Amrutanjan: Hitting jarring high notes
The company appears to be geared for a charge forward but it will help if it is a little more forthcoming on its operational aspects.
117 years old and pushing forward
Amrutanjan Health Care is an Indian pharmaceutical company which specialises in ayurvedic balm for headaches, cold and cough. The origins of this Chennai headquartered company go back 117 years to 1893. The managing director in his note to the shareholders states that the company's vision is to bring the essence of life to consumers of the world through brands that have perceptible and differentiating benefits for all age groups in our different product and service categories. Though labelled as a pharmaceutical company, almost its entire turnover is slotted in the OTC (over the counter) category. Besides, having its product lines classified as ayurvedic also infers having to pay almost zilch excise duty on what rustles up from its manufacturing facilities.
The company currently groups the products that it puts in the market under five categories. Products in pain management are one of the categories. Coming in this category are Amrutanjan balm, Amrutanjan aromatic balm, Amrutanjan Roll on, Amrutanjan joint muscle spray, Amrutanjan body pain crème, and Amrutanjan Reusable gel pad for hot and cold therapy. The second category is Products in Congestion Management. Coming under this wing are Amrutanjan relief balm for cough and cold rub, Amrutanjan Relief Cough and Cold syrup, Amrutanjan cough and cold inhaler, and Amrutanjan cough and cold mint. The third category is Products in purity. In this category are Amrutanjan Purity hand sanitizer, and Amrutanjan purity corn caps. The fourth category is Foods and Beverages. The products here are juice drinks and kitchen delights. The fifth category is called Comfy. In this category are sanitary napkins.
Diversification plans and other matters
Under its diversification plans it is foraying into the service sector by launching specialised hi-tech centres for pain management across the nation in a phased manner. These centres will treat all types of pain experienced by people. In May 2011 the pharmaessence chemistry services division was transferred to a wholly owned subsidiary company Amrutanjan Pharmaessence.
The company drummed up a sales top line of Rs 1.1 bn for the year ended March 2011. Factor in the other income of Rs 48 m, against Rs 61 m previously, and the gross revenues amounted to Rs 1.1 bn against Rs 998 m recorded previously. (The other income component is a significant benefactor to the profit before tax in either year. It constituted 30% of pre-tax profit, against a higher 35% previously). The company posted a pre-tax profit of Rs 160 m, which was marginally lower than the pre-tax profit of the preceding year of Rs 193 m. (The company also earned an exceptional income of Rs 19.4 m in the preceding year). The ten year highlights of its financial performance reveals an almost consistent rise in sales each year over that of the preceding year-barring two years that is. But the pre-tax profit has witnessed a roller coaster ride, implying perhaps that with rising competition the margins are under strain. The management has obviously given the go by to the issue of bonus shares given the almost steady paid up equity capital base. On the contrary the management engineered a buyback of shares in 2008-09 and 2009-10 which led to a marginal reduction in the capital base by Rs 1.7 m. The buyback in 2009-10 cost the company Rs 30 m. Such a buyback of shares only leads to an accretion in the holding of the management, while simultaneously requiring no spending by the management in the process, as the company coughs up the buyback payouts. The promoters holding in the company inched up by 1.8% to 48.6% following the buyback of shares. Looks like the buybacks will continue till the critical 50.1% barrier is reached. So quite obviously the present promoter fraternity have ground breaking plans of their own. The present capital base stands at Rs 30.3 m. The reserves and surplus however dwarfs the capital base weighing in at Rs 999 m.
Action to the fore
There is plenty of action stirring in this company alright, besides the buyback of shares. During the year it made some swift moves on the funds flow front. The borrowings accelerated to Rs 266 m from Rs 12.5 m. (The auditor's report states that the company used funds of Rs 192 m raised on short term basis for long term purposes. This borrowing of Rs 192 m is made up of loans against fixed deposits of Rs 92 m and working capital loan of Rs 100 m). In tandem, the investment portfolio accelerated to Rs 684 m from Rs 459 m previously. During the year the company acquired Siva Soft Drink Pvt Ltd, which owns the Fruitnik brand for a consideration of Rs 257 m, at an acquisition price of Rs 286 per share on a face value of Rs 10 per share. The gross fixed assets including capital work in progress jumped to Rs 426 m from Rs 309 m previously. The cash and bank balances however decelerated to Rs 198 m from Rs 240 m previously.
Why exactly is the company resorting to borrowings when the company is quite cash rich in reality? Besides the year-end cash balance, the company has liquid investments worth Rs 216 m in tax free debt instruments, and a further Rs 40 m in other corporate bonds. Further, it had investments in other mutual fund schemes valued at Rs 167 m. It also boasted of investments worth Rs 290 m in subsidiary companies, but that is a separate issue. Apparently the company is trying to get the double benefit of tax free dividend income from its debt investments, while it is able to treat the entire interest paid out on borrowings as a charge against taxable profits.
The company has during the year received bank interest income of Rs 10.9 m, other interest income-probably from debt securities-of Rs 3.5 m, income from investments of Rs 17 m, (whether this is a dividend receipt or not is not known) and dividend receipts of Rs 6.9 m - collectively aggregating to Rs 38.4 m. There are far too many classifications if one may say so. But crucially, it has not stated separately how much dividend it received from its investment in its siblings. (This has to be seen in the light of the fact that it has provided for depreciation of Rs 30 m on its investments-which in all probability is against its subsidiaries. Separately it has made a provision of Rs 170 m on loans advanced to its subsidiaries). Then there is the profit on sale of investments amounting to Rs 2.2 m. This profit could have emanated from it pulling out of its two subsidiaries, Egattur Printing and Packaging, and ADCL Drugs and Chemicals, in which the book value of its investment in the preceding year end was Rs 10.5 m. The cash flow statement does not specifically mention any sale of these investments. It merely shows a net sale of investments to the tune of Rs 35 m, against a net purchase of Rs 456 m previously. On the flip side however, the interest payout on its debt that it debited to the profit and loss account was Rs 3 m.
A few riddles
In the schedule showing the production, stock, and turnover figures, the company classifies its sales under four heads of account. The Amrutanjan pain balm is at the top of the heap. With a turnover of Rs 892 m, it accounted for a whopping 83% of all sales of Rs 1.1 bn. Next in line is an item classified as Chemicals which tossed in another Rs 97 m. This was followed up by Inhalers with Rs 49 m, and the back end was brought up by Agency Products with Rs 39 m. Overall rupee sales rose 15%, but the input costs accelerated at a much faster pace -by 31%. What is very revealing here is that the sales generation till the other day, was achieved on a wisp of an opening historical gross block of Rs 42 m and a post depreciated net block of Rs 21 m. (As a matter of fact the opening gross block of the research and development wing of the company was higher at Rs 49 m!) The company has during the year upped gross block spending by a whopping Rs 97 m, with the vast bulk of the expenditure of Rs 80 m being made on plant and machinery with the balance of Rs 11 m being spent on buildings. Whether this spurt in gross block addition led to any capacity increase or not in its product lines is not known, as the licensed and installed capacities of the product lines at Chennai and Hyderabad for the two years have been very improperly stated in the annual report. This only makes a mockery of statutory requirements. Besides, the written copy of the annual report does not appear to shed any light on this capex. Apparently it is a trifling matter or some such.
There appears to be an anomaly in the gross block addition. The company has broken up its fixed assets schedule under three heads. There are the 'manufacturing' fixed assets, the 'Pharmaessence chemistry' fixed assets (this severely haemorrhaging division has since been transferred to a wholly owned subsidiary), and the 'Research and Development' fixed assets. Individually they had gross fixed assets of Rs 247 m, Rs 73 m, and Rs 82 m at year end. Individually the additions to gross block during the year were Rs 97 m, Rs 65 m, and Rs 0.04 m respectively, or a cumulative addition of Rs 161 m less the depletion in the value of capital work in progress of Rs 43.8 m. That is a net addition of Rs 117 m. But the cash flow statement for the year paints a different picture of the purchase of fixed assets for the year. According to this statement the addition was only Rs 103 m. This is not possible, unless I am missing out on some vital statistic. Also of some bearing are the sizeable capital assets of the R&D division, and the revenue expenditure incurred yearly on research and development. The company spent Rs 6 m on revenue expenses on R&D in the latest accounting year. The vast bulk of this expenditure is on salaries, bonus etc. The directors' report dwells on the tireless efforts of this division to improve existing products and develop new innovative products. If so, the effort is not exactly percolating down to the bottom-line as yet. It will be nice to know what exactly the fruits of this R&D effort are.
Price realisations under strain
The company is labouring on the price realisation front, and that is for certain. It managed to eke out only a very marginal 2.7% increase in the gross unit price realisation per tonne from its very crucial Amrutanjan pain balm division. In the case of Inhalers however the unit price increase per tonne as higher by 16%. In the chemicals division it was a more than a bit topsy turvy. In quantity terms, the sales were substantially higher at 50.2 tonnes against 10.9 tonnes previously. In value terms the figures were Rs 97 m and Rs 48 m respectively. But the unit price realisation per tonne fell drastically to Rs 1.9 m from Rs 4.4 m previously. Whether this infers a change in the composition of this product line, or is the result of some other aberration is not known. What is significant here is that the consumption of 'chemical raw materials' accelerated to Rs 81 m from Rs 28 m previously. On paper it appears to have got the maximum price increase on its agency products division. The average price realisation in this instance was Rs 8.5 lakhs per tonne against Rs 5 lakhs previously. Handling third party products appears to be more profitable, and by a mile at that.
At end March 2011 the company had two wholly owned subsidiaries - Holistic Beauty Care Ltd and Siva's Soft Drinks Pvt. Ltd. From the current year the subsidiary list will be joined by a new and limping subsidiary, the Pharmaessence division, which in 2010-11 rigged up revenues of Rs 92 m but made a segment loss of Rs 28 m, against figures of Rs 45 m and a loss of Rs 35 m previously. What in heaven's name does this division put out in the market? Is it the chemicals business or some such? It possesses either a licensed capacity or an installed capacity to make 1 ton of whatever material. What disclosure is it making by doing so?
The newly acquired subsidiary, Siva's, is an enigma of sorts. As per brief financials that it has published it recorded a turnover of Rs 20 m and recorded a loss before tax of Rs 1.2 m. For which financial year these results were ordained has not been stated. This is becoming some sort of a joke. But let it be. It has a capital base of Rs 9 m, reserves and surplus of Rs 55 m, and total assets of Rs 108 m. Looks like it had a pleasant past. But what does the latest loss point to? Why did they pay 'top dollar' for this company? The other subsidiary Holistic Beauty Care is also walking on stilts for whatever reason. It has a capital base of Rs 4.2 m, nil reserves (how is this possible?), total assets of Rs 15 m, a mini turnover which is too small to be mentioned here, and a loss before tax of Rs 3.6 m. Is the company's net worth totally written off or what? Here too there is no mention to which year the results pertain to. There is a third subsidiary sporting the name of Data Quest InfoTech and Enterprises in which the company has a capital stake of Rs 30 m. But there is no data on this company. As stated earlier the company has made a provision for investments of Rs 30 m. Separately, there is a provision of Rs 170 m for loans advanced to them.
Companies which are not very forthcoming about their operations to their minority shareholders should ideally be given the short shrift by such aggrieved parties.
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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