The company appears to have lost the zest for living ever since the passing away of its founder chairman.
Getting on in years
The company is getting on in years for sure - after having lost its founder chairman some seven years ago. It was incorporated as long back as 1944 - to make carbon dioxide of all things in the erstwhile princely state of Kapurthala. But, fortunately, the IMFL (Indian made foreign liquor) that it distills and markets today still continues to be of the vintage variety. The company was promoted by the late LP Jaiswal - and it probably boasts the unique distinction of being the only one of its kind to be promoted by a member of the particular community and faith that he belongs to and hawking IMFL products. In all probability the company is also named after the then maharaja of Kapurthala. Today it makes and sells liquor, malt and malt extracts, and malt milk food, in the main. It also indulges in traded goods - largely comprising the sale of bought out liquor, and petroleum and its products. Where the latter product fits in is not known. The carbon dioxide biz is still extant - but brings in no more than a few pennies.
The company shot into the limelight in the 1960's after it bagged the licence to make and market OVALTINE the famed malted food extract in India. The brand was owned by A. Wander & Company, London. Children of my generation were brought up on Ovaltine mixed in milk, or we just ate the crunchy flavour whole. (The two other boosters that my generation imbibed was the gooey mix Ferradol, and Waterbury's Compound - both of which have also exited the market). Jagatjit however lost the licence (if my memory serves me right) to make Ovaltine after A Wander was acquired by the Swiss pharma giant Sandoz. The latter in turn much later merged with Ciba Geigy to form Novartis. But Jaiswal immediately concocted a new malt drink and called it Maltova and substituted it for the lost brand - and it was a winner.
Top of the pops in decades past
It was in the late 1960's, I think, that the company introduced its Aristocrat whiskey, and subsequently did an encore with a souped up version, Aristocrat Premium. Today it makes the whole hog of IMFL products - Whiskey, rum, gin and brandy - including such brands as AC Black, Sinclair and Bonnie King whiskies, Aristocrat Brandy, Fire Rum, and iice Vodka etc. The company was during the time of Mr Jaiswal's active superintendence one of the more fancied counters of the .
The company is however not up to much good judging from the latest financials. Though the revenues have almost shown a steady increase in each year over the last ten years, the pre-tax profits have gyrated uncomfortably. The pre-tax figures include a pre-tax loss in two of the ten years. There does not appear to be much of an effort being made to right matters either, and the company is resorting to other means to pen the bottom-line in black ink. In the last two accounting years for example it is the receipts generated from 'other income' which has provided some succour to the bottom-line. For example, it generated a pre-tax profit of Rs 367 m in 2011-12 but this includes other income of Rs 855 m - implying a loss but for this receipt. The situation in the preceding year was only marginally better. Besides, there appears to be an attempt to sell the family silver to generate the 'other income'. In the latter year the profit on sale of fixed assets amounted to Rs 796 m out of total 'other income' of Rs 854 m. In the preceding year the profit on sale of fixed assets amounted to Rs 315 m out of a total 'other income' of Rs 358 m. Further, the cash flow statement for 2011-12 is a hotchpotch of figures - with the entries going hither and thither.
How the revenues and expenses tote up
Before we meander into the figures that constitute the cash flow - take a look at what brings in the bacon. The 'gross' revenues from operations rose to Rs 15.2 bn from Rs 13.8 bn previously. Add other income of Rs 855 m (Rs 358 m), and the gross revenues add up to Rs 16.0 bn against Rs 14.1 bn previously or by 13.5%. However the revenues 'net of excise' rose by 12.4% or to Rs 11.6 bn. The revenue from operations in turn is made up of manufactured sales, traded sales, income from services (job works), and other operating revenues. Manufactured sales accounted for close to 91% of the top line, followed by traded goods with 4.5%, income from services with 2.2% and other operating revenues of 2.5%. The pattern was not much different in the preceding year.
Liquor in turn accounted for over 93% of the gross manufactured sales, followed by glass bottles, and malt and malt extract with contributions of 3.6% and 2% respectively. The other contributors are minor distractions. In traded sales too, the contribution of liquor was as high as 71% with petroleum and its products bringing in the balance moolah. Thus liquor is the top dog today in revenue accretions from the mainline business, while malted food products is a very distant second. Then there is 'income from job works' and 'other operating income' which look like a perennial source of steady income - and not just one time wonders. But their contribution to the top-line is middling. I have already harped on the game changing proclivities of another receipt called 'other income'.
The mood spoiler on the expenditure side of the equation is 'Other expenses'-a hotch potch of expenses which cumulatively rose 20% to Rs 4.9 bn. (This percentage increase is far higher than the percentage increase in revenues). This omnibus item in the main includes advertisement, publicity and sales promotion amounting to Rs 1.9 bn against Rs 1.6 bn previously. Put differently it would infer an increase of around 23%. It may also infer that acute competition is pushing the company to spend ever more on marketing its FMCG line up of products on the one hand, and the inability to mark up product prices to cover the cost increases on the other. But such spending also infers the inability of new competition to muscle into established territory. Another big expense item is power and fuel which rose 16% to Rs 825 m. Then there is an extraordinary debit of Rs 160 m against Rs 19 m previously - pertaining to bad debts, advances and stock write off. The company also seems to be having some problem on its advances and book debts portfolio - but more on this later on in the copy.
An avoidable loss
And as bad luck would have it, the company also suffered another extraordinary and avoidable loss during the year. It sold its holding of 600 shares in LPJ Holdings with a book value of Rs 90.5 m for Rs 8.1 m incurring a loss of Rs 82.4 m in the process. In my humble opinion this would ordinarily be an improbable transaction. But, considering the stakes involved nothing is improbable in the world of business. The initials LPJ in LPJ Holdings is in all probability the acronym for the late founder promoter and it must also be referring to one of the holding companies of Jagatjit Industries or some such. Fair enough - no quarrel here. This acquisition price per share of Rs 1, 50,833 per share was also obviously arrived at based on some sane calculation I would guess. But this sale transaction would infer that the shares were in turn sold for a mere Rs 13,500 per share. The question that arises is to whom were these shares sold and on what valuation basis was the sale price per share arrived at? Was it a sale from the right hand to the left hand or some such, with the loss being booked in the accounts of the listed company? And, will this book loss be a deductible expenditure for tax accounting too? These are questions that should naturally beget answers.
A jigsaw puzzle
The promoter family has an unassailable holding of 94.9% in terms of voting rights in the equity capital of Rs 461.5 m in Jagatjit Industries. This capital includes the underlying value of the shares amounting to Rs 252 m when the GDRs (global depositary receipt) which were issued earlier are converted into equity. The promoters holding in the paid up capital itself is another eye-opener. In reality the promoters hold only 37.8% of the outstanding paid up capital. But this holding in turn has enabled the promoters to acquire voting rights to the extent of 94.9%. The other shareholders like the Indian public hold 6.5% but it translates into voting rights of only 4.4%. Ditto is the position of other minority shareholders too. It is not immediately known how these bizarre looking percentage figures of the voting rights were arrived at as it would imply disproportionate voting rights at first sight for all categories of shareholders - with the only real beneficiaries being the promoters. But the catch to this jigsaw may lie elsewhere. As I had stated earlier the company has also issued GDRs. These GDRs in turn account for 54.63% of the total capital. The GDRs do not carry any voting rights. The GDRs have yet to be converted into shares. When the underlying shares to the GDRs are issued at a future date the voting rights emanating at that point may correspond to the new shareholding - as the bulk of this issue may have been subscribed to by the promoters. But the footnotes do not appear to clarify the picture one bit.
There is another twist to the shareholding pattern tale. In the details of shareholders who hold more than 5% each of the outstanding capital of the company there are three shareholders who collectively hold 76.13% of the capital base against a holding of 82.96% previously. This includes a 54.63% holding in the company held by The Bank of New York representing the underlying value of the shares arising from the issue of GDRs. In all probability this percentage holding represents yet another shareholding pattern of the promoters in the company. This is only a guess - but a reasonable guess I would add.
Whatever may be the many no brainers that one has to encounter - the company for segmental purposes has divided its business into four broad categories - beverages, food, packaging and others. And, according to this data the company logged in sales (net of excise), services and other income of Rs 12.4 bn. It is difficult to reconcile these figures with that of the earlier set of revenues and other receipts. But, nevertheless, it appears that the food business is running at an operating loss (what a fall from grace from its days of glory) and it is the beverages and packaging division which is rolling in the margins. Packaging in this context probably refers to the glass bottles biz. There is of course no knowing whether the traded goods per se are adding value or not as the separate sales figures for comparison purposes have not been furnished. But, presumably, this line of activity tossed in a few pennies into the bottom-line or so one hopes. Then there is an innocuous item called 'others' which also provides some humour of sorts.
The cash flow statement
The cash flow statement provides its own perspective. The real meat is in the revelation that it lost money from operations during the year. Excluding the loss from the sale of investment of Rs 83 m, the company was out of pocket to the tune of Rs 131 m against a positive outcome in the preceding year. The change in fortunes in the latter year was occasioned by a massive increase in working capital requirements due to a higher holding of inventories, trade receivables, and in long term loans and advances. The relief provided through its ability to get more leeway from working capital creditors was not enough to make good the damage.
It was the cash flow from investing activities that brought in the badly needed cash. It realised cash of Rs 814 m from the sale of fixed assets. But the spending on capital assets was pidgin at Rs 238 m considering that it boasted a gross block of Rs 6.2 bn (including revaluation) at the beginning of the year. It appears that the management is either not too keen to update its manufacturing facilities, or has no clue on what to do in this direction. Either way the company will be the loser in the bargain. But the excess cash that the company realised by the sale of fixed assets was put to some good use, in a manner of speaking. The borrowings at year end were marginally down to Rs 1.6 bn from Rs 1.8 bn previously.
The advances to group companies and its inter-se doings with its subsidiaries is another cause for concern. The long term loans and advances schedule shows that it has advanced Rs 298 m to group companies and against the advances it as provided Rs 126 m as bad and doubtful. It has also written off dues amounting to Rs 56 m during the year from an associate company Hyderabad Distilleries and Wineries to which Jagatjit pays bottling charges. Just like that? It had four siblings at the beginning of the year and by year end one of them, Anjali Estates, ceased to be a subsidiary during the year as its entire holding in the sibling was hived off during the year. To whom was it sold to please? Admittedly, the book value of its investment in these companies collectively amount to a middling Rs 0.3 m - which makes one wonder what the express purpose was in procreating these companies in the first place. Though the parent's equity investment in Anjali and another sibling SRK Investment is only a ludicrous Rs 0.05 m and Rs 0.01 m respectively, the foot notes to the accounts state that the maximum advances due from these two lilliputs during the year collectively was Rs 311 m. Why then was Anjali sold when it owed moneys to the parent? Is one to presume that this sale is a precursor to writing of - of the dues if any? Also, judging from the other income schedule the advances are of an interest free nature.
The company has condescendingly provided the brief financials required under law on the functioning of the remaining three siblings. JIL Trading is a total washout with an equity base of Rs 0.01 m and little else. Seabird Securities has a paid up capital of Rs 0.01 m, negative reserves, and total assets of Rs 8 m. These assets are in the form of investments that it holds - the moneys for the investments probably came from loans advanced by the parent. It has zilch revenues and rustled up a very marginal loss. This company beats me totally. That brings us to SRK Investments. The initials in the name also rhyme with Shah Rukh Khan. This is another oddball by any stretch of imagination. On a capital base of Rs 0.01 m, it has negative reserves of Rs 0.02 m. and total liabilities of Rs 297 m. It is matched by investments of Rs 297 m. The liabilities and the assets in all probability represent the advances made to it by the parent. But the investments yield not a dime in revenues as the accounts show. This is indeed a very strange state of affairs.
The strange state of affairs extends to several other aspects of the company's functioning too.
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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