also buys and uses a number of items like textile membranes and steel wire ropes etc, for completion of contracts that it undertakes. The company was originally set up with the collaboration of Wall Industries of the USA. There does not appear to be any representatives of the collaborators on the board today, and the foreign equity holding in the company, if any to start with, has been reduced to zilch. But it still retains the collaborators name on its name plate.
Cost reduction methods - Not really
On a marginal increase in gross revenues to Rs 4.5 bn, the company recorded a 38% increase in pre-tax profits to Rs 260 m. The higher profit the management concludes, is attributable among others to well planned cost reduction measures, value additions to new products and addition of new customers globally. It is not possible to evaluate all these claims, given the limitations of the data contained in the annual report. And, from the available evidence, this conclusion is indeed a revelation, because these claims do not correctly bear out the facts. It was quite a struggle to push its products in the market to start with. For example, the discount and commission on sales at Rs 231 m accounted for 5.1% of gross sales, against Rs 181 m or 4.1% of gross sales in the preceding year. It would imply that it had to work harder to push sales. It also realized 10% less on a gross rupee basis for every ton of twines, ropes, and yarns that it sold. This item alone brings in over half the rupee turnover. And, to add to the confusion, it realized 3% less on every ton of nettings that it sold, as compared to the preceding year. The latter accounted for 42% of all rupee sales. To be fair however, the input cost of its two biggest items of consumption, polyethylene and polypropylene, were down sharply. This probably accounts for the decrease in price realizations on the one hand, and the higher volume sales on the other.
The hidden nuggets in the income schedule
Secondly, another fortuitous gain helped to record higher margins - namely a gain in forex fluctuations to the tune of Rs 22 m in the latter year, against a loss of Rs 76 m recorded in the preceding year. (The company has large forex transactions emanating both from the total value of imports, and from export sales. Import of raw materials at Rs 751 m accounted for 51% of all raw material imports, while the exports brought in Rs 1.5 bn. Exports accounted for over 35% of net sales.) If one were to erase these extraordinary entries from the profit figures, then the pre-tax profit for the year would be Rs 238 m against Rs 265 m in the preceding year. Quite the reverse of what the directors' report has to say! It is another matter and a paradox at that, that the company was able to generate substantially more net cash of Rs 611 m from operations during the year, against Rs 287 m in the preceding year. This effect was pronounced in its favor during the year, due to the additional leeway that the company got by squeezing its creditors. The increase in trade and other payables brought in additional moolah of Rs 363 m, against a negative charge in this respect, in the preceding year.
The breakup of sales and other income is another revelation. If one does a recce of the breakup of the individual volume sales figures, there is a big loss in the tonnage of goods that is technically produces, at the point of sale. As stated earlier, sales of twines, ropes, and yarns accounts for 53% of gross rupee revenues. If one were to take the volume opening stock, the production, the sales, and closing stock of this item, the stock on hand at year end is lower by 8,288 metric tonnes than it should be. This is significant as the total production during the year was only around 25,000 tonnes. In the preceding year there appears to be a negative discrepancy of 7,851 tonnes. And in the case of nettings, which brings in 42% of rupee revenues, there is a discrepancy of 738 metric tonnes. Here too the total production for FY10 was only 6,900 tonnes. Obviously there is a catch somewhere, as there cannot be a difference of such a large magnitude. But there does not appear to be any immediate explanation for this in the annual report. In the preceding year it also appears to have made an unfortunate loss on the sale of Securgrid,
Textiles, and Membranes, relative to the purchase cost per square metre, and the opening inventory cost. This anomaly has been set right in the current year.
The other income factor
The ‘other income' schedule is also very educative. The company recorded such other income of Rs 28 m (Rs 30 m) during the year. Despite the fact that exports are a kingpin in its overall sales strategy, (it is forex positive), there does not appear to be any incomes arising from export benefit receipts that the government doles out - unless this receipt is merged into some other account. This is true for the preceding year too. There is a marginal dividend receipt of Rs 1.5 m on its year end investment portfolio of Rs 201 m. (There is a provision of Rs 32 m against this book value, for an anticipated decline in the value of investments). The spread of the investment portfolio makes for unhappy reading. The vast bulk of these moneys have been sunk into Garware group company ventures, including five bearing the family name. It fortunately exited from two others bearing the brand during the year, and guess what, it even earned a profit of Rs 4 m on the transaction. Given the portfolio mix, it is reasonable to expect only a bare minimum, or even nil
Dividends from its current holdings. It is also nice to see that the management has not splashed out any loans of every hue to its siblings. On the contrary, it seems to have availed of substantial loans during the year, actually in either year, from affiliates, but repaying the lump sum at year end to show a clean balance sheet. The auditors have no qualifications to make on this two way transaction.
If the company is to grow it will have to think big, both in terms of capacity additions and in value addition. The company is already operating at close to its installed capacity in both its major manufactured product lines. The company has spent quite some moneys during the year on gross block addition of Rs 236 m (Rs 148 m). But this addition has brought about only a less than marginal addition to the installed capacities of its major productive assets and none to the other product lines. Presumably then, this expenditure had more to do with sprucing up the quality of its assets (including what looks like a
brand new building), than in laying out more production oriented spending.
In sum, slow and steady performers, with no grand plans up its sleeve. It is unlikely to elicit any interest in the minds of investors.
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.