A company which is trying to come to terms with itself and the many siblings that it has spawned
Covering quite some distance
Tata Global Beverages (TGB), the present avatar, is trying to cover some distance in its gamut of outlays--in old and new businesses-as compared to the days of its forbears, James Finlay and Tata Finlay. The present concoction is still basically a naam ke vaaste spinoff (in its mainline activities) from the earlier named Tata Tea. James Finlay, a British managing agency, was the de-facto owner lording over tens of thousands of acres of tea and coffee in the four states of Kerala, Tamil Nadu, Assam and West Bengal. Its largest single land holding was concentrated in Kannan Devan Hill Produce Company (KDHP) at Munnar. Tata Finlay -a joint venture between the Tatas and James Finlay --in turn was the marketing arm. Tata Finlay became Tata Tea after the former became the de-facto owner of the plantation lands when James Finlay finally bid adieu to its century old creation in the 1970s around the time that the dreaded FERA (Foreign Exchange Regulation Act) came into play.
TGB is today primarily a ‘marketer’ of value added tea and coffee with bottled water thrown in for added colour. It markets 11 tea brands ranging from Tetley, Kannan Devan, Good Earth, Chakra Gold etc, to three coffee brands (Tata Coffee, Eight O’clock, Grand), and four bottled water brands (Himalayan, Activate, Tata Water Plus, Tata Gluco)-a total of 18 brands. However, the company does not appear to have to spend much on sustaining the brands. The cost of ‘advertisement and sale charges’ amounted to a relatively pale Rs 1.63 bn against Rs 1.54 bn previously. It still owns some tea plantations (Pullivasal and Periakanal Estates) but the bulk of the properties were spun off into a closely held entity as some sort of a workers’ co-operative among other tidings. The large acreages that beget the crop in Kerala are primarily vested on leasehold lands.
Buying back into its old pickings
TGB today owns 28.9% of Kannan Devan Hill Plantations Pvt. Ltd (KDHP). With the tide turning it is now slowly buying into KDHP. The book value of it holding amounts to Rs 123 m. On a face value of Rs 10 per share, the current acquisition price is Rs 31 per share. TGB says KDHP became an associate company with effect from October 30, 2012. It held shares of the face value of Rs 25 m in KDHP in the preceding year end. This company produced 20.23m kgs of tea in 2012-13. TGB also owns a 49.66% stake in Amalgamated Plantations Pvt. Ltd and a 49% stake in Estate Management Services Pvt. Ltd which controls Watawala Plantations Ltd in Sri Lanka. Tata Coffee is its subsidiary. So TGB has plenty of pickings here.
The shareholding pattern in TGB is an interesting mix. The ‘category of shareholders’ schedule states that the Tata Group companies hold 35.2% of the outstanding voting capital of Rs 618m. (The biggest group company shareholder is Tata Sons with 23.1% followed by Tata Chemicals with 6.98% and Tata Investment Corporation with 4.45%. These three holdings together add up to 34.53%). The second biggest shareholding group are the FIIs at 17.9%, followed by the domestic institutional investors with 10.5%--with LIC topping the list here. The FIIs apparently see a lot of scope in this company. As one will see later on, TGB on its part holds large blocks of shares in other Tata group companies. It is all in the family as they say.
It is also one of the few Indian owned listed companies whose consolidated base is far greater in all respects than that of the standalone entity. (TGB makes do with 39 siblings and or step down siblings, three associate companies, two joint ventures, two associates of subsidiaries, and five joint ventures of subsidiaries).Among the notable joint ventures is Tata Starbucks in which it has an equity stake of Rs 350 m, and NourishCo Beverages in which it has an identical stake.TGB per se has seven siblings under its wing. Three other Indian owned listed companies that are similar in nature are Tata Steel, Tata Motors, and Hindalco Industries. The standalone company registered revenues from operations of Rs 23.26 bn, and separately other income of Rs 1.1bn. The consolidated entity registered revenues of Rs 73.5 bn, and separately other income of Rs 860 m. Likewise, the pre-tax profit of the standalone unit mounted to Rs 3.2 bn andthat of the consolidated entity at Rs 6.4 bn respectively. Interestingly enough, other income is a big player in the books of the standalone entity. It accounts for 40.8% of pre-tax profit in the case of the standalone entity and made for 13% of the pre-tax profit in the case of the consolidated entity.
Old wine in new bottle
The slickly produced annual report inclusive of the directors’ report, the management discussion and analysis report, and the report on corporate governance runs into all of 91 pages of verbose matter. Getting through it is quite a pain. The revenue from operations rose 14% to Rs 23.26 bn while the pre-tax profit before exceptional items rose 5.7% to Rs 3 bn. Exceptional income is a big and bizarre player in the bottom-line sweepstakes--Rs 179 m for the current year against a whopping Rs 831 m previously. The company per se has not metamorphosed one penny bit --name change withstanding-and earns almost all its revenues from the sale of tea. There are also marginal receipts from ‘others’ and from the sale of traded goods. Keeping company in the definition of revenues is ‘other operating revenues’ amounting to Rs 483 m. This is basically made up of management services fees of Rs 176 m (the receipt is twice that over the preceding year) and liabilities no longer required of Rs 121 m. Miscellaneous receipts of Rs 108 m chips in with its share. Such incomes are malleable and cannot be depended on for an encore-especially sums that tantamount to write backs.
This in turn is followed by other income which as I stated earlier is substantial. It includes large dollops of income on dividends from trade investments and mutual funds, and dividend income from siblings amounting to Rs 905 m, and interest income from advances and investments etc of Rs 221 m. For the matter of record the company boasts non-current investments valued at Rs 22.25 bn, inter-corporate deposits of Rs 1.4 bn and advances to parties of Rs 142 m. This company is thus a hotch potch gooey mix of manufacturing, trading, and investments activities. Of the total investments, the outlay in other unrelated Tata companies amounted to Rs 1.90 bn. These investments form a part of the ‘strategic’ outlay of the group. The biggest outlay in this grouping is in the unlisted company Tata Industries at Rs 1.15 bn and next in line is Tata Chemicals with Rs 503 m. The biggest group investments per se are in Tata Global Beverages Capital Ltd at Rs 7.6 bn and Tata Global Beverages Group Ltd at Rs 5 bn respectively. This is followed by Mount Everest Mineral Water Ltd with Rs 2.46 bn and Tata Coffee Ltd with Rs 1.6 bn. One must keep in mind that all these investments are for keeps.
The revenue account
The way the apple pie is carved up, of the total revenues (including other income) of Rs 24.4 bn, the share of tea, others, and traded goods amounted to Rs22.8 bn. The rest of the revenues are made up of moolah which has no fixed income pattern given the manner in which it is generated. This is the crux of the matter. The cost of materials consumed as a percentage of the latter figure amounted to 66.4% against 64.4% previously. The company makes green tea and also buys green tea. Some of the tea that it buys is sourced from group plantation companies. The problem is that the company has not stated separately how much of the green tea is sourced in-house and how much is outsourced. But it did outsource ‘goods and services’ of the value of Rs 2.37 bn from group companies. The all in all cost of materials consumed totalled Rs 15.12bn.
Not only did TGB buys goods and services from group companies it also sold goods and services to group companies amounting to Rs 1.5 bn. The entire export effort was concentrated in group companies-period. The main group beneficiaries of the sales were Tata Global Beverages Group, Tata Global Beverages Australia, Tata Global Beverages Polska, and Tata Tea Extractions US Inc.
Inspite of the furious pace of investments in group companies, the churning of resources in inter-corporate deposits and loans to group companies etc, and the sharp increase in inventory values, the company is relatively under borrowed relative to its scale of operations. That is to say the borrowings at year end amounted to Rs 1.83 bn, though this figure is sharply up fromthe Rs 418 m that it recordedpreviously. Very notably, the interest charges that it expended amounted to Rs 320 m. Such an interest outflow would appear to be on the higher side, and may infer that the company borrowed heavily during the year for working capital purposes. The company was however able to virtually sell cash down as seen by the year end figure of trade receivables. As a matter of fact the trade payables at year end were more than the trade receivables figure. Just as importantly, the current liabilities at year end were more than that of the current assets, helping it to contain working capital costs to some extent.
Cash crunch in its operations
This is just as well, as the company experienced difficulty in generating cash from its operating activities. (This could be a major reason why the company is so stingy about parting with post tax profits as dividends). Thanks in part to a sharp hike in trade receivables and inventories, and the direct tax payment of Rs 792 m the company was out of pocket by Rs 622 m during the year. The situation was further exacerbated by the demands for funds into fixed asset expansion and further investments in the capital of siblings and joint ventures. So the company resorted to a neat trick to set right the aberration. It sold its holding of 3.9 lakh shares in group company TCS Ltd (acquisition cost Rs 0.12 m) and some other minor pickings for a solid Rs 683 m and partly retrieved the situation. (This sale could infer a sign of desperation perhaps). The cash flow statement says that it redeemed another set of investments for Rs 273 m. The investment schedule does not however offer a ready clue on this redemption if any. But, still, the company was quite out of pocket at the end of the day and had to borrow Rs 1.41 bn from lenders of capital to balance its books.
Since the investment portfolio is big biz for the parent company we can take a look at the financials. The company has furnished the brief financials of 38 siblings/ step down siblings. The vast bulk of the companies are either pound sterling denominated, or in US dollars, Russian roubles, Canadian and Australian dollars, Polish Zloty, Czech Krona, Malawi Kwacha, South African Rand, Chinese Yuan, Kenyan Shilling or some such. If the objective was to be termed an MNC then TGB has more than achieved the distinction. The most startling observation however is that only one of the 38 companies --Tata Coffee--has paid out a dividend during the year. The financials of several large group companies by and large make for depressing reading, very depressing reading. A clutch of companies both with large paid up capital and with low paid up capital boast very large asset bases-but there is very little else to show for it. Some of the financials on display border on the incredulous if that is the right term. The numbers are too numerous to comment on, so I will dwell on the more colourful results on tap.
At the top of the heap are three group stalwarts Tata Global Beverages Group Ltd, Tata Global Beverages (GB) Investment Ltd, and Tata Global Beverages Holdings Ltd. All three companies are pound sterling denominated and hence possibly are UK based or some such. The first named has a capital base of Rs 19.3 bn, boasts reserves of Rs 1.1 bn, total assets of Rs 68.7 bn but could not rustle up any revenues. But it did show a pre-tax loss of Rs 102 m. And on this loss it made a negative tax provision of Rs 272 m and ended up reporting a post tax profit of Rs 170 m. I wish we had similar tax laws in India. What exactly was this company incorporated for by the way? The second named is not as colourful. A capital base of Rs 19.2bn and accompanies by reserves of Rs 16.3 bn, investments of Rs 1 bn and total assets of Rs 35.9 bn. Not unexpectedly, it generated no revenues whatsoever, but anted up a pre-tax profit of Rs 998 m. It is remarkable enough that a company can generate profits on zilch revenues. Or, probably, the UK has a different set of accounting rules perhaps.
The third named is the most colourful by far. On a piffling capital base of Rs 0.017 m it anted up humungous reserves of Rs 14.3 bn and had total assets of Rs 15.5 bn. This company too could not generate any revenues but sallied up a pre-tax profit of Rs 1.7 bn. These guys should coach the Central government exchequer on how to pull rabbits out of the hat. Then there is Tata Global Beverages Services Ltd which is also apparently based out of the UK. On a capital base of Rs 13 m, it has reserves of Rs 28.2 bn, total assets of Rs 40.8 bn but generated revenues of Rs 2.3 bn, and recorded a pre-tax profit of Rs 122 m. Such massive reserves and assets on such a puny capital base sounds interesting. There is yet another company sporting an almost similar name. This one goes by the name Tata Global Beverages GB Ltd. (Too many group siblings with almost identical names makes for a very confusing state of affairs). This creation has a zero capital base, solid reserves of Rs 15.2 bn, and total assets of Rs 23.2 bn. But the difference here is that it rustled up revenues of Rs 14.7 bn and posted a pre-tax profit of Rs 2 bn. How can an incorporated company have a zero capital base for starters? Apparently, anything is possible.
Tata Global Beverages US Holdings Inc appears to be another cock and bull affair, but Tetley USA Inc is another kettle of fish. On a capital base of Rs 7.4 bn it had negative reserves of Rs 5.3 bn and total assets of Rs 2.3 bn. On revenues of Rs 1.47 bn it anted up a pre-tax profit of Rs 219 m. Mount Everest Mineral Water in which it has a capital investment of Rs 2.46 bn appears to be a washout. The point is also that the Rs 10 face value shares were acquired at a hefty price of Rs 145 per share. On a share capital base of Rs 340 m it has total assets of Rs 501 m. It was barely able to rustle up revenues of Rs 247 m and ante up a pre-tax profit of Rs 5 m. It appears that this company requires a lot of rejuvenation before it gets going.
The list goes on and on with other group companies operating on both ends of the spectrum. The wonder is that at the end of the day the consolidated group was able to drum up a bottom-line far in excess of that of the standalone company.
Disclosure: I hold four shares in 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.