Consolidating Consolidated

The solidification of the Tata group companies in the coffee business will be of benefit to Consolidated Coffee (a subsidiary of Tata Tea).

It will now be an integrated entity possessing plantations and processing facilities under one roof. Two companies that are being merged with it are Asian Coffee and Veerarajendra Estates.

Another company, Coffee Lands, that owns coffee plantations, too, is being merged with the company. Coffee Lands has an equity capital of Rs 1.44 crore, net worth of Rs 9.52 crore as of March 1996.

It made a net profit of Rs 2.74 crore and Rs 4.5 crore in 1996-97 and 1997-98, and assuming that these were added to reserves, its net worth would be about Rs 16.76 crore at present.

 

This would translate to a book value of Rs 116 per share against Rs 52.35 per share of Conscofe. It has a gross profit margin of about 50 per cent and overall the valuation seems beneficial for Conscofe.

Veerarajendra Estates is a wholly owned subsidiary of Conscofe and its merger will not affect valuations in any manner. However, in the absence of consolidation of accounts in the country, its net worth of Rs 1.64 crore, sales of Rs 1.01 crore and its profit before tax of Rs 76.35 lakh will get directly reflected in its accounts now. It produced about 80 tonne of robusta coffee in 1997-98)

Asian Coffee is a subsidiary of Tata Tea and has a 2,000 tpa instant coffee processing plant. Apart from making the coffee brands --Tata Cafe and Tata Kaapi-- for Conscofe for the domestic market, it also exports instant coffee.

This company's performance has been relatively poor as it has been affected by price fluctuations of coffee beans as it was a standalone processor.

Though its turnover in 1997-98 increased by 68 per cent to Rs 35.8 crore, but its net profit during the year was only Rs 1.49 crore against Rs 1.52 crore in the previous year.

In 1997-98, it revamped its distribution structure and has made a direct entry in to the Russian markets.

It has secured large orders from the country and had plans to finalise long term contracts to stabilise sales volumes and profits. With the devaluation of the rouble, its Russian operations are likely to be affected in the current year. Conscofe will have to bear the impact of this due to the merger.

Asian Coffee has a relatively high equity capital of Rs 11.67 crore compared to Rs 9.51 crore of Conscofe. Asian Coffee, however, has a relatively low book value per share of Rs 20.44. The merger ratio has been kept at one share of Conscofe for six shares of Asian Coffee.

This ensures that Conscofe's valuations are not adversely affected by the merger. Even when one considers to the current market prices of Rs 118 and Rs 30 of Conscofe and Asian Coffee, the ratio is tilted in favour of Conscofe.

VST Tillers Tractors

Having a two-product basket came to VST Tiller's rescue in 1997-98. The company makes power tillers and tractors in collaboration with Mitsubishi, Japan. Cheaper imports from China and a slowdown in off-take in the fourth quarter of 1997-98 resulted in only a 6.7 per cent increase in power tiller sales to 6,532 numbers.

Yet, overall turnover increased by 22 per cent to Rs 71.92 crore in the year, largely fuelled by higher tractor sales. Volume sales of tractors increased by 92 per cent to 842 numbers and contribution of tractors to sales increased to 18 per cent from 11 per cent. Higher per unit price realisations combined with cost control led to a two percentage point improvement in its operating margin to 11.05 per cent in 1997-98.

A tight control over its interest costs led to a substantial increase in its net profit to Rs 4.05 crore from Rs 2.77 crore in the previous year. This year too, it plans to focus on the tractors segment where growth is relatively better. Since the company is not keen on cutting prices to tackle imports of power tillers, volume growth in this segment will continue to be restricted. Using tractors as a hedge is indeed a wise strategy as its consumer in any case still remains the farmer.

One decision that is must be ruing now is the setting up of a subsidiary company, VST Precision Castings, a joint venture with Mitsubishi to make cylinder heads, cylinder blocks and crankshafts primarily for exports to Thailand, In 1997-98, it started operations and executed some orders to Thailand. The chaos that gripped Thailand during the course of the year led to cancellation of orders and much of the capacity was idle. The cancellation of orders also led to a steep jump in interest costs and receivable levels, ultimately resulting in a loss of Rs 65.69 lakh. It is exploring other overseas markets and expects to start generating profits in the second half of the current year.