Vaibhav Gems: Not much shine
It will help if the management of Vaibhav Gems can give a satisfactory explanation of why the company is being run the way it is being run.
This company's annual report and accounts is almost as intricate in a manner of speaking, as the jewellery filigree that it puts out in the market. The jewellery business brings forth visions of pelf and splendour, but such visions go up in smoke when one has an 'encounter' with the annual report of Vaibhav Gems. It is a mishmash of funds flows, of carry forward losses, higher revenues, a profit before tax in one year and a loss before tax in another year, and cash flows which move in the opposite direction to the bottom-line. In the reporting year ended March 2010 the company revealed a positive cash flow from operations of Rs 192 m, while it reported a loss before tax of Rs 136 m. In the very next year the tables were turned ulta - the respective figures were a negative Rs 3.8 m in cash flow and a profit before tax of Rs 30 m (before extraordinary items). These anomalies are merely the 'starters' please!
Equally difficult to digest is the shareholding pattern in this company. The Indian promoters have an 8.5% stake in the equity while the foreign promoters have a 4.9% stake, making in all a 13.4% stake for the promoter group. Who exactly these foreign promoters are is not readily known, or whether they have a seat on the board of the company for that matter. But the key promoter apparently is Mr Sunil Agarwal, the chairman of the Board. It is quite remarkable that the management is able to keep a firm grip over the company with such a minority percentage shareholding to back them up. The company also has a 'pious' vision which is 'to be the most preferred global jewellery company for all stakeholders worldwide'. This is a tall order to fulfil. An equally pious mission is to 'bring a smile to our customers and all other stakeholders'.) A very laudable objective no doubt, but the minority stakeholders in all likelihood will vehemently disagree. (Considering that the company has accumulated losses of Rs 3.2 bn which has yet to written off against reserves it will be a trifle difficult to bring a smile on the faces of its minority shareholders)
How it earns its bread
And why would they? Read on! The company earns its bread by selling principally, jewellery and to a much lesser extent gem stones. Products categorised as accessories, diamonds and roughs bring in the dribblings. Jewellery sales and gem stones bring in 85% and 11% of the overall pickings, or some 96% of all sales. In rupee terms, total sales added up to Rs 1.45 bn against Rs 1.2 bn previously. Other income chipped in with Rs 16.8 m, against a humungous negative income of Rs 55 m previously. (The company took a whopper of a loss of Rs 62 m on the exchange fluctuation account in the previous year). From the looks of it, some jewellery companies, despite the glitz and the glamour, seem to subsist on meagre margins. Vaibhav reported a pre-tax profit of Rs 30 m against a pre-tax loss of Rs 136 m previously. Raw material input costs are the bugbear here. Such costs accounted for 71% of sales in 2010-11 against 76% previously. Even then it is amazing at the lack of value addition. (What is important to note here is that imported raw materials and components consumed accounted for only 36% of all such materials consumed.) The way the company goes about its business; it consumed Rs 1 bn worth of roughs, gold, silver, alloys, gem stones and accessories to produce 8.5 m carats of gemstones, 1.45 m pieces of studded jewellery, and 670,000 pieces of accessories. Of all the gemstones and accessories that it produced, it consumed on a captive basis, 1.3 m carats of gem stones and 540,000 pieces of accessories. That is close to 16% of all the gemstones and 81% of all the accessories that it produced! Only the balance is hocked in the market. It also purchased Rs 15 m worth of gem stones. What exactly does captive consumption in this context imply, as we are not talking about small change here? Does it mean wastage or some such? Is there an industry benchmark on this or what?
Export oriented sales
By choice it sells almost its entire output in the foreign markets. That is to say out of the total sales of Rs 1.45 bn, barring the domestic sales of a forgettable Rs 1.7 m, the balance was flogged in foreign shores. It was a similar pattern in the preceding year too - total sales of Rs 1.2 bn and exports sales of Rs 1.2 bn. Now the catch here is that almost the entire export sales were effected to its own siblings. Sales to its subsidiaries amounted for Rs 1.3 bn against Rs 1.1 bn previously. The parent in turn purchased goods worth Rs 161 m against Rs 297 m from its siblings. Presumably this means that it bought finished gems and jewellery for a like amount. (Incidentally the consolidated entity in turn ramped up sales - excluding other income - of Rs 5.3 bn against Rs 3.4 bn previously. The consolidated results include the working of eight subsidiaries and three step-down subsidiaries.) The plot thickens at this stage.
The trade debts receivable at year end from its siblings amounts to Rs 1 bn against Rs 1.3 bn previously. Note that the trade debts at the preceding year end were more than the sales effected to its siblings in that year! A neat way of doing business, what? But the amounts payable to the siblings was only Rs 41 m against Rs 29 m previously. In other words the parent was quick at paying its tithes to its siblings, but the siblings were given an extra long rope to pay their tithes to the parent. It gets even more interesting at this stage.
The importance of subsidiaries
The parent has 'trade investments' in eight wholly owned subsidiaries. The total value of its capital investment in the subsidiaries at gross value amounts to Rs 5.8 bn. It also has an investment in VGL Software for Rs 5.2 m, which is shown under the heading of 'Other than trade investment'. Further it also boasts of a total of 16 direct/ indirect subsidiaries. The country of incorporation of 13 companies is known. There are four based out of the USA, two out of Thailand, and one each in Japan, Canada, Mexico, Hongkong, British Virgin Islands, St Kitts and Nevis, and the UK. Having letter head companies functioning out of the Caribbean is now de-rigueur for India Inc.
Its biggest capital stake is in STS Jewels Inc, USA, with an investment outlay of Rs 2 bn, followed by the subsidiary based in the British Virgin Islands (BVI) with 1.5 bn, and followed by STS Gems Thailand with Rs 1.1 bn. Next in the pecking order is Jewel Gem USA with Rs 527 m, and the Hongkong sibling with Rs 410 m and so on. But what is very perplexing is that the parent has provided a depreciation factor in all its investments, barring two. The only two companies not facing the hangman's noose are STS Jewels USA, its largest individual investment outlay, and STS Gems, Hongkong. The two collectively account for an outlay of Rs 2.15 bn. On the balance investments of Rs 3.6 bn, the company has provided depreciation in value by Rs 2.8 bn or by 77%. Some of the investments have been written down by 100%. Further, its investment in VGL Softech is also fully depreciated.
High priced acquisitions
Some of these rickety companies have been acquired at fantabulous prices per share. Top of the pops is the Mexican subsidiary. The capital base consists of 2 shares at an overall acquisition price of Rs 410 m. That would work out to a per share acquisition price of Rs 205 m! The shares in Gem Jewels USA were acquired at a per share acquisition price of Rs 5.3 lakhs, while the shares in STS Jewels were acquired at Rs 9.98 m per share. But the shares in Genoa Jewellers were acquired at Rs 43 per share or US$ 1 each. On what basis was the price per share decided on in each individual case given that all these companies appear to be in the same shit house?
This is only a part of the big sordid picture, in a manner of speaking. The accounts are replete with entries which have the effect of writing off dues taken by the siblings. Take the sundry debtors schedule for starters. It has provided for a book entry provision of Rs 188 m being doubtful dues from long term trade debtors, and then reversed this provision by a transfer of this amount to 'investment' account. The point however is that the company did not anticipate any doubtful debtor dues over 6 months old in the first place. (It states that during the year it was able to recover past debtor dues of Rs 188 m.) Why in the first place is the company making this entry in the trade debtors schedule, especially since it relates to the dues of past years' and should logically be set off against prior years' provision, or added back to the profit and loss account? To add to the confusion the company has reduced this figure from its investment portfolio in Genoa Jewellers. What sort of accounting entries has it put together please? In the preceding year the provision for doubtful debts was Rs 314 m on total dues over 6 months amounting to Rs 802 m.
Advancing large sums to its siblings
It has also advanced large sums of moneys to its siblings, which is grouped under 'Loans and Advances'. It has provided for doubtful loans of Rs 673 m against total loans advanced of Rs 1.3 bn. The loans have been hogged by just four of the eight direct subsidiaries with the British Virgin Islands outfit Genoa Jewellers being the principal beneficiary taking in over 80% of all advances. Besides, the 'administration and selling expenses account' has been charged with bad debts written off to the tune of Rs 86 m - but a book entry rolls back this write off. Looks like a bizarre entry if one may say so. The total 'advances and loans' given to its siblings at year end as stated earlier was a not inconsiderable Rs 1.3 bn. No interest is charged on these loans even though the parent has to suffer interest on the loans of Rs 1.7 bn that it avails of. The overall borrowings availed of by the parent includes a sizeable corporate loan of Rs 407 m. That is a fairly large loan to be advanced by whichever joint stock company, given the seemingly shaky legs that Vaibhav Jewellers is standing on.
These peccadilloes are a bit difficult to fathom, given the very pious vision statement of the proprietors. The point here is that the company is selling to its own flesh and blood out of choice. If these siblings are any way going to default, why then are sales being effected to them in the first place? Ditto on the Loans and Advances front. Further, why would the jewellery industry which sells in the retail sector on a cash basis be afflicted with such large and recurring bad debts at that? It would appear that the parent is not exercising adequate due diligence in its dealings with its siblings. Consider this very telling note to the account on the state of affairs. It says - 'Three subsidiaries of the company are having a negative net worth'. Which subsidiaries these are have not been identified but in all likelihood they are Jewel Gem USA, Indo Mexico Company, and Genoa Jewellers BVI. The parent has a total exposure of Rs 5.3 bn in these companies towards investments, loans and advances, and sundry debtors, against which aggregate provision of Rs 2.2 bn has been made in the accounts.
The siblings in brief
Cut to the performance indicators of its siblings. The parent has provided the brief financials of 13 subsidiaries. The siblings together rang up sales of Rs 6.1 bn. (Since the parent had sold goods worth only Rs 1.3 bn to them, it implies that they also probably outsourced jewellery from foreign shores and generated additional revenues in the bargain). Collectively however, these companies constitute a bunch of nuggets. Only six of the 13 recorded revenues, while none of the thirteen declared a dividend. Besides, very few are in a position to do such honours. In terms of paid up capital the bid daddy here is Genoa Jewellers, the BVI based subsidiary. On a paid up capital of Rs 1.6 bn, it has negative reserves of Rs 2.1 bn. Its total liabilities far exceed its assets-nothing surprises you see. It has investments valued at Rs 172 m, implying its shareholding in subsidiaries perhaps. The company did not register any turnover, but still managed to record profits of Rs 20 m. Where have these humungous funds been invested please, and besides, how does a company record a profit on NIL revenues? There is a definite pattern here in the collective madness of India Inc which has companies registered in offshore tax havens.
Next in the pecking order is Jewel Gem USA Inc. On a paid up capital base of Rs 534 m, it has negative reserves of Rs 689 m. This worthy actually recorded revenues of Rs 103 m, but backed that up by showing a pre-tax loss of Rs 44 m. With a performance like this why does it continue to be in business? Its Mexican subsidiary is even more titillating. On a capital base of Rs 356 m, it boasts negative reserves of Rs 376 m. No revenues to show, but a pre-tax loss of Rs 5 m is the story of its life.
A pattern in the madness
The pattern in this company is that subsidiaries with large capital bases record marginal revenues or NIL revenues, but companies with marginal capital bases recording large revenues. Even step down subsidiaries get into the act big time here. The sibling recording the largest revenues is its step down subsidiary, The Jewellery Channel Inc, USA. On a capital base of 136 m, and maha negative reserves of Rs 1.4 bn; it recorded revenues of Rs 2.7 bn, and reported a pre-tax profit of Rs 194 m. This is a bit difficult to swallow. Next in line is another step down subsidiary, The Jewellery Channel Ltd UK. On a whisker of a capital base of Rs 1.8 m, and negative reserves of Rs 779 m, it ponied up revenues of Rs 1.7 bn, and recorded a pre-tax profit of Rs 180 m. How in heaven's name is it able to generate such large volumes of business on seemingly weak kneed financials? This is followed by STS Gems, Hongkong. On a capital base of Rs 51 m, it anted up revenues of Rs 847 m and eked out a sliver of a pre-tax profit of Rs 17 m. To round out the picture there is yet another exotica, based out of St Kitts and Nevis, also named as Genoa Jewellers. This company has a piffling paid up capital of Rs 0.02 m, negative reserves of Rs 33 m and little else.
As one can see this is more intricate than the jewellery that it puts out in the market
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.
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